The attorneys general of Illinois and California both filed lawsuits on Wednesday against lending giant Countrywide. The lawsuits allege a wide range of suspect dealings with customers, which led to spiking foreclosures. The Illinois suit, filed in Cook County Court, names the company and CEO Angelo Mozilo; the California lawsuit, filed in Los Angeles Superior Court, names the company, Mozilo and president David Sambol. Both lawsuits came on the same day Countrywide shareholders approved the lender's takeover by Bank of America Corp (BofA).
Angelo Mozilo is the founder and CEO of Countrywide Financial Corp.
The Illinois suit alleges that Countrywide Home Loans, Inc., and its parent company, Countrywide Financial Corporation, engaged in unfair and deceptive conduct on a large scale in creating, originating, marketing and servicing unnecessarily risky and costly mortgage loans for Illinois homeowners.
Selling risky loans
Illinois Attorney General Lisa Madigan's complaint alleges that Countrywide, in a "single-minded quest to dominate the nation's mortgage market," sold risky and costly loan products to borrowers who could not afford them. The lawsuit also details how, as failure rates on Countrywide loans began to escalate, the company intensified its distribution of unaffordable and poorly underwritten loans to satisfy its obligations to Wall Street investors.
"Countrywide's unfair lending practices have harmed tens of thousands of borrowers who've been placed in unaffordable loans and, as a result, our communities are now being destabilized by a skyrocketing number of home foreclosures," Madigan said in a statement.
The complaint outlines Countrywide practices that put borrowers into unaffordable home loans, including relaxing underwriting guidelines to qualify borrowers with insufficient income and assets, inflating borrowers' income on loan applications, and underwriting borrowers for less than the full amount ultimately owed - a practice that counted on borrowers refinancing when payments became too expensive.
Madigan further alleges that the company combined lax underwriting standards with loan products containing multiple layers of risky features, thus ensuring that loans would fail. Madigan says subpoenaed documents showed how employees were given incentives to write these loans, receiving higher commissions for the riskier products.
Fueling a crisis
Madigan's complaint comes in the midst of an unprecedented national foreclosure crisis, which many industry insiders argue Countrywide helped fuel. In May 2008, there were 9,670 foreclosure filings reported in Illinois, up nearly 42 percent from May 2007, and the delinquency rates on Countrywide loans in Illinois from 2005 through the first half of 2007 are even higher than Countrywide's national rates.
By 2007, Countrywide was both the nation's largest originator of prime and subprime mortgage loans. In the first quarter of 2008, Countrywide originated $73 billion in mortgage loans nationally. At its peak, the company operated approximately 100 retail branches in Illinois and was the largest mortgage lender in the state from 2004 to 2006, selling approximately 94,000 loans to Illinois consumers in that period. Countrywide also was the largest seller of high-cost, or subprime, home loans in the Chicago area in 2006, according to a 2007 Chicago Reporter study.
The end is near
As the nation's largest mortgage lender and servicer, Countrywide has been under a hail storm of scrutiny by federal and state authorities. It also faces numerous other lawsuits related to its lending practices.
The Illinois lawsuit wants Countrywide to pay restitution to all affected consumers who lost their homes or loans. Madigan's suit also asks for 90 days to review any loans that are in or near foreclosure to see if borrowers can pursue affordable options. This may just be the beginning of the end for the lending giant - too late, perhaps, for BofA to rescue them now.
Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.
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Amy -
Not sure if you saw or not but CA is following suit as well. My guess is there will be more to come w/ this topic. I would also venture to say other Lenders will fall into this.
The news certainly pulled down the stock price of BofA. Ken Lewis is probably loving this decision.