The Federal Bureau of Investigation (FBI), on Saturday, launched a probe into the lending practices of the largest US mortgage lender, Countrywide Financial Corp, currently in the process of being acquired by Bank of America.

According to a US government official, the mortgage company is suspected of fraudulent practices and financial reporting, which may have led to the sub-prime crisis in the US.

This story was first reported in The Wall Street Journal on Saturday.

According to the report, the FBI will scrutinise the mortgage origination and the underwriting practices of the company. It will also investigate into the possibilities of whether the company "window dressed" the losses relating to the sub-prime meltdown.

The investigation will also entail looking for insider trading and other infractions of loans made to weaker credit borrowers.

FBI spokesperson Richard Kolko, refrained from making any comment on which other companies were under investigation, though he mentioned that the FBI has been investigating potential fraud in the mortgage / sub-prime lending market. It was also uncertain if anyone would be indicted with a crime.

It has been learnt that the FBI has repeatedly warned of the growing mortgage fraud. With a staggering number of 35,600 frauds documented in 2006, from 7,000 reported frauds in 2003, the bubble has eventually burst.

The New York Times reports that, state officials have also been active in bringing up mortgage cases. The New York attorney general, Andrew M. Cuomo, is enquiring into Wall Street banks and if they have withheld damaging information about their loans. Prosecutors in the states of Connecticut, Illinois, Massachusetts and Ohio have also been keeping an eye on the industry.

When the housing crash began, Countrywide faced an increasing number of sub-prime customers delinquent on their mortgage payments. The company stopped its sub-prime lending operations last year, to concentrate on originating loans that would conform to the securitisation guidelines, considered to be safe investments.

Late last year, the legendary Warren Buffet, expressed an interest in acquiring certain business of Countrywide (See: Buffett may acquire some Countrywide Financial businesses). This came on the back of Countrywide suffering increasing defaults, as rising interest rates made it harder for people to pay their mortgages. Several home loan providers went bust while many others struggled to cope with rising defaults, refusal of investors to buy loans they make, and the unwillingness of banks to extend credit.

In September Countrywide received a new credit line of $12 billion, on top of an $11.5 billion that it secured through bank credit lines amidst reduced access to the commercial paper market, where the company usually borrows. (See: Countrywide secures $12 billion fresh funding)

In August 2007 it received $2 billion fresh capital injection from Bank of America Corp, the second biggest US bank, which bought $2 billion worth of convertible preferred stock yielding 7.25 per cent and to be converted into Countrywide common stock at $18.

In January this year, Bank of America had agreed to purchase Countrywide $4 billion in an all-stock transaction. (See: Bank of America agrees to purchase Countrywide Financial Corp) Countrywide has been fraught by bad home loans and also reported a loss of $422 million for the fourth quarter of 2007.

In a bid to reduce its costs, Countrywide fired 11,000 employees. The California-based Countrywide, is pegged as the largest mortgage lender, and is responsible for approximately 20 per cent of the mortgages in the US.