Let's not forget that if the gravy train of absurd housing price increases had continued, nobody would have complained. It is "good for Amerika" to have absurdly unaffordable housing, and it is good for business when deadbeats with no financial sense are given huge loans while savy savers and investors are punished by having to compete against idiots wielding NINJA loans. Bubbles are "good" until the pyramid scheme collapses; then, everyone is "shocked - just shocked" to see what was happening in plain sight all along.
Whatever - just more of the same pandering from politicians.
That said, it seems it would be fair for Mozilo to lose all funds obtained from his stock sales and have that money go towards paying off the mortgages which have gone bad shortly after their creation. Otherwise a punk like Mozilo destroys the debt market for future transactions. Someone holding the paper created by Mozilo's company the past few years must be VERY ticked.
I am going to assume ... just for the time being, mind you, as I fully expect more information to make this all seem even more ridiculous ... that the actual legal proceedings are much, much more nuanced and, well, based on actual law than one can infer from Gretchen's write-up.
People should rapidly be learning that getting an opinion on a legal case or lawsuit or criminal indictment from someone with absolutely no training in the law can be somewhat problematic.
Might as well let your neighbor fix your car. Oh, wait ... people do that, too.
(Once the Congress gets involved, this will all get even more divorced from reality and law. I can't wait. Snark.)
Tanta - you really really need to stop obsessing on Morgensen, It makes you shrill, it makes you oblivious to the underlying story and it makes you childish - and a whole LOT less credible.
Now, from the quick summary of the case as reported, it looks like the AG is relying on some standard UCC principles. (And you could get off your backside and go read the entire complaint rather than merely whining that the media doesn't report it word for word or to your satistfaction - whatever that may be. The media NEVER gets it 100% accurate on reporting legal concepts since to be accurate takes more than a soundbite or summary. And that includes you.)
One UCC rule that appears to be in play in the case is in the allegation that Countrywide sold loans to borrowers that they knew or should have known that borrowers could not repay on their income - and did so solely to generate fees. That brings into play the aspects of fraud as in selling the borrower a product which was 'not fit for its intended purpose' - ie: a loan they could repay and thus purchase a house. As a merchant in the business of lending money, Countrywide is held to the standard of not palming off garbage loans that will not work for the borrower and thus selling a defective product.
All the stuff about volume, commissions, churning new loans etc is merely the means by which they peddle garbage loans to consumers in order to generate fees lke a snake oil salesman.
BTW, a merchant in the business of selling a good is presumed to know more about it that the garden-variety consumer, and is thus held to the implied warranty of fitness for an intended purpose.
The allegations that Countrywide made loans where the borrowers income was misstated WITHOUT the borrower knowing about it, is very very serious and part of the fraudulent pattern of inducing the borrower to take out a loan they couldn't pay. It also has aspects of forgery and uttering in this allegation.
And the part about CW making loans to those who could not qualify for anything else? Try working on your reading comprehension. That appears to be related to the allegation that CW sold these unsuitable loans to borrowers who would never be able to repay them after the reset - and COuntrywide KNEW it but sold the consumer junk anyhow.
(If you want more details on the legal concepts, my rates are $300 an hour or you could go to lawschool.)
Sorry if this has been noted in an earlier set of comments, but the Washington Post has an article today by Jeffrey Birnbaum which essentially morphs "BOA wrote the new law" to "Credit Suisse wrote the new law."
It's one of those long, well-researched pieces that the New Yorker, WaPo and the NYT like - must have been working on it for a while.
Well the second block DOES contain a (poorly expressed) nugget IMHO. Qualifying borrowers on their ability to make payments that are non-or-negatively ammortizing or at a teaser* rate when they would't qualify otherwise IS a bad thing.
*for thoroughness we'll define a teaser rate as any initial ARM rate that has a lower margin over the index than that specified for the later years of the loan. I feel that it's only prudent to approve based upon margin plus some sort of reasonable average of the index rate, but even if people can hang themselves with it, we DO need the hardware stores to stock rope.
Just a couple of comments. First, the UCC doesn't apply to Real Estate. RE law is completely different. Not saying that the same principles don't apply, but it can't be used as a source.
Secondly, I am surprised at all the outrage by Tanta and the posters. This is typical behavior for a merger. It happens in every bank merger. Lawsuits come out of the woodwork, many without merit. They are simply there for two purposes:
Hold up regulatory approval
Gain concessions from the acquiring institution to make them go away.
