Countrywide Sued As Shareholders Vote To Approve Merger With Bank of America

Both the California and Illinois attorney generals' offices plan to sue Countrywide for engaging in deceptive lending practices.  It's unclear how the attorney generals managed to come up with this brilliant plan on the exact same day.  Perhaps it was timed in an effort to attempt to derail Bank of America's proposed merger before it's too late.  However, Countrywide's shareholders just approved the takeover, realizing they would need Bank of America's deep coffers to pay for all the litigation.

The Illinois lawsuit alleges that the company engaged in "unfair and deceptive practices."  Illinois officials say that Countrywide relaxed its underwriting standards, put together loans with risky features and used marketing and sales tactics that motivated employees and brokers to push loans regardless of whether borrowers had the resources to repay them.  Meanwhile, the California attorney general is accusing Countrywide of misleading advertising and other unfair business practices to trick borrowers into taking on risky home loans they didn't fully understand.  

Both the Illinois and California lawsuits fairly accurately describe the entire mortgage industry for the past three years.  Every lender relaxed its underwriting standards, otherwise it would not have been able to compete with all of the bozos pumping no-doc, negative am, interest only and option arms.  Without a doubt, Countrywide was the worst offender, if you're going to base the competition on sheer volume.  But if the attorney generals are attempting to make a statement, they might as well sue them all.  

Why regulators failed to notice the mortgage industry's deceptive practices from 2005-2007, I have yet to understand.  It was constantly reported in the newspapers.  Anecdotal stories about people purchasing homes with no doc loans and option arms were reported nearly every day in the financial press.  Did regulators actually believe back then that people understood negative amortization?  Is it only now becoming clear because default rates are soaring due to falling home prices and the lack of ability to refinance into yet another risky mortgage?  I understand that regulators need to appear vigilant in going after the worst offenders.  And I'm certain that much evidence will be presented that proves that brokers preyed on the financial ignorance of the average American negative amortization mortgage borrower.  What I'm uncertain of is how going after Bank of America, who will own Countrywide on July 1st barring any unexpected events, will help alleviate the foreclosure crisis.  Bank of America is already on the hook for Countrywide's poorly performing mortgage portfolio.  Allowing the bank to remain solvent so that it can provide banking services in this extremely tight lending environment is a much better alternative.