Bank Of America Corp (NYSE:BAC) is facing a hefty penalty in connection with the complaint that its business unit sold defective mortgages to the government-sponsored entities (GSEs)—Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC).
United States Judge Jed S. Rakoff of the Federal District Court In Manhattan ordered Bank of America Corp (NYSE:BAC) to pay $1.3 billion penalty after a jury found that Countrywide Financial was guilty of selling the defective mortgage loans to the GSEs in the run-up to the 2008 financial crisis.
Bank of America ‘driven by hunger for profits’
Judge Rakoff is known for his strong position on financial fraud. In his ruling, he wrote criticized the bank for its misconduct. According to him, Bank of America Corp (NYSE:BAC) was “driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims, but also on the financial system as a whole. He added, “It was from start to finish the vehicle for a brazen fraud by the defendants.”
According to Judge Rakoff, he did not compute the penalty imposed to Bank of America Corp (NYSE:BAC) based on the amount of losses incurred by Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) from the mortgages.
He said the calculated the penalty based on the price they paid for mortgages proven defective by prosecutors to the jury—approximately 42% out of the total 17,611 loans.
Bank of America Corp (NYSE:BAC) is required to pay the full $1.3 billion penalty by September.
Observers in the financial industry suggested that the penalty will likely complicate the settlement negotiations between the bank and the Department of Justice (DOJ) to prevent a different lawsuit related to the sale of mortgage securities that cost investors billions of dollars in losses.
Countrywide’s top manager to pay $1 million penalty
Rebecca Mairone, a top manager at Countrywide Financial, was also found responsible for selling thousands of defective loans to the GSEs. Judge Rakoff ordered her to pay $1 million in penalty.
According to the Judge Rakoff, Mairone could pay the penalty in an installment basis over a period. In his decision, he indicated a concern that a demand for Mairone to pay a lump sum “would restrain her resources to the limit.”
