Jury Finds Bank of America Liable in Mortgage Program Nicknamed the 'Hustle'

Brendan McDermid/Reuters

Bank of America, one of the country's largest banks, was found liable on Wednesday for having purposely sold defective mortgages, a result that will be seen as a victory for the government in its aggressive effort to hold large American banks accountable for their role in the housing crisis.

Moreover, the jury also found a top executive at Bank of America's Countrywide unit liable, pinning some - if not all - of the responsibility for the bad acts on an individual.

During the trial, federal prosecutors accused Rebecca Mairone, a top executive at Countrywide at the time, of having opted for quantity over quality in its mortgage writing program, which resulted in the bank churning out housing loans that were destined to fail.

In its case, federal lawyers claimed that Ms. Mairone, who now works at JPMorgan Chase, led a program nicknamed the 'hustle,' derived from HSSL, or the 'high-speed swim lane.' The program linked bonuses to how fast bankers could originate loans. As a result, the credit quality of the borrower was given short shrift, the government contended. When these loans were sold on to mortgage giants like Fannie Mae and Freddie Mac, they failed, generating more than $1 billion in losses.

The civil case, which has been tried in a Federal District Court in Manhattan, follows close on the heels of JPMorgan's tentative agreement to pay $13 billion in fines and payments to settle with various state and federal authorities for its own exposure to the mortgage mess.

Countrywide, the mortgage originator that Bank of America bought in 2008, has been a morass of problems ever since the deal went through. While the bank bought Countrywide for $4 billion in 2008, analysts believe that to date it has already paid close to $50 billion in fines and settlements. In light of Wednesday's decision, that figure is likely to continue to rise.

In a statement, Preet Bharara, the United States attorney in Manhattan, who has scored a number of legal victories as part of a campaign against crime on Wall Street, hailed the jury's decision.

'In this case, Bank of America chose to defend Countrywide's conduct with all its might and money, claiming there was no case here,' Mr. Bharara said. 'The jury disagreed. This office will never hesitate to go to trial to expose fraudulent corporate conduct and to hold companies accountable, particularly when it has caused such harm to the public.'

Consumer advocates have long pushed for such an outcome, arguing that given the extensive losses suffered by homeowners and investors during the mortgage crisis, top executives at the firms in question should pay a price.

Prosecutors have asked that Bank of America pay a fine of $848 million, although the judge presiding over the case, Jed S. Rakoff, will set the penalty.

While the suggested fine pales in comparison to the check that JPMorgan is expected to write, lawyers point out that that the eventual cost could far exceed what the government has asked for because the jury's decision is likely to spur a torrent of class-action suits that could cost Bank of America many billions of dollars in settlement payments.

Bank of America has spent the better part of the year trying to convince investors that its devastating mortgage problems are an issue of the past, and to some extent the bank has been successful, with its stock increasing 55 percent this year. And compared to JPMorgan, which just reported a rare quarterly loss because of increasing amounts of cash set aside for legal purposes, Bank of America beat analyst expectations, because of a strong performance in its credit cards.

Still, the weight of Countrywide's mortgage exposure hangs heavy over the bank and compared to JPMorgan, Bank of America trades at a deep discount to its book value - a sign that investors believe that toxic housing loans will bedevil the bank for years to come.

As for JPMorgan, it has argued that the bulk of its toxic mortgage exposure comes from Bear Stearns, which regulators pressured the bank to buy in 2007. Lawyers and bankers counter this defense by saying that Washington Mutual, an institution that Morgan aggressively pursued, represents an even greater mortgage time bomb for the bank.