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Bank of America (Countrywide) sued by mortgage investors for massive fraud

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(3 February 2011) Bank of America’s Countrywide mortgage operation was accused of “massive fraud” in a suit by big investors who say they were misled about the quality of mortgage-backed securities. Dexia Holdings, New York Life Insurance Co, TIAA-Creff and Mainstay Funds are among the plaintiffs who say the defendants committed “massive fraud” when they made “recklessly or knowingly false” statements about mortgage-backed securities (MBS) they were selling.

In a 194-page complaint filed in the New York State Supreme Court on the 24th January, investors say they were looking for conservative, low-risk investments when they purchased hundreds of millions of dollars in Countrywide MBS between 2005 and 2007. That wasn’t the case though, they allege. The dozen or so plaintiffs say they relied on prospectuses and defendants’ public statements about the health of the securities but the reality was that “Countrywide was an enterprise driven by only one purpose–to originate and securitize as many mortgage loans as possible into MBS to generate profits for the Countrywide defendants, without regard to the investors that relied on the critical, false information provided to them.”

The argument about relying on public statements made by defendants refers in part to Countrywide co-founder Angelo Mozilo. When Countrywide was looking to achieve a 30% marketshare, Mozillo assure investors that his company would not sacrifice its strict mortgage underwriting standards to achieve that goal, the complaint says. And while Mozilo knew that the so-called Pay-Option adjustable-rate mortgage loans on the company’s books were risky, he characterized them as being “prudently underwritten,” “prime” and of “high credit quality,” the complaint alleges. Mozilo isn’t the only executive named in the suit. David Sambol, Countrywide Financial’s COO is also named as well as others including Stanford Kurland, David Spector, Eric Sieracki, Joshua Adler, Ranjit Kripalani, Jennifer Sandefur, Thomas McLaughlin, Jeffrey Grogin and Thomas Boone.

Countrywide’s loose underwriting standards resulted in pre-tax earnings of $2.4 billion and $2 billion in its loan production divisions in 2005 and 2006, respectively. In 2005, 32% of Countrywide’s loan originations were prime conforming loans, or loans with high-credit quality, down from over 50% during earlier periods. Bank of America doesn’t want to hear it. A spokesperson told Bloomberg that the suit “sounds like a large, sophisticated investor who now wants to blame someone for the fact that the declining economy caused its investment to lose value.” Here’s the complete list of plaintiffs and named defendants in yesterday’s suit:

  1. DEXIA HOLDINGS, INC.
  2. FSA ASSET MANAGEMENT LLC
  3. DEXIA CREDIT LOCAL
  4. NEW YORK BRANCH
  5. NEW YORK LIFE INSURANCE COMPANY
  6. NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION
  7. THE MAINSTAY FUNDS
  8. MAINSTAY VP SERIES FUND, INC.
  9. TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA
  10. TIAA-CREF LIFE INSURANCE COMPANY
  11. TIAA GLOBAL MARKETS, INC.
  12. COLLEGE RETIREMENT EQUITIES FUND
  13. THE TIAA-CREF FUNDS

vs.

  1. COUNTRYWIDE FINANCIAL CORPORATION
  2. COUNTRYWIDE HOME LOANS, INC.
  3. COUNTRYWIDE HOME LOANS SERVICING LP
  4. CWALT, INC.
  5. CWMBS, INC.
  6. CWABS, INC.
  7. CWHEQ, INC.
  8. COUNTRYWIDE SECURITIES CORPORATION
  9. COUNTRYWIDE CAPITAL MARKETS LLC
  10. ANGELO MOZILO
  11. DAVID A SAMBOL
  12. BANK OF AMERICA CORP.
  13. BAC HOME LOANS SERVICING, L.P.
  14. NB HOLDINGS CORPORATION
  15. STANFORD L KURLAND
  16. DAVID A SPECTOR
  17. ERIC P SIERACKI, N
  18. JOSHUA ADLER
  19. RANJIT KRIPALANI
  20. JENNIFER S SANDEFUR
  21. THOMAS K MCLAUGHLIN,
  22. THOMAS H BOONE
  23. JEFFREY P GROGIN
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