June 25, 2008

California Sues Countrywide (And Who Do You Think Might Pay?)

As Countrywide’s shareholder’s approved Bank of America’s takeover offer, California and Illinois filed suit against the mortgage lender for “luring borrowers into risky loans they couldn't afford.”

Countrywide and Chief Executive Officer Angelo Mozilo were named in the suits, filed today, claiming the lender's tactics led thousands of borrowers to lose their homes when they couldn't make their payments. Countrywide used deceptive practices, including low ``teaser'' rates, to entice borrowers into adjustable-rate loans without adequately informing them that the payments would balloon in later months, according to the suits.

The suit seeks “restitution for borrowers, civil penalties of as much as $2,500 per violation and a court order halting the practices.” Mortgage surcharge anyone?

UPDATE: From a plugged-in litigator: "I litigate cases under this statute all the time. It will be resolved with a promise to stop doing all these things and a payment to the state of several million dollars. The alleged "victims" (those who took out CW loans) won't get a dime and there will be no "mortgage surcharge." Basically, B of A shareholders will take an insignificant hit and that will be the end of it."

Countrywide Sued by California, Illinois, Over Mortgage Loans [Bloomberg]

First Published: June 25, 2008 1:00 PM

Comments from "Plugged In" Readers

Where is the individual responsibility???

I won't defend mortgage lender's practices but anyone that has purchased a home knows what their payments will be and that the rates will go up after the 'fixed' period. It seems like the disclosures at signing state this 3-4 times.

Anyone who borrows hundreds of thousands of dollars without KNOWING they can afford to pay no matter what happens to interest rates or the underlying value of the property unfortunately deserves what they get. Just like the mortgage companies that make the bad loans end up going out of business or in Countrywide's case having to be sold off.

Posted by: CameronRex at June 25, 2008 2:00 PM

Every boom-and-bust cycle needs a face to villify our past excesses.

In 2001 it was Kenneth Lay from Enron, this time around it appears this will be Angelo Mozilo and his very orange complexion.

Posted by: San FronziScheme at June 25, 2008 2:41 PM

I'm surprised Moz didn't give all the AG's special 4.25% mortgages like he did with the Senate.

Posted by: Jay at June 25, 2008 3:48 PM

Our original working title (note the URL): "It's Time To Point Another Finger: California Sues Countrywide"

Posted by: SocketSite at June 25, 2008 3:49 PM

"...this time around it appears this will be Angelo Mozilo and his very orange complexion."

Ok, I had to look up his picture after that amusing observation and I'm shocked. He makes George Hamilton's complexion look normal. I can only guess that there was one of those exploding ink devices in his last bonus payment...

Posted by: pica1986 at June 25, 2008 3:51 PM

I wonder if this is actual tan or Q-Tip-hue self-tan lotion.

Posted by: san FronziScheme at June 25, 2008 3:56 PM

The complaint certainly reads like a nice synopsis of all the mortgage industry practices we've heard about from a variety of sources. Here it is (with the press release):

http://ag.ca.gov/newsalerts/release.php?id=1582&

In sum, the AG alleges that CW engaged in unfair competition in the following ways:

• Encouraging borrowers to refinance or obtain financing with complicated mortgage instruments like hybrid adjustable rate mortgages or payment option adjustable mortgages
• Marketing complex loan products by emphasizing a very low “teaser” rate while misrepresenting the steep monthly payments, increased interest rates and risk of negative amortization
• Dramatically easing underwriting standards to qualify more people for loans
• Using low or no-documentation loans which allowed no verification of stated income
• Hiding total monthly payment obligations by selling homeowners a second mortgage in the form of a home equity line of credit
• Making borrowers sign a large stack of documents without provider time to read the paperwork
• Misrepresenting or hiding the fact that loans had prepayment penalties

I suspect the AG will have no problem proving all these as factual matters, so this will really come down to whether this conduct violates the unfair competition statutes or not (it will be decided by a judge, not a jury). Some clearly seem to be wrongful, e.g. misrepresenting prepayment penalties, while others seem to be stupid but not unlawful, e.g. easing underwriting standards. This would all be a bit more interesting if we hadn't already learned long ago about all these practices, and worse.

I litigate cases under this statute all the time. It will be resolved with a promise to stop doing all these things and a payment to the state of several million dollars. The alleged "victims" (those who took out CW loans) won't get a dime and there will be no "mortgage surcharge." Basically, B of A shareholders will take an insignificant hit and that will be the end of it.

Posted by: Trip at June 25, 2008 3:59 PM

LOL @ that fake tan...he looks like an Oompa Loompa!

Posted by: Anon at June 25, 2008 4:15 PM

Both borrowers and lenders should have responsibility. It is not okay to vend bogus toxic lending products just because you found some suckers, and it is zero help to society whatsoever to allow this kind of foolishness to go on under any circumstances ever, period.

