Sorry for the lack of entries of late. Somehow Google decided I was in Japan, so everything in blogspot was in Japanese. Google, I assure you that I am not in Japan, and as evidence submit the sub-zero temperatures and mounds of snow outside my window.
First, if you are having difficulties making your payments, contact your lender, and see if you can work something out with them. Document EVERYTHING. Every telephone call, every letter, every statement, every check. Write down who you talked to, what was said, what time it was, what number you called. Keep copies of everything you send to your lender and everything your lender sends to you.
If you or anyone you know is in foreclosure, or even close to foreclosure, I would suggest a consultation with a knowledgable attorney. I have seen some amazingly sloppy and/or fraudulent work on the part of lender, mortgage brokers, closing agents, appraisers, and real estate agents. Some of their sloppy and/or fraudulent work may be a foreclosure defense. I will run through a few examples, but there are so many tricks these folks pull. Even if you do not see anything in this list that you think applies to your situation, there may be something else that a thorough review of your closing documents might reveal. Be sure to refer to my Foreclosure Rescue Scams article.
In Iowa, if a spouse does not sign the mortgage, the mortgage is void. Wells Fargo recently lost big on this one. Married couple owned a home and refinanced with Wells Fargo. Only the husband was on the loan and only the husband signed the mortgage. Judge said the mortgage was void, and Wells Fargo could not foreclose. Yes, that means they could live there forever without making a house payment. Well, they could live there forever without making a payment IF they could live forever, which they probably can't, but you get my point.
For a refinance, each individual must be given two copies of the Notice of Right to Cancel.
For a refinance, if two people own the property, both of them must sign the Notice of Right to Cancel, even if only one of them is on the loan.
For a refinance, the dates on the copies of the Notice of Right to Cancel give to the borrowers must be completed. Often, I have seen where the closing agent fills in the dates on the original signed by the borrowers, but fails to do so on the copies given to the borrowers.
For some reason, many lenders are sloppy about giving required notices of default to borrowers. When a lender forecloses, they must do everything exactly, perfectly right.
Some lenders fail to provide disclosures to you prior to your closing.
Some lenders fail to provide accurate estimates of closing costs prior to your closing.
There is an interesting case brewing on the east coast. Countrywide is arguing that their claims that they are working with people to prevent foreclosure is mere puffery. Read this story, and see if your blood boils as much as mine did. How they are still in "business," if that's what you call it, completely escapes me.
Wednesday, January 21, 2009
Wednesday, September 24, 2008
Foreclosure "rescue" scams
Whenever disaster strikes, most people try to help out others. Most people. A few others swoop in to try to take advantage of the situation. Foreclosure "rescue" scamsters are just such scumbags. Since foreclosures are public record, it is very simple for the scamsters to get online and see who might need their "help." We used to have one such gentleman in our community who provided such services for a couple of years. What he would do is contact his potential victim, er, I mean client and tell them he could clear up their foreclosure for them. He would have the homeowner sign a power of attorney, sometimes a deed to him, and an authorization to talk with the homeowner's lender. He would make sure he would drain the homeowner of any money they might happen to have for his service fee.
Early in his career he would contact the lender, and find out what it would cost to get the mortgage payments current, and pay that. He skipped this step later. He would then require that the homeowner pay him the monthly payment, which he generously bumped up for more of his "service fees." He even set up an out of state corporation for this payment processing. For a while, he actually made some payments directly to the lenders. This must have been very boring, since he stopped doing this after a time.
You might be thinking that the homeowner would get notification that their payments were not being made. You would be right if he hadn't used that power of attorney to change the address the lender had on file for sending notices to his address. Of course, he had that signed when he was the great guy, white knight, rescuer, etc. Often the next thing people knew was that the foreclosure was back on, and the scamster had been pocketing their money for months without making a single payment to their lender.
In one particularly egregious case, he had the homeowner deed the property to him, in addition to paying him a $20,000 service fee. When the homeowner got wind that he was not making payments, she wisely contacted a lender to help her straighten things out. The scamster, since he was now the owner of the property, demanded that the homeowner give her some money to "buy the house back from him," because he had lots of equity (which he of course stole from the homeowner in the first place). We eventually got him and his equally sleazy attorney to drop this preposterous demand, and we got the property back in her name, with a fair and reasonable mortgage. I wish I could give you a transcript of our "negotiations" with the scamster's attorney, but his language and his claims of what he was going to do to me would require this blog to get an R rating if I did post it. Lucky for us, both the scamster and his sleazy attorney have left town--no doubt raining fraud upon another community.
