Friday, July 18, 2008

CA AG Amends Countrywide Complaint

On June 20, 2008 California Attorney General Edmund G. Brown Jr. sued Countrywide for engaging in deceptive advertising and unfair competition by pushing homeowners into risky loans for the sole purpose of reselling the mortgages on the secondary market. On or about June 24, 2008, Brown filed an amended lawsuit in Los Angeles Superior Court which reveals twenty new details about the company’s scheme to deceive consumers into taking out dangerous mortgages. The information had been previously withheld from the complaint.

Some of the new information includes the fact that Countrywide‘s wholesale lending officers received higher commissions for selling Pay Option Adjustable Rate Mortgages--loans that entice consumers with a very low initial “teaser” rate--and loans with weak underwriting standards. Countrywide also paid higher commissions for putting borrowers into loans with higher rates and fees than they qualified for based upon credit scores and other factors.

Countrywide ignored factors that it identified as having negative impacts on underwriting including: high debt ratios, low credit scores, and minimal down payments. Company employees regularly overrode warnings from Countrywide‘s computerized underwriting system, known as CLUES, which issued loan analysis reports rating consumer credit, purported ability to repay, and whether a proposed loan complied with underwriting guidelines.

The following examples describe new details about how Countrywide granted exceptions to sound business practices. These examples represent a small percentage of the large number of California residents who are facing foreclosure due to Countrywide‘s dangerous practices:

• A Countrywide loan officer convinced a borrower to take a Pay Option ARM with a 1-month teaser rate and a 3-year prepayment penalty plus a full-draw piggyback home equity line of credit based on the loan officer’s representation that the value of the borrower’s home would continue to rise and he would have no problem refinancing. The borrower’s debt-to-income ratio was 47 percent and credit score was 663. The loan officer offered the loan even though the company’s CLUES report and an underwriter review indicated strong doubts about the borrower’s ability to repay. The loan closed in January 2006, and a Notice of Default issued in June 2007.

• The CLUES report issued for a loan applicant in February 2005 stated that the consumer had too much debt for the loan program and identified other elements of risk including a low credit score. The CLUES report raised doubts about the borrower’s ability to repay the loan but Countrywide approved a 3/27 adjustable rate mortgage with a 3-year prepayment penalty, to an 85-year old disabled veteran with a credit score of 509 score and an debt-to-income ratio of nearly 60 percent. The loan closed in February 2005, and a Notice of Default issued in July 2005.

• The CLUES report for a proposed loan identified multiple risks that created doubts about the borrower’s ability to make the payments, including the fact that a borrower had an open collection account. In January 2006, however, Countrywide granted exceptions for these risks and approved a reduced documentation Pay Option Adjustable Rate Mortgage loan for $352,000 with a 3-month teaser rate and a 3-year prepayment penalty, as well as a Piggyback home equity line of credit for $22,000. The loan closed in January 2006, and a Notice of Default issued in October 2006.

Many borrowers who obtained Pay Option and Hybrid ARMs did not understand that their initial monthly payment would at some point “explode,” that their initial interest rate would increase and become adjustable, or that the principal amount of their loans could actually increase. Countrywide received numerous complaints regarding these practices from borrowers, including over 3,000 complaints per year handled by the Office of the President between January 2005 and August 2007.

Countrywide gave branch managers commissions or bonuses based on the net profits and loan volume generated by each branching, thereby creating intense pressure to sell as many loans as possible, as quickly as possible, at the highest prices possible. Branch managers were rewarded for meeting production goals set by corporate management, increasing the number of loans sold per loan officer, and reducing the time periods between the loan application stage and funding--or penalized for failing to do so.

The amended lawsuit also contains updated data about Countrywide‘s staggering foreclosure rates. As of April this year, 21.11% of the mortgages owned by Countrywide Home Loans were in some stage of delinquency or foreclosure, including 47.97% of originated non-prime loans, and 21.23% of Pay Option ARMs. In January and March, 2008, Countrywide recorded 3,175 notices of default in Alameda, Fresno, Riverside, and San Diego counties alone, representing an aggregate total of delinquent principal and interest of more than $917 million.

“These shocking new details provide further evidence of Countrywide’s dangerous lending practices, which included ignoring borrowers’ low credit scores and rewarding employees for selling risky loans,” Attorney General Brown said. “In one case the company approved an adjustable rate mortgage to an 85-year-old disabled veteran with such a low credit score and high debt that he defaulted in less than six months.”

mortgage fraud

1. As an appraiser I can tell you that Countrywide/Landsafe asked us not to mention additions, not mention problems with the dwelling, use non comparable sales etc.  CW and Landsafe pressured us to ‘inflate’ values.  When we resisted we were kicked off their list as ‘they had appraisers who would hit their values.’ Glad to see them go, hopefully we can clean up this mess.

   Posted by  on  07/18  at  12:36 PM

2. Rachel it has been a whils since I have blogged on your site. it is good to see that you are still keeping us all notified about the recent developments of the industry.

   Posted by  on  07/18  at  07:54 PM

3. Rachel, I always enjoy keeping up with the origination side fraud you so doggedly report on.

   I would like to point out that there are nuances to the scheme that may have even broader implications, particularly those where lenders like Countrywide ‘bought’ the credit scores they were destined to use.

   To believe the credit reporting agencies weren’t tuning their scoring products to their customer’s needs is absurd. Their data is so utterly contaminated that they can pretty much make up a score at will without having to worry about making it reflect risk reality - in either direction.

   If we relied on such nonsensical data to do something important like air traffic control no one would dare fly an airplane anywhere, much less take people on board for money.