For example, ACORN will almost always file predatory lending suits as soon as a bank merger is announced.
Now, it is entirely possible that there is another motive here, and I am sure politics is one. That said, expect these things to continue. It is just a fact of mergers and banks.
Recriminations and even criminal proceedings concerning what had previously been "normal" and "acceptable" business practices that "everyone knew about" and "openly and enthusiastically participated in" is what has always happened in the aftermath of a financial mania.
Read a little history for a change. ("Once in Golconda" is my current favorite. Pay particular attention to the Pecora Commission.)
This is as predictable as the rising of the sun this morning (and Tanta complaining about Gretchen Morgenson.)
Of course the issue isn't UCC (Uniform Commercial Code, civvies), unless we're talking mobile homes or maybe co-ops. I wouldn't pay AnnS $300 an hour for advice on this subject, myownself.
One big issue is that the Interagency Guidance on Nontraditional Mortgage Loans didn't see print until October of 2005. Before that document, the federal bank regulators had never said squat about "teaser qualifying." After that doc, they still hadn't criminalized it.
I point this out not to defend teaser qualifying now or ever. It was always stupid. But if the OTS, OCC, Federal Reserve, etc., weren't willing to come right out and call it "fraudulent inducement," why would anyone think the State of Illinois can slam-dunk that idea?
RiskMgrMarc, I saw this less as a merger-related stunt as just the political posturing for the citizens of Illinois stunt.
"That brings into play the aspects of fraud as in selling the borrower a product which was 'not fit for its intended purpose' - ie: a loan they could repay and thus purchase a house. As a merchant in the business of lending money, Countrywide is held to the standard of not palming off garbage loans that will not work for the borrower and thus selling a defective product."
You're shitting me right? Making a stupid business decision and giving money to a deadbeat is fraud or a violation of the UCC? Seriously? It never ceases to amaze me how many folks actually think subprime borrowers are somehow 'victims' in this situation. They got loans at rates much lower than their lousy credit deserved!
And the part about CW making loans to those who could not qualify for anything else? Try working on your reading comprehension.
I read just fine, you know.
Look. Every lender with more than one product has borrowers who only fit in the bottom product. If CFC eliminated its subprime product, it would have "near prime" borrowers who only fit in that product. If it eliminated "near prime," it would have "standard prime" who only fit in that product. If it eliminated "standard prime," then only super-wealthy borrowers with an 800 FICO and 60% equity would qualify for a loan.
Do you understand my point? It would be WORSE if these borrowers qualified for other products (but didn't get them). Not better.
This ginned-up outraged innocence--all directed at Countrywide, as if everyone else in the industry had never heard of any of this--is truly getting on my nerves.
I don't know if I can handle all this honesty and intellectual integrity.
I mean, it takes more than just a lender to create a housing bubble, doesn't it? As a renter in New York (despite having read most of the UberNerd posts) I will admit my ignorance about buying a house. And before AnnS attacks me, no, I haven't read the indictment nor do I intend to. (Flaubert had a nervous breakdown when he went to law school. Enough said about that.)
I understand it isn't very nice to criticize people who are already suffering, but, surely, overweening greed wasn't just confined to the Tan Man and his cronies?
It sure sounds like lying when they make up bullshit information to put on the loan paperwork. It is the duty of the underwriter to know if it is producing fraudulent paperwork isn't it? If they are doing it on purpose and this can be proven, why shouldn't they be put in jail?
That's Haloscan for ya. On those rare occasions I am willing to punctuate comme il faut, I type the word in Word and then copy it into Halo. You can write the tags perfectly correctly, even see it in preview, but then it ends up displaying garbage. I have no idea why.
Last week when the BSC indictments were announced we went from:
"This seems a little flimsy for a criminal charge"
"Election year grandstanding"
"Yeah, if the Fed can indict and convict these two guys, they might as well do the same for the entire financial industry.
The case is not that strong."
based on the Journal article, to a consensus that it seemed a pretty well constructed case after all once we had a chance to read the indictment itself.
Could we, maybe, suspend judgment this time until we've seen the indictment?
I don't know why we'd assume Madigan's public comments are a good summary of the case, either. Public comments by attorneys about a case are always grandstanding.
