DOJ sues Bank of America (BAC 1.70%) for mortgage fraud: Stock dips slightly

This imaginary headline says it all. For the second time this month, the U.S. attorney's office in Manhattan is suing a big American bank for alleged mortgage-lending abuses dating back to the pre-crash era. The first was JPMorgan Chase (JPM 1.44%), sued on October 1, for alleged mortgage fraud that was perpetrated by its Bear Stearns unit.

Just like B of A, after the charges were announced, JPMorgan's share price dipped slightly, and then rose significantly). What does this say? That shareholders don't care a whit about the effect these Johnny-come-lately government lawsuits might have on their investments? Probably, and it's a reasonable sentiment at this point.

Do the hustle
The charge against B of A is civil fraud. Specifically, the federal government is claiming that B of A sold "defective loans" to Fannie Mae and Freddie Mac, the country's federally backstopped mortgage lenders, through its Countrywide unit. B of A purchased Countrywide in July 2008. The fraud began before B of A bought Countrywide, the allegations go, but then continued after the acquisition.

In the filing, the U.S. attorney's office specifically damned a Countrywide practice called the "high speed swim lane," or HSSL. According to the complaint:

The goals of the Hustle were high speed and high volume, where loans 'move forward, never backward' in the origination process. To accomplish these goals, the Hustle removed necessary quality control 'toll gates' that could slow down the origination process. 

Sins of the father
In the JPMorgan suit, brought by the same U.S. attorney's office, there isn't even a direct connection between the business charged with mortgage fraud, JPMorgan, and the business that may have actually committed the fraud -- Bear Stearns. JPMorgan Chase bought Bear in March 2008, just as it was about to implode, in a hastily arranged deal to try and stabilize the crumbling U.S. financial system.

Yet, JPMorgan is the entity being charged with mortgage fraud, when nothing in the complaint even happened under its watch. In the case of the charges against B of A, at least the DOJ is making some sort of reasonable connection between the past and present; but even given that, you don't have to be too cynical to wonder about the suit's timing -- weeks before the election, just like with JPMorgan.

Of note: the uber-prosecutorial authority Bharara is working under is the Residential Mortgage Backed Security Working Group, set up by President Obama just this past January, to go after banks that had misbehaved in the run-up to the crash.

This too shall pass
In yesterday's filing, the government asked for $1 billion in damages, but B of A shareholders are responding with a big yawn because they know how these things usually go: There's an out-of-court settlement for less than what was originally asked for, no one admits guilt, and everyone goes away kind of content:

  • Citigroup (C 2.82%) recently settled a $590 million lawsuit, brought by angry shareholders who contend they were misled about the bank's exposure to subprime mortgage debt in the run-up to the financial crisis.
  • Wells Fargo (WFC -0.26%) settled a $175 million lawsuit in July, which charged it had racially discriminated against mortgage applicants, shifting them toward higher-rate loans when they could have gotten lower-rate loans. 

In yesterday's filing, Manhattan U.S. Attorney Preet Bharara added:

Countrywide and Bank of America made disastrously bad loans and stuck taxpayers with the bill ... systematically [removing] every check in favor of its own balance ... This lawsuit should send another clear message that reckless lending practices will not be tolerated.

No, reckless lending practices should not be tolerated. But whether the intentions were good or questionable, four years after the crash, the pace of related legal action is not only not slowing down, it's accelerating. It will be interesting to see if that trend continues after the election. There has to be an endpoint, when everyone feels they've gotten what they deserve out of the system, right?

For investors' sake, let's hope so. In the meantime, properly Foolish investors should take solace with a glass of their favorite adult beverage and a cheery novel, confident in the knowledge that, despite the seeming gloom of the current B of A drama, little of substance will actually come of it.

Thanks for reading and for thinking. By the way, the Motley Fool has just produced a brand new in-depth report on Bank of America. It concisely details B of A's prospects, and highlights three reasons to buy and three reasons to sell. Just click here to get access.