Illinois Sues Countrywide

Ooh, the blood sport of watching Countrywide come under attack for its predatory mortgage practices is getting even more gripping. Gretchen Morgenson of the New York Times reports that the Illinois attorney general is suing the lender for not simply selling a toxic product, but other fraudulent practices, including falsifying borrower income and making bogus marketing claims. And even more fun, Angelo Mozilo is a defendant too.

Before the Morgenson skeptics tune up, let me point out in this case she appears to have a copy of the complaint (I’d love to read it myself, I imagine it’s juicy), and she has demonstrated herself to be accurate when dealing with legal documents and SEC filings.

Moreover, I’ve heard many aspects of the complaint confirmed. While my take is admittedly base on anecdotal evidence, some of the sources were in a position to witness numerous instances of the behavior in question. One ex-CFC employee told me, consistent with the allegations in the Illinois suit, that not a single “no fee” mortgage had been issued despite a national ad campaign. Why? It was bait and switch. The call center operators had scripts that steered consumers away from the advertised product into an allegedly cheaper alternative.

Similarly, the head of a not-for-profit mortgage counseling service (a large one, I might add) says her organization’s experience suggests that 70% to 80% of subprime mortgages involved fraud by the mortgage broker, including inflating income. The vast majority of consumers mistakenly thought the broker had a fiduciary duty to them (funny, when I hear the word broker, I think “fees” and my next question is, “and are they worth it?”). She knows personally of cases where the broker gave a quote for a fixed rate mortgage, which the consumer thought was the product they were getting, and then gave the borrower execution documents for ARMs or worse, option-ARMs. Virtually no one examines the mortgage to see if they are getting what they were promised.

There is no reason to expect that Countrywide exceeded the industry’s generally low standards of behavior; indeed, their reputation suggests the reverse.

And this development again illustrates what an error of judgment it was for Bank of America to seek to buy Countrywide. We took an early dislike to the deal, noting last September:

I will confess I haven’t studied the details of the deal for a simple reason: I’m appalled that B of A would even consider it. The two banks had reportedly been talking for six years. That means B of A knew, or ought to have known, Countrywide very well…..

I know lawyers who have Countrywide in their crosshairs, and I am certain they have plenty of company.

To put it another way: there’s enough fraudulent selling in the the subprime market in general, and smoke around Countrywide in particular, to deter anyone investor who takes litigation or reputation risk seriously.

In my day, no respectable institution would make a high-profile equity investment or otherwise closely link its name with an organization that had the whiff of serious liability about it (except in liquidation or some other scenario which got rid of the incumbent management team).

This transaction is likely to prove to be a very costly lesson for the Charlotte bank.

From the New York Times:

The Illinois attorney general is suing Countrywide Financial, the troubled mortgage lender, and Angelo R. Mozilo, its chief executive, contending that the company and its executives defrauded borrowers in the state by selling them costly and defective loans that quickly went into foreclosure.

The lawsuit, which is expected to be filed on Wednesday in Illinois state court, accused Countrywide and Mr. Mozilo of relaxing underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, like its heavily advertised “no closing costs loan.” Countrywide also created incentives for its employees and brokers to sell questionable loans by paying them more on such sales, the complaint said.

In reviewing one Illinois mortgage broker’s sales of Countrywide loans, the complaint said the “vast majority of the loans had inflated income, almost all without the borrower’s knowledge.”

The civil lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present. The attorney general, Lisa Madigan, also asked that Mr. Mozilo contribute personally to the damages and that the court give her office 90 days to review loans serviced by Countrywide that were in foreclosure or soon would be…

The lawsuit adds to the considerable legal risks facing Bank of America as it prepares to absorb Countrywide in a takeover announced in January. Countrywide and its executives have been named as defendants in shareholder lawsuits, and the company’s practices are the subject of investigations by the Securities and Exchange Commission, the F.B.I. and the Federal Trade Commission, which oversees loan servicing companies.

The United States Trustee, a unit of the Justice Department that monitors the bankruptcy system, has also sued Countrywide, contending that its loan servicing practices represent an abuse of the bankruptcy system…

The Illinois complaint was derived from 111,000 pages of Countrywide documents and interviews with former employees. It paints a picture of a lending machine that was more concerned with volume of loans than quality.

For example, former employees told Illinois investigators that Countrywide’s pay structure encouraged them to make as many loans as they could; some reduced-documentation loans took as little as 30 minutes to underwrite, the complaint said.

The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages requiring minimal payments in the early years, known as hybrid A.R.M.’s, would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.

Even more surprising, Ms. Madigan said, was her office’s discovery of e-mail messages automatically sent by Countrywide to its borrowers offering complimentary loan reviews one year after they obtained their mortgages from the company.

“Happy Anniversary!” the e-mail messages stated. “Many home values skyrocketed over the past year. That means that you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards.”

Ms. Madigan said, “I was just struck that on the first anniversary of these people’s loans they would get these e-mails luring them into a refinance, into another unaffordable product to generate more fees and originate more loans.”

The complaint also described dubious practices in Countrywide’s huge servicing arm, which oversees $1.5 trillion in loans. For example, an Illinois consumer whose Countrywide mortgage was in foreclosure came home to find that the company had changed her locks and boarded up her home, the suit said, although no judgment had been entered and no foreclosure sale conducted. It took a week for the homeowner to regain access to her home, the complaint said.

Ms. Madigan began investigating Countrywide after her office sued One Source Mortgage, a Chicago mortgage broker that shut down last year. Countrywide was One Source’s primary lender, according to that lawsuit. Ms. Madigan also said that her office had received 200 customer complaints about Countrywide.

Update 12:30 AM: The Wall Street Journal story on the suit notes that the vote by Bank of American shareholders on the Countrywide acquisition is scheduled for tomorrow and the deal is expected to close July 1.