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Connecticut AG files Suit Against Countrywide - Santa Calls?

The State of Connecticut has brought suit against Bank of America's newly acquired Countrywide Financial Corp. alleging that Countrywide made loans that were unaffordable or unsuitable to the borrower in violation of the state's unfair trade practices and banking laws. Countrywide was recently acquired by B of A in a $2.5 billion deal last month. The lawsuit seeks civil penalties of as much as $100,000 per violation of the state banking laws and $5,000 per violation of the state consumer protection laws, disgorgement of allegedly ill-gotten gains and an order compelling the company to cease the disputed practices.

The Connecticut suit follows suits brought in June by the States of California, Illinois and Washington against the lender. The Connecticut Post further reports that the state AG seeks not only to halt all foreclosure activity by Countrywide, but undertake the extraordinary remedy to undo past foreclosures. In an interview, Blumenthal stated that "he would also attempt to return foreclosed homes, when possible, to people who lost them as a result of these unscrupulous loans. . . .If the houses have already been sold to other families, Blumenthal said, the state will seek enough compensation to enable those who unjustly lost their houses to get another one." "We're talking hundreds, likely thousands, of families," Blumenthal said. Blumenthal said he has asked Bank of America, Countrywide's parent company, to suspend all foreclosure activity until this issue can be resolved. Banking Commissioner Howard Pitkin said that the suit could suddenly leave a lot of people free of mortgages, and that the lawsuit seeks to invalidate not only subprime loans, but borrowers who took equity lines of credit on their houses.

If the loan was unsuitable and the borrower by definition unable to afford the home, Connecticut now seeks to reward the borrower with a mortgage free home, invalidation of duly commenced foreclosure sales and invalidation of too risky home equity loans. And if the foreclosed home is already gone, the AG seems to be saying Countrywide's successor's has got to provide a replacement home for the borrower. It will be interesting to see if the AG can deliver on these promises and important to track who pays for these extraordinary government-provided handouts and further who benefits from the state suits.

Another nagging question. Will Connecticut's AG apply the same regulatory zeal to Connecticut Democratic Senator and Chairman of the Senate Banking Committee Christopher Dodd's, sweetheart home financing deal with Countrywide that reportedly reduced the rate of two loans including his mortgage on his Connecticut home saving him $17,000 over the life of the loan? This would be the same Senator Dodd that is one of the prime movers of the taxpayer financed mortgage bailout.

Another political link? James A. Johnson, who had been head of presidential candidate Barack Obama's vice presidential search committee resigned abruptly in mid-June after days of intense scrutiny from the news media and political criticism that Johnson, a former chief executive of Fannie Mae, had received mortgages on favorable terms from Countrywide, a central player in the subprime lending crisis. Johnson and Senator Dodd are just two amongst many political players who appear to have received "friend" of Countrywide deals.

Business Week reported on Friday that the SEC has now launched a formal investigation into Countrywide, according to a recent regulatory filing by the Bank of America. The filing does not specify the nature of the inquiry, but notes that the lender has responded to subpoenas issued after an informal inquiry was launched in November 2007 into former Countrywide chairman and CEO Angelo Mozilo's stock trades. Businessweek further quotes an article in the Los Angeles Times that reports "that the SEC probe centers on whether Mozilo's stock trades violated the law and whether the lender's financial disclosures misled investors. . . .The executive exercised options on thousands of shares of common stock through a prearranged trading plan, but the timing of changes in the stock-selling program drew shareholder criticism. The changes, which were made in the months before the company's stock plunged, allowed Mozilo to significantly increase his sales of Countrywide shares."

Connecticut's suit comes right before a court hearing on August 11, in which Businessweek notes that a U.S. Bankruptcy Court judge in Pittsburgh "is set to review an agreement in which Countrywide agreed to pay a bankruptcy trustee $325,000 to settle allegations that the mortgage lender sought improper fees or payments from bankrupt homeowners and otherwise violated bankruptcy court orders and regulations in nearly 300 cases. Countrywide acknowledged errors in handling some debts, but it had denied any systematic effort to thwart bankruptcy protections to collect money. (Update 8-16-08: The bankruptcy judge has declined to allow the settlement to go forward at this time.)
Countrywide is also among the companies being investigated by the FBI as part of the agency's probe into the financial services industry in the wake of the mortgage meltdown."

Finally, the WSJ reports today that the U.S. Justice Department has challenged this deal with the bankruptcy trustee, saying that the lender is trying to silence a critic of the company.

The Countrywide saga offers a heady mix of law and politics, as its CEO Mozilo, has also been identified as just one of the players in what the Wall Street Journal has dubbed the Fannie Mae Gang. Stay tuned.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.