Moral of the story: If you are in financial trouble, contact your lender right away. And contact a reputable real estate attorney before you sign anything designed to help you. I will bet most attorneys will charge you less than $20,000...
Early in his career he would contact the lender, and find out what it would cost to get the mortgage payments current, and pay that. He skipped this step later. He would then require that the homeowner pay him the monthly payment, which he generously bumped up for more of his "service fees." He even set up an out of state corporation for this payment processing. For a while, he actually made some payments directly to the lenders. This must have been very boring, since he stopped doing this after a time.
You might be thinking that the homeowner would get notification that their payments were not being made. You would be right if he hadn't used that power of attorney to change the address the lender had on file for sending notices to his address. Of course, he had that signed when he was the great guy, white knight, rescuer, etc. Often the next thing people knew was that the foreclosure was back on, and the scamster had been pocketing their money for months without making a single payment to their lender.
In one particularly egregious case, he had the homeowner deed the property to him, in addition to paying him a $20,000 service fee. When the homeowner got wind that he was not making payments, she wisely contacted a lender to help her straighten things out. The scamster, since he was now the owner of the property, demanded that the homeowner give her some money to "buy the house back from him," because he had lots of equity (which he of course stole from the homeowner in the first place). We eventually got him and his equally sleazy attorney to drop this preposterous demand, and we got the property back in her name, with a fair and reasonable mortgage. I wish I could give you a transcript of our "negotiations" with the scamster's attorney, but his language and his claims of what he was going to do to me would require this blog to get an R rating if I did post it. Lucky for us, both the scamster and his sleazy attorney have left town--no doubt raining fraud upon another community.
Moral of the story: If you are in financial trouble, contact your lender right away. And contact a reputable real estate attorney before you sign anything designed to help you. I will bet most attorneys will charge you less than $20,000...
Saturday, August 23, 2008
Interesting how they change their tune
We had another "deed and green" transaction, this one in Poweshiek County in Iowa. The attorney charged $85 to prepare a deed. There was a strange little title defect, and when we called the attorney, he told us, "Why are you asking me? The real estate agent represents them." Clearing title defects in Illinois and Iowa is considered the practice of law, and therefore real estate agents are not allowed to clear title defects. We believe we are assisting in the unauthorized practice of law when we "work with" real estate agents in clearing title defects. We also believe that attorneys should "do their job." I sent the attorney a letter outlining my concerns, advising that I was not about to assist in the unauthorized practice of law, and including a copy of the Iowa Court Rules which set forth what real estate agents can and cannot do in real estate transactions. By golly, he called me right back, and started working on clearing that title defect.
Thursday, August 21, 2008
These are supposed to be smart people
http://www.chicagotribune.com/business/chi-sun-title-insurance-fraud-aug17,0,1998638.story
Ticor is claiming that they should not have to cover a title claim because Countrywide should not have given the loan to these scammers. Heck yes, Countrywide should never have given this loan. But Ticor agreed to take some money to insure title. Unfortunately, their local agent may have been a bit sloppy according to the article. That's not really Countrywide's problem. Maybe Ticor should have done a better job of qualifying and/or checking on their agents.
I understand the sentiment, really I do. If Countrywide had done its job and seen all of the neon clues that this was a scam from top to bottom, they would never have given the loan, and therefore, they would never have hired Ticor to give them a title policy, and therefore, there would be no title claim. But isn't this tantamount to your car insurance company refusing to cover you because the accident would not have happened if you were not driving? If Ticor succeeds in this case, haven't they demonstrated that title insurance is worthless? And, having done that, wouldn't they have litigated themselves out of existence?
Ticor is claiming that they should not have to cover a title claim because Countrywide should not have given the loan to these scammers. Heck yes, Countrywide should never have given this loan. But Ticor agreed to take some money to insure title. Unfortunately, their local agent may have been a bit sloppy according to the article. That's not really Countrywide's problem. Maybe Ticor should have done a better job of qualifying and/or checking on their agents.
