“Like a fat kid in dodgeball, these need to stay on the sidelines.”
That’s how one Bank of America trader described the substandard, Alt-A mortgages the bank wanted to stuff into mortgage-backed securities in 2008, according to a new filing from the Justice Department.
In the Justice Department’s new lawsuit (there’s a separate SEC filing too), the government argues BofA misled investors over the quality of loans in $US850 million in mortgage-backed securities.
The “fat kid” line is the most colourful detail (the filing shows how traders actually opposed including some bad mortgages, with moderate success). Essentially the government says BofA sold the loan pool as AAA-rated when 70% of the residential mortgages originated through brokers and were, as the financial crisis reminded us, riskier than loans originated by the bank itself.
More than 40 per cent of the 1,191 mortgages in the pool didn’t “substantially comply” with the bank’s underwriting standards, the Justice Department said in the complaint. Employees who worked on the origination of the mortgages said that the bank “emphasised quantity over quality” and that they were instructed by supervisors that it wasn’t their job to discover mortgage fraud, according to the complaint.
Bank of America decided not to conduct loan-level due diligence on the mortgages used as collateral in the securitization, in part to save about $US15,000 in expenses, according to the complaint.
Either way, litigation expenses may dog BofA earnings, and shares were down 1.7% this afternoon.