I just learned that the sales guy at Circuit City is paid by the amount of product he sells and not for helping me find the right product! It's completely outrageous!!!
And then -- get this -- one year after I bought my TV, they sent me an offer to trade it in and buy a newer model! I am absolutely speechless. Who do these people think they are? Somebody ought to go to jail.
P.S. To AnnS: Thank you for validating all of my favorite stereotypes about lawyers.
...Countrywide sold loans to borrowers that they knew or should have known that borrowers could not repay on their income
If this is the standard for negligence then what lender is not guilty? Should we sue Fannie Mae for some of the Dumbass EA-III loans they approved? It's like Rip Van Winkle is the prosecutor here
I am going to second AnnS' comments. Tanta, your anti-Gretchen Mortgenson (GM) fixation is hurting your credibility with me as well -- and I have been a fan of yours in the past. GM is working under a severe limitation of space and editor's overview. She is a Pulitzer Prize-winning reporter (which she won because of her reports about Wall Street). So I think she has some idea of what she is talking about. She may not get all the details right, but from what I read, the general thrust is correct. Financial institutions harmed unsuspecting borrowers by selling them products to which all of the terms were not disclosed.
It makes me start to wonder if you are "talking your book" instead of dispassionately rendering your opinions on these matters.
The current case in Illinois involved only the Petition and is only one part of legal proceedings against Countrywide and Mozilo. The Petition can always be amended to reflect legal theories found during the discovery process. I once had a judge order me to amend the pleadings at trial. (Interestingly enough, that case involved a rogue banker.)
I think that in addition to the legal theories AnnS has flushed out, there are also the legal theories involving "products liability." Although I am unaware of it being used in the context of financial instruments, the principles involved are certainly applicable to financial products, in my opinion. It is simply a fact that the law regarding financial instruments have failed to keep up with developments in other areas of the law. Just because that is the case, that does not absolve the wrongdoing done by financial institutions in general and Mozilo in particular. For some reason in this country we seem to "blame the victim" in financial crimes cases when we don't do it in any other scenario.
Could we, maybe, suspend judgment this time until we've seen the indictment?
Well, we can. But I wonder how many readers of the Times will.
Let's assume it's a solid indictment with real charges therein. The question becomes, why does Morgenson blather on about 30-minute underwriting? Does she want us to think the indictment's fluff?
On the BSC thing, I had it in the back of my mind that the original WSJ report probably did want us to think it was fluff, the WSJ having something of a reputation for defending Wall Street reflexively. But GM has a big stake in establishing the credibility of attacks on CFC. So what gives? We know she read the complaint.
Drawing a parallel to guns, these loans need controls on their distribution. You punish the end users for their misuse, and you regulate who is given the privilege of their ownership.
Ignorance is no more of an excuse now than it ever has been. You would think that people would read the docs and insist on complete understanding of what they are buying when it amounts to 5-7 figures....but then again....
It makes me start to wonder if you are "talking your book" instead of dispassionately rendering your opinions on these matters.
Darlin', what "book" do you think I'm talking? I'm sorry, but that accusation is the second-to-last refuge of a scoundrel.
I have spent years and years openly criticizing industry practices like volume-based commissions, "streamlined" underwriting, stated income, toxic products, etc. Long before it was cool, long before the bottom fell out. Back when one actually risked being wrong in one's predictions about where this would all end up.
So forgive me for having no patience for everybody who now just "knows" how obviously illegal this all was.
Any case like this typically includes (1) actual allegations of violations of existing statutes, and (2) allegations of questionable conduct that isn't actually illegal but establishes a pattern that might indicate that the statutory violations were deliberate acts and not just errors. Public reporting on the Bear Stearns case focused on (2), leaving the impression that there weren't any actual violations alleged.
I wonder if something similar is happening here? It's no surprise that the AG, in public comments, would skip over the legal details to focus on the stuff that would get the lynch mob going.
But now I'm speculating too...I think I'll shut up until the actual documents get posted.
GM's reporting is flawed because it's missing the scope of the problem. We wouldn't be in the mess we're in if this was just a Countrywide issue, this is an industry wide issue. Picking on productivity incentives or some of the other sweatshop like tendencies of a particular lender doesn't lead to the real crux of the problem. How did so many parties (from the brokers/LOs to the lenders to the investment banks to the rating agencies) complictly act to make such terrible lending possible.