I understand the sentiment, really I do. If Countrywide had done its job and seen all of the neon clues that this was a scam from top to bottom, they would never have given the loan, and therefore, they would never have hired Ticor to give them a title policy, and therefore, there would be no title claim. But isn't this tantamount to your car insurance company refusing to cover you because the accident would not have happened if you were not driving? If Ticor succeeds in this case, haven't they demonstrated that title insurance is worthless? And, having done that, wouldn't they have litigated themselves out of existence?
Tuesday, August 19, 2008
Say the name! Say the name!
A banker friend of mine told me he had a conversation with a real estate agent who was complaining that I was not "flexible" about how something should be done in a real estate transaction. He knows how I operate, and he asked, "Well, was he right?" To which the real estate agent responded, "I guess so. Technically....." I was so proud.
Speaking of flexibility, I came across the following press release from the Department of Justice District of New Jersey website.
http://www.usdoj.gov/usao/nj/press/press/files/pdffiles/cart0813%20rel.pdf
Here is a brief quote:
"According to the Indictment, the borrowers attended closings at a Garfield law office where Gebbia worked. There, at the closing attorney’s direction, Gebbia prepared fraudulent HUD-1 Uniform Settlement Statements that were signed by the borrowers, Ugwu and others reflecting deposits that had never been made. The closing attorney then allegedly distributed proceeds of the fraudulently-obtained mortgage loans to the conspirators by checks made payable to companies controlled by Eliasof, who in turn paid kickbacks to Carti, the closing attorney and others. "
I can only hope they did not name the closing attorney because they have something really "special" planned for him/her. Not only do attorneys have a lot to lose by playing these games, they violate their duty to their clients by allowing these transactions to go through this way. Perhaps if a few more attorneys would have stood firm, we might not be in the mess we are in right now. Sure, some real estate agent might complain that we are "not flexible," but isn't that our job?
Speaking of flexibility, I came across the following press release from the Department of Justice District of New Jersey website.
http://www.usdoj.gov/usao/nj/press/press/files/pdffiles/cart0813%20rel.pdf
Here is a brief quote:
"According to the Indictment, the borrowers attended closings at a Garfield law office where Gebbia worked. There, at the closing attorney’s direction, Gebbia prepared fraudulent HUD-1 Uniform Settlement Statements that were signed by the borrowers, Ugwu and others reflecting deposits that had never been made. The closing attorney then allegedly distributed proceeds of the fraudulently-obtained mortgage loans to the conspirators by checks made payable to companies controlled by Eliasof, who in turn paid kickbacks to Carti, the closing attorney and others. "
I can only hope they did not name the closing attorney because they have something really "special" planned for him/her. Not only do attorneys have a lot to lose by playing these games, they violate their duty to their clients by allowing these transactions to go through this way. Perhaps if a few more attorneys would have stood firm, we might not be in the mess we are in right now. Sure, some real estate agent might complain that we are "not flexible," but isn't that our job?
Monday, June 30, 2008
This is a bad thing, isn't it?
Then why didn't it get more publicity? This is lifted right from the Office of United States Attorney District of Arizona's website.
PHOENIX - The United States reached a civil settlement with Wells Fargo Bank and Ticor Title Agency of Arizona. In the settlement, Wells Fargo Bank has agreed to pay $4,046,786 and Ticor Title has agreed to pay $265,370.
Under certain circumstances, the Federal Housing Administration’s "pre-foreclosure sales" program allows homeowners with federally-insured loans to avoid foreclosures by listing their homes for sale. If a sales price is not enough to pay-off a loan, then the lender submits an insurance claim to the Federal Housing Administration which will pay the lender the balance owing on the loan.
The United States contends that Well Fargo Bank submitted more than 70 false claims to the Federal Housing Administration under the pre-foreclosure sales program and that Ticor Title prepared inaccurate escrow documents which allowed lenders to submit false claims to the Federal Housing Administration. The United States contends that it suffered $2,156,078 in losses. Wells Fargo Bank and Ticor Title deny the United States’ contentions but agreed to pay the amounts listed above.
The investigation leading to the settlement was conducted by the U.S. Department of Housing and Urban Development, Office of Inspector General.
