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 this article.
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.