Posted by: Mole Man at June 25, 2008 5:27 PM

"and it is zero help to society whatsoever to allow this kind of foolishness to go on under any circumstances ever, period".

Not really true,Mole Man. The great thing about bubbles is they get people with way more money than they can spend (i.e. savers) to hand it to people who will actually spend it. So you get a pretty good boost to the economy.

Of course, it's better when the bubble is something people don't really need, like dot com stocks or tulip bulbs.

We may be about to find out what our real economy looks like: for the first time, since 1997 no bubbles. I think you are going to find that it isn't a pretty sight for the average person. Higher unemployment (rather than people building, selling, financing and furnishing way more houses than the regular economy could support) and the people with money won't spend it. Be careful what you wish for...

Posted by: tipster at June 25, 2008 10:18 PM

c'mon tipster...

although it's true a bubble will give a short term boost to the economy, it's equally true that the aftereffects are devastating. Bubbles encourage OVERinvestment into a certain asset class. Once the bubble ends a reallocation is needed. This is intensely painful to an economy. Not only that, during times of bubble people leave other productive areas to go to the bubble (like doctors becoming RE agents as example) leaving those other areas UNDERinvested

Even if the bubble is in a "productive" asset... like Broadband as example. Sure, eventually we soaked up the broadband cables all over the place. our internet of today wouldn't have been possible today without the 90's bubble. (however we would eventually have gotten here internet-wise). But the dislocation of 2001 was very painful for hundreds of thousands of IT workers. it would have been worse except a second bubble (RE) replaced the first. So a lot of IT workers were suddenly in the RE field.

This bubble will be painful for hundreds of thousands of construction, real estate, decorator, architect, landscaper workers, etc. Not to mention whatever spillover effects caused by the sudden jump in unemployment. It will very likely cause a recession... unless another bubble can be found (which will only delay the recession again).

Posted by: ex SF-er at June 26, 2008 5:25 AM

The city of San Francisco is helping to fight any construction bubble bursting by taking so long to give permits. Work is just beginning on total fixers bought in 2005/2006, and the people who bought any time after that won't have there permits for a while. I'm speaking of larger scale work, not quick flips. These projects all take time to build, so the construction industry will be busy for the next 3+years.

Everyone I know is hiring now. Most are booked for the next year.

Posted by: sparky at June 26, 2008 11:16 AM

I am also an attorney. I think Trip is trying to tell you that the suit is not meant to let the borrowers off the hook. The AG's are just enforcing the laws in their respective states. These bad loans cost the states a lot of money in property tax revenue & maintainence for blighted abandoned properties.

@ Moleman, the feds have already started prosecuting borrowers for mortgage fraud. In addition to those already prosecuted, I can tell you that many others are under investigation.

Additionally, those who used "liar loans" are having a hard time seeking bankruptcy relief, because their mortgage app's are being used against them. From there, it might or might not trigger a criminal investigation.

So you see, there will be plenty of fury to go around.

Posted by: BBSmurf at June 26, 2008 11:44 AM

CameronRex -

Unfortunately, that is not always true. Sometimes income documents are either falsified or outright forgeries. Signatures have been forged on disclosure documents. Sometimes the borrower never sees the documents. The resulting loan is sometimes nowhere near what the person can afford.

The lender in a case I am familiar with was already prosecuted by attorney generals in this state and many others. But I fear that what Trip says is true. Even though the lender paid a big settlement they continued with the same behavior.

In this case they took advantage of a person who is fairly unsophisticated. But I don't know if I would have been any better at protecting myself before becoming an attorney. In fact, I bought a house before I went to law school and I didn't have any idea what was in the closing documents. I just trusted the people I worked with and signed where they told me to sign.

Posted by: Publius at June 26, 2008 6:14 PM

i think this is bull, because we get the problem , then the lender alway getaway with it we get stuck with a bad loan then what happend to most lender thers nothing happened no matter if we new about are loan or not, they should be fixing the problem with their client or try to find way to help our problem ,cause most of the time we get the short end of the stick,n they made the sale just like buying a car with get the car,then when their a problem they can't help u they alredy got their commisiom selling u a bad car, i think company should help their client no matter what they sell or loose their commision that what think should cause i was force out my house,by countrywide home loan,n found out that my loan was sold to a different bank so i had to leave my house recently,i think it not fair. my loan was 3100 amonth then went to 3300 to 3600 to 4300 why did it go up when they should of found way to keep me n my family to stay at this house, then i found out that a person that sold several loan that was stolen was arrested but then what happened to my situation i lost my house n my life is messed up now. i think our laws are bad n should not be trusted, n let people know not to purchase home cause they don't help their clients in situation like this.nobody helping me so i stuck in noware land thank alot countrywide.... mark penas

Posted by: mark penas at January 17, 2009 2:00 PM

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