California joins legal fight against Countrywide

California Attorney General Jerry Brown says he's seeking something quite simple for thousands of homeowners who lost money or their houses to foreclosure after borrowing from Countrywide Financial Corp.

Payback.

But the state's top lawyer warned that the journey to compensate troubled homeowners who took out Countrywide loans will be marked by a lot of roadblocks. And just where that journey will lead remains unclear.

On Wednesday, Brown sued the nation's largest home loan lender, alleging it engaged in "deceptive advertising" to lure borrowers into taking out loans they weren't capable of repaying. The suit claims Countrywide, based in Calabasas, put intense pressure on managers and sales staff, offering financial incentives to sell risky loans without regard to the borrower's ability to repay them.

The lawsuit alleges that Countrywide lowered its lending standards to place large numbers of its loans in the "secondary market," a term for packaging them into profitable mortgage-backed securities and selling them to global investors. In a statement, Brown called Countrywide a "mass production loan factory, producing ever-increasing streams of debt without regard for borrowers."

The state of Illinois also filed a similar lawsuit Wednesday.

Countrywide did not respond to an e-mail and phone calls seeking comment.

Hours after Brown filed the suit in Los Angeles Superior Court, Countrywide's shareholders approved the sale of the company to Charlotte, N.C.-based Bank of America. Scott Silvestri, spokesman for BofA, said the bank had no comment.

As fresh lawsuits hang over BofA's July 1 acquisition, some say the giant bank may get more than it bargained for.

"Bank of America is taking on a big risk," said Kurt Eggert, a law professor at Chapman College in Orange in Southern California.

Eggert said Countrywide could be liable for "huge sums of money and might have to return houses that have been foreclosed. Until this litigation is resolved, it strikes me that Countrywide is under a very dark financial cloud."

Yet, it's by no means clear that California's lawsuit will get traction in the courts, let alone prevail, said Wesley M. Marple, professor of finance at Boston's Northeastern University. Marple's hunch is that Brown is grandstanding and that other states will follow.

"It's a great way of getting political support on the part of the naive electorate," he said. Though attorneys general have "enormous prosecutorial power that dwarfs that of most individuals, Countrywide, with Bank of America, can probably withstand the onslaught," he said.

Both California and Illinois contend that Countrywide's practices caused thousands of foreclosures that damaged the states' economies and housing markets. In an interview, Brown said the Calabasas lender "accelerated financial activity way beyond what the real financial conditions permitted.

"Now, we're getting a letdown, the backlash, where people are thrown out of their homes," he said. "Businesses are closing, the economy is down and taxes are down."

The suit seeks not only compensation for an untold number of borrowers, but asks for civil penalties of $2,500 for each violation. It did not specify the number of violations.

During the housing boom, Countrywide became the nation's largest lender. From June 2005 to June 2007, it was the largest lender in the Sacramento region.

The lawsuit singles out a variety of "teaser rate" loans that Countrywide and other lenders specialized in as housing prices rose. Those offered initial interest rates to borrowers as low as 1 percent.

The state's lawsuit said many borrowers mistakenly assumed those were permanent rates. Borrowers then quickly found themselves making higher monthly payments than they expected or could afford. Now, thousands of borrowers across California are defaulting, and no one knows when foreclosures will peak.

Six pages of the lawsuit deal with an especially risky type of Countrywide loan called the pay option ARM. That loan offers borrowers lower initial interest rates and several payment options. Most chose the least expensive, which didn't even cover the full interest payments. That meant the principal would then grow.

Steve Abrams, a training manager who works for the state, has made mostly minimum payments on his Countrywide pay option ARM, adding $1,000 to his principal every month.

"It's like I'm getting deeper and deeper," he said.

Abrams said he has kept up payments since getting the loan in 2005. But next year, it will go up by $1,000 a month, he said. He said repeated requests to Countrywide for a new kind of loan have led nowhere.

Brown encouraged Countrywide borrowers to call his offices – (916) 322-3360 – and provide examples of being misled.

About the writer:

• Call The Bee's Jim Wasserman, (916) 321-1102. Read his Home Front blog at www.sacbee.com/blogs.