   Posted by Judge Roy Bean  on  07/22  at  04:56 PM

4. As an appraiser I can sympathize with you.  when we kill deals for the lenders we can expect to be off the list. 
   
   the solution to the problem of home ownership and affordability:  let the prices drop to where people can afford them.  take the commission out of selling a house to live in so the realtor and loan officer can work for a “fair professional fee for a service”, when you take the commissions out of the equasion you can keep prices down.  this is not to say that commissions can’t be charged for other property types,.  keep the investors out of our houses and let the people live.
   
   appraisers are a non-biased group that has no interest in the price being high or low.  the homeowner wants it as low as possible.  the commission driven, greedy brokers pushed up prices and investments in real estate became the way to move up the economic ladder, the only trouble is there is no way to get down without falling.......
   
   Deborah L. Smith, MAI

   Posted by  on  07/22  at  08:28 PM

5. Deborah Smith, You are right on with your thoughts.  Typically, new homes sales agents have a flat fee commission.  There commission has no regard for the price of the property just the service they provide.  Take the escalting commission out of the mix for real estate agents and lenders and you take most of the temptation for fraud away.  Simple common sense.

   Posted by  on  07/23  at  04:46 AM

6. I am a bank reviewer, but had a good history with LandSafe Appraisal forf several years. Never had a call from a loan officer or reviewer with an attempt to influence value (appraisals were for Countrywide). Protecting the valuation process thru more regulation to brokers, Realtors and lenders will help get valuation to unbiased analysis and opinions of value.

   Posted by  on  07/23  at  05:30 AM

7. The only way mortgage fraud will stop, Loans or Appraisals etc.... Is to have a outside party either managed or ran by the local goverment “city” that will not profit from any such deal to ask the home owners questions per phone or in person to see if they understand each number and detail, and this would notify the goverment if the Loan officers or brokers are teach or describing the loan to their clients and also a review of the loan just like the banks do but by someone who is not paid by the loan nor can they except flowers or gifts just like police officers. If you let money motivation control money choices your going to end up here every time. Home owners thought they could get rich, and they were over extended in the pursuit of the home lotto ticket. The banks played the biggest rol in this mess, They created the stated income and no doc loans, No money down or 50-60 % debt ratios come on get real the banks saw the money, created the programs and now because of Long beach, and Acrredited Loan officers are going to jail...I have hundreds of advertisements that now I see people going to jail for save from country wide, Wamu, tons of banks and lenders. No money down, 580 fico, stated income....come on what did they think would happen, now Loan officers are taking the hit. Granted yes some did do illegal activities but come on going to jail for stated income.......Please banks would tell me we don’t care as long as it falls in the guidelines of income for the position they hold...they did not say hey you will go to jail in 5 years for a program we created......Each city needs to take over the review of each resedential loan not commercial, but each home loan and yes it will slow down the process by 3 months but you know what how slow is it now. I have tons to say if anyone has questions or needs advice I already designed a program for California and the Citys to set up a homebuyers course of action if they want a home.  This will stop fraud, stop people taking advantage of bad to poor to know english speakers, to people who shouldnt qaulify, help regulate housing tax and scams.... Sorry spelling is so bad im on my mobile phone.

   Posted by  on  08/21  at  09:36 AM

8. Oh and P.S who thought it was a good idea to sell a $400,000 or $500,000 to a jack in the box worker, come on get real. The system was screwed up from the top up....
   Loan officers were making $20-30-50 thousand a month and banks said hey we got a new program out called gift back. now I see people going to jail for Gift Back programs when Acreddited Home loans marketed such a program. I did one and it was sent to me via fax I called the rep and they explained it to me....And now I see tons of prosecutions for this....Why are some loan officers getting in trouble lets go back to the banks and managers or Mortgage lenders who designed the programs and go after the Generals. I say that the banks marketed the program, the goverment regulated the program and to cover tracks now no goverment official has said I made a mistake, and nobank ceo to managemnt said we designed this with money in mind????? Why not because when they sold a house to 18yr old kids whith a cell phone bill and one credit card and a $3000 auto loan who made $35,000 a year do you think that could be a problem. I was in the business for a month and no one ever explained to me about mortgages, I sold houses and loans before I bought any, come on stated income loans were approved by the bank, gift back programs, approved and designed by the bank, now people are in serious trouble because of bank programs and instead of talking to the loan officer and getting to the rot of the matter they have cops some dirty, some biased, some legit that don’t NO anything about loans who call themselves experts and started prosecuting normal everyday people for loans that were designed and approved by the banks. Now these loan officers have to wait to go to court and if they were smart kept names and phone numbers and documents from these bank detailing the programs they are all in trouble for. How can you save a country or it’s people by stepping on those who did a job they were told to do and then letting the banks go. I am not saying hey go after the banks but how much more is all this prosecution costing and has any one asked the Department of Real Estate why to tell someone how to invest a $10,000 stock account you have to have a series 7 and take some of the most rigorous tests out there but to do loans that change dollar amounts no less then an average of $50,000 all the way up to millions you have to take some courses you complete in 5 hours and you get a RE license and if you work for a bank you can walk in and sell loans off the street.????????

   Posted by  on  08/21  at  09:56 AM

9. Re: Noah

   Can you please give some basis for your contention that loan officers are being prosecuted for merely doing their job? Specific examples, please.

   Posted by  on  08/23  at  11:43 AM

10. It’s really good informatic Artical. Thanks

    Posted by  on  09/14  at  04:18 AM