RELEASE NUMBER: 2008-165(Wells Fargo settlement)
Unless I am completely misunderstanding this, Ticor Title and Wells Fargo were in cahoots to lie to the government--OUR government--about the sale price of properties that were in foreclosure but not yet owned by Wells Fargo. This is the way I understand it, and please someone correct me if I am mistaken: Homeowner owes Wells Fargo $100,000, stops making payments, and foreclosure is commenced. Homeowner tries to sell house before foreclosure sale, but can only get $80,000 for the place. The FHA's pre-foreclosure sale program would allow Wells Fargo to recoup that $20,000 (which is darned nice of us taxpayers). But that's not enough for Messrs. Wells and Fargo. They somehow get Ticor to prepare a HUD-1 that says the property only sold for $50,000, so now Wells Fargo can get a $50,000 shortfall (rather than the $20,000 to which they are entitled) from the government, as well as the $80,000 from the sale of the house. This would net them $130,000 rather than the $100,000 they were owed.
Wow.
PHOENIX - The United States reached a civil settlement with Wells Fargo Bank and Ticor Title Agency of Arizona. In the settlement, Wells Fargo Bank has agreed to pay $4,046,786 and Ticor Title has agreed to pay $265,370.
Under certain circumstances, the Federal Housing Administration’s "pre-foreclosure sales" program allows homeowners with federally-insured loans to avoid foreclosures by listing their homes for sale. If a sales price is not enough to pay-off a loan, then the lender submits an insurance claim to the Federal Housing Administration which will pay the lender the balance owing on the loan.
The United States contends that Well Fargo Bank submitted more than 70 false claims to the Federal Housing Administration under the pre-foreclosure sales program and that Ticor Title prepared inaccurate escrow documents which allowed lenders to submit false claims to the Federal Housing Administration. The United States contends that it suffered $2,156,078 in losses. Wells Fargo Bank and Ticor Title deny the United States’ contentions but agreed to pay the amounts listed above.
The investigation leading to the settlement was conducted by the U.S. Department of Housing and Urban Development, Office of Inspector General.
RELEASE NUMBER: 2008-165(Wells Fargo settlement)
Unless I am completely misunderstanding this, Ticor Title and Wells Fargo were in cahoots to lie to the government--OUR government--about the sale price of properties that were in foreclosure but not yet owned by Wells Fargo. This is the way I understand it, and please someone correct me if I am mistaken: Homeowner owes Wells Fargo $100,000, stops making payments, and foreclosure is commenced. Homeowner tries to sell house before foreclosure sale, but can only get $80,000 for the place. The FHA's pre-foreclosure sale program would allow Wells Fargo to recoup that $20,000 (which is darned nice of us taxpayers). But that's not enough for Messrs. Wells and Fargo. They somehow get Ticor to prepare a HUD-1 that says the property only sold for $50,000, so now Wells Fargo can get a $50,000 shortfall (rather than the $20,000 to which they are entitled) from the government, as well as the $80,000 from the sale of the house. This would net them $130,000 rather than the $100,000 they were owed.
Wow.
Thursday, June 26, 2008
Oooo, you're in trouble....
And it's about time. Of course, I won't mention that I contacted her office about three years ago concerning rampant mortgage fraud in the Quad Cities by a couple of bad apples (no offense intended to apples), and got absolutely nowhere. Apparently it wasn't a glamourous crime at that time. Anyway, I'm glad we're getting after it now.
Here's the link to the press release:
http://www.illinoisattorneygeneral.gov/pressroom/2008_06/20080625.html
If you have scads of time on your hands (it's 81 pages), you can download the complaint here:
http://www.illinoisattorneygeneral.gov/pressroom/2008_06/countrywide_complaint.pdf
From the Illinois Attorney General's website:
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.”
Countrywide’s Major Role in the Foreclosure Crisis
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.
Countrywide Used Unfair and Deceptive Sales Techniques to Lure Borrowers
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.
Countrywide’s Conduct Violated Illinois Law
Madigan’s 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.
www.thomasmoens.com
Here's the link to the press release:
http://www.illinoisattorneygeneral.gov/pressroom/2008_06/20080625.html
If you have scads of time on your hands (it's 81 pages), you can download the complaint here:
http://www.illinoisattorneygeneral.gov/pressroom/2008_06/countrywide_complaint.pdf
From the Illinois Attorney General's website:
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.”
Countrywide’s Major Role in the Foreclosure Crisis
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.
Countrywide Used Unfair and Deceptive Sales Techniques to Lure Borrowers
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.
Countrywide’s Conduct Violated Illinois Law
Madigan’s 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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