Racer X writes:
...Countrywide sold loans to borrowers that they knew or should have known that borrowers could not repay on their income
If this is the standard for negligence then what lender is not guilty?
In some states, and I think Illinois is one, that is the precise definition of one form of illegal predatory lending. Typically it only applies to certain loans defined as "high cost", with interest rates or origination fees above specified levels.
(2) allegations of questionable conduct that isn't actually illegal but establishes a pattern that might indicate that the statutory violations were deliberate acts and not just errors.
I do understand that.
But that is why I refuse to let anyone get away with the implication that the contents of item (2) are just a CFC problem.
Look, if all that stuff is really a pattern of questionable conduct, then indeed every mortgage lender in this country except two backwoods community banks and a couple of nickel and dime credit unions have to do time. I'm not necessarily saying I have problems with that, at least on my better days.
But I can't help wondering why the statute of limitations hasn't run out on some of it. AUS was invented in the 80s and widespread by the mid-90s. Loan officers have been on volume based commissions since the 70s, at least. And the only reason the email solicitations are new is because email is new; we used to put "statement stuffers" out and anyone who has ever had any kind of mortgage loan has gotten one.
You are right that we need to be careful with speculating, but I'm just trying to keep hold of the fact that all those things were considered perfectly legitimate "competitive practices" for decades. I have a lot more respect for those who criticized them back then, taking the long view of where the industry was headed, than these mouthy politicians who, apparently, got some mortgage loans from CFC themselves while the gettin' was good and now want to pile on Nobody But CFC.
I don't really understand, if nobody much likes these practices and yet they have been hiding in plain sight, isn't it about time they were discussed very openly and perhaps changed?
and what better company to use as exhibit "A" in this discussion than than one that is safely in transition to a new owner already because of all the dodgy products it sold?
Nobody is going to change anything absent a big messy court case. So bring it on..
Ah Tanta, I have missed you...I may still buy a Kindle yet based on your reporting.
Jim and Sarge6 up top have a key element of this story nailed, and I'm not even a resident of their fair state, just a neighbor to the north who does quite a bit of work down in their fair state. If you can't follow the money, follow the politics. Oh wait, methinks there's some relationship between the two...
RacerX brings up the word "sweatshop." Where was all the outrage during the boom for these poor CFC employees? Who were constantly subject to speed-ups, being put on less and less plausible "incentive" plans, who were not allowed to do their jobs right because some metric-obsessed manager needed them to cut another 1.7 minutes per loan off this month so management bonuses would get paid?
OK, so everyone wants the Tanned One to cough up ill-gotten gains. Fine. But he took that off the backs of his own employees as much as the borrowers. I doubt Madigan really understands what these ex-CFC employees are trying to tell her.
Maybe someday someone will sue on behalf of the workers who got screwed in all this, instead of just the borrowers. Yeah, right, Pangloss.
While I'm loath to criticize a prize-winning reporter and terrified of losing my "credibility" among pompous Internet attorneys, I must say the problem with Gretchen is that she has New York Times disease, i.e., flattering one's sources to protect access at the expense of accuracy. (See also: Judith Miller.) The regulators, politicians and prosecutors now supplying such juicy quotes are never asked where they were while the barn door was ajar.
Tanta, Your comments show how little you know about the kind of business that Coutrywide, and companies like them, engage in. Not every borrower has a degree from Harvard.
Many of their borrowers are good people with good credit, or have no other choices, who get suckered into signing papers they don't understand by someone who knows exactly what they are doing. All so that some paper pusher can make a quota or receive a larger bonus. To them the people are nameless. There is no empathy, no morals, just like most Wall Street types.
Why do you think that 1% of the population in the U.S. control 90% of the wealth ? They found a way to take it. Notice I didn't say earn it. Look at the obscene amounts given to Countrywides CEO, the "Oompa Lumpa". That is nothing more than legalized? theft.
sounds like they have evidence of wrongdoing. even if they think everybody is doing the same illegal acts, without evidence sitting in front of them, they don't have a case.
Maybe someday someone will sue on behalf of the workers who got screwed in all this, instead of just the borrowers.
I have seen a few wrongful termination lawsuits brought against lenders for firing or constructively terminating underwriters and QC workers who wouldn't play ball. I don't know if any have been successful.
Yalt, I agree that loans with a "high cