On Tuesday, the Department of Justice
filed a lawsuit against Bank of America. The lawsuit alleges that BofA lied to investors about the quality of
the mortgages backing residential mortgage-backed securities that BofA
sold. The SEC has also filed similar charges in federal court.
The lawsuit involves $850 million in securities sold to investors. According
to the complaint, 40% of the securitized mortgages failed to substantially
comply with BofA's underwriting guidelines when they were issued.
Bank of America claims that it will demonstrate that the loans were all
prime loans and were sold to sophisticated investors. The bank also denies
liability for the housing market collapse, which was the "true"
culprit behind the massive default rate. You can read more of BofA's
wild assertions in
So what does this case mean for us? Not much. While it's great to watch
BofA being held accountable for selling bundles of garbage as piles of
gold, this case will likely settle out of court with no admission of wrongdoing.
I hope that I am wrong and that we see some serious penalties levied against BofA.
In a best-case scenario, this lawsuit will lead to the disclosure of lots
of juicy details about BofA. Even those juicy details will likely do very
little to help people facing foreclosure or other collection actions by
BofA. Quite simply, pointing to BofA's lies to investors doesn't
destroy the bank's standing to file a foreclosure lawsuit or to collect
on a debt. Similarly, just because the bank didn't follow its own
underwriting guidelines doesn't mean that all of its loans are automatically
predatory and worth a free house.
This case will likely further tarnish the bank's reputation, and we
will probably see a settlement that is more symbolic than punitive. The
one major positive that I am taking away from this lawsuit is that those
of us who have always said that the banks lied about the quality of the
mortgages in loan pools were right. Allegedly.