Wells Fargo challenges suit brought by federal prosecutors over FHA bad loans

Wells Fargo yesterday mounted a legal challenge against a fraud mortgage lawsuit brought by federal prosecutors last month, arguing in court that an existing settlement with the government cleared it of liability.

The US attorney's office in Manhattan sued the lender in September for ''reckless'' and fraudulent mortgage practices that left the Federal Housing Administration servicing hundreds of million of dollars in insurance claims when those loans went bad.

A slew of government charges and settlements sought to hold the nation's biggest mortgage lenders accountable in various cases of alleged wrongdoing, but the San Francisco-based banking giant said the lawsuit violated the conditions of a settlement with state and federal attorneys over widespread foreclosure abuses that was approved in April, according to a motion filed in federal court in the district.

Wells Fargo was one of five large banks to agree to pay up the amount for the $25 billion national settlement. According to analysts, the case could have far reaching implications for some of the largest banks that were party to the mortgage settlement and were also facing a barrage of related lawsuits. If the federal judge were to side with Wells Fargo, mortgage lenders, including Bank of America and JPMorgan Chase, could use the case as the basis to ward off federal litigation.

According to the bank, the false claims suit violated the terms of the earlier settlement, under which the bank was required to pay over $5 billion in return for a broad release from further legal claims by the government.

That release "wiped the slate clean for Wells Fargo in terms of facing any further liability to the United States (except in carefully crafted, narrow circumstances) for a wide range of Wells Fargo conduct relating to its Federal Housing Administration ... mortgage loan portfolio," the bank contended in its legal filing.

With the previous settlement and an investigation by 49 state attorneys general and the US justice department into allegations that the five biggest home lenders "robo-signed" foreclosure documents and otherwise abused the mortgage process came to an end.