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Justice Department Sues Bank of America for Mortgage Fraud (Update 1)

Stocks in this article: BAC WFC

Updated from 4:11 p.m. ET with comment from Bank of America Spokesman Lawrence Grayson.

NEW YORK ( TheStreet) -- The Department of Justice Tuesday afternoon announced a lawsuit against Bank of America (BAC), alleging the bank made "false and misleading statements," in connection with the sale of $850 million in mortgage-backed securities in February 2008.

"Bank of America's reckless and fraudulent origination and securitization practices in the lead-up to the financial crisis caused significant losses to investors," U.S. attorney Anne Tompkins said in a press release.

According to the civil complaint filed in the U.S. District Court in Charlotte, N.C., where Bank of America is headquartered, Bank of America defrauded five institutional investors, including the Federal Home Loan Bank of San Francisco and Wachovia Bank, which along with its parent company was acquired by Wells Fargo (WFC) in December 2008.

The Justice Department said in the complaint that more than 40% of 1,191 mortgages included in one of the securitized pools "did not substantially comply with Bank of America's underwriting standards in place at the time they were originated and did not have sufficient documented compensating factors." The DOJ also said "Bank of America did not conduct any loan-level due diligence at the time of securitization."

According to the complaint, Bank of America also failed to disclose to the investors that more than 70% of the loans had been originated through third parties. "More significantly, at the same time Bank of America was finalizing this deal, it was receiving a series of internal reports that showed an alarming and significant decrease in the quality and performance of its wholesale mortgages," the Justice Department said.

The Securities and Exchange Commission filed a similar lawsuit against Bank of America over the same securitization, as part of President Obama's RMBS Working Group.

Bank of America spokesman Lawrence Grayson expressed confidence the company would win in court, saying in an email exchange "These were prime mortgages sold to sophisticated investors who had ample access to the underlying data and we will demonstrate that. The loans in this pool performed better than loans with similar characteristics originated and securitized at the same time by other financial institutions. We are not responsible for the housing market collapse that caused mortgage loans to default at unprecedented rates and these securities to lose value as a result."

Bank of America previously reported that outstanding mortgage repurchase claims from investors totaled $16.468 billion as of June 30.

Bank of America's shares were down 1% Tuesday to close at $14.64.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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