ILLINOIS ATTORNEY GENERAL MADIGAN FILES LAWSUIT AGAINST MORTGAGE GIANT COUNTRYWIDE

Alleges Company Deceptively Sold Risky Loans
Despite Borrowers’ Inability to Pay

Chicago – Attorney General Lisa Madigan today filed a lawsuit in Cook County Circuit Court against Countrywide, the nation’s largest mortgage lender and servicer. The complaint 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.

The complaint also names as defendants Countrywide’s subprime lending unit, Full Spectrum Lending; the company’s servicing arm, Countrywide Home Loans Servicing LP; and Angelo Mozilo, the co-founder and former CEO of Countrywide Financial whose name has become synonymous with the excesses of the subprime mortgage industry. The lawsuit is the result of a nine-month probe by Madigan’s office into the lending practices of Countrywide.

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 originations of unaffordable and poorly underwritten loans to satisfy its obligations to Wall Street investors.

“Countrywide created risky and costly loan products and marketed them to borrowers who could not afford them,” Madigan said. “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’s complaint comes in the midst of an unprecedented foreclosure crisis. 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.

Countrywide’s delinquency rates are having a devastating impact on Illinois homeowners because of the company’s massive presence in the market:

• 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, Countrywide operated approximately 100 retail branches in Illinois and was the largest mortgage lender in the state from 2004-2006, 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.

Moreover, Countrywide is unique among lenders for its involvement in virtually every segment of the mortgage industry. Countrywide sells, purchases, services and securitizes mortgage loans.

“At the start of our investigation, we knew that Countrywide was a major player in the rapidly collapsing subprime mortgage market,” Madigan said. “Through the investigation, we have learned the larger story of how Countrywide created and implemented a corporate strategy that resulted in widespread loan failures by luring Illinois homeowners into unfair and unaffordable loans.”

Countrywide Relaxed Underwriting Standards and Placed People into Unaffordable Loans
Madigan’s complaint outlines the 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 products containing multiple layers of risky features, thus ensuring that loans would fail.

As one example of Countrywide’s practice of placing borrowers into unaffordable loans, the complaint describes how Countrywide lessened its underwriting standards to place more subprime borrowers into reduced document loan products, which were faster and easier for Countrywide to sell, but came with higher costs for borrowers and higher delinquency rates. The complaint alleges that Countrywide sales employees and independent brokers selling its products used reduced document loans to inflate incomes of borrowers who otherwise wouldn’t qualify for a loan.

“Countrywide repeatedly qualified borrowers for mortgage loans based on salaries that were significantly higher than what they really made,” Madigan said. “As a result, Countrywide put borrowers into loans that they could never afford, leading to high failure rates.”

Moreover, the complaint alleges, even as Countrywide was increasing sales volume with reduced document loans based on inflated incomes, the company was also ramping up its sales of “affordability” products that exposed borrowers to unnecessarily high risk of foreclosure or loss of home equity. “Affordability” products are loans with low payments that last for only an initial period. Madigan alleges that Countrywide routinely qualified borrowers for affordability loans based on the initial low payment amount, even though the company knew that the borrowers would not be able to repay the loan after it reset to a higher rate.

One example of these risky products is Countrywide’s popular hybrid adjustable rate mortgage (hybrid ARM). These loans typically have a two- or three-year fixed rate, followed by 28 or 27 years in which the rate varies. Countrywide’s hybrids usually had discounted interest rates during the short fixed-rate period. After that period, the rate would reset upward every six months to a year, resulting in higher monthly payments. Most of the Countrywide borrowers who qualified for the lower fixed-rate period would not have qualified at the higher payment amounts after reset. Nonetheless, the company put borrowers into these unaffordable loans, assuming that borrowers would refinance the loan or sell the home before the payments increased.

Madigan also alleges that Countrywide relied on a host of unfair and deceptive sales techniques to push its unaffordable loan products on unsuspecting borrowers. Specifically, the lawsuit alleges that Countrywide enticed borrowers with promises of the best loan terms, low monthly payments, low interest rates and no closing costs but failed to disclose the loan’s true costs, affordability and risk.

The lawsuit alleges that Countrywide’s deceptive sales techniques were due in large part to a compensation structure that encouraged sales employees to place borrowers in risky loans by tying their compensation to the volume of loans sold. Madigan further alleges that Countrywide incentivized its vast network of independent mortgage brokers to sell home loans that were riskier and costlier than necessary, to the exclusion of other products.

complaint alleges that Countrywide violated Illinois law by engaging in unfair and/or deceptive practices that included:

• Originating mortgage loans that borrowers could not afford;
• Relaxing certain underwriting guidelines, particularly through the company’s reduced documentation loan program, dramatically increasing the risk that borrowers would be unable to pay;
• Originating mortgage loans that exposed borrowers to an unnecessarily high risk of foreclosure or loss of equity, particularly through risky products like pay option ARMs;
• Originating unnecessarily costly loans to borrowers;
• Engaging in unfair and deceptive marketing and advertising practices to lure borrowers into risky loans;
• Incentivizing employee and broker misconduct and the use of unnecessarily costly and risky loan products; and
• Engaging in deceptive practices in the servicing of mortgage loans, resulting in greater risk of foreclosures.

“Countrywide used egregiously unfair and deceptive lending practices to steer borrowers into loans that were destined to fail,” Madigan said. “As the nation’s largest originator of mortgage loans, Countrywide’s conduct has had and will continue to have a devastating financial impact on tens of thousands of families and many communities in Illinois.”

Madigan’s lawsuit asks the court to rescind or reform all Countrywide loans originated with the use of unfair and deceptive practices. This includes providing financial relief to borrowers who lost their homes to foreclosure, refinanced, sold, or have loans currently being serviced by Countrywide, even if that requires Countrywide to repurchase loans from current investor owners. For those loans currently being serviced by Countrywide, Madigan requests that the court allow the Attorney General’s Office 90 days to review any loans in foreclosure or moving toward foreclosure that were originated using the unfair and deceptive practices alleged in the complaint to determine if the loan can be modified to be affordable.

The Attorney General issued a second subpoena to Countrywide in March seeking information to determine whether the company has violated state and federal fair lending laws. That investigation is ongoing.

A team of attorneys in Madigan’s Consumer Fraud Bureau is handling this suit for the Attorney General’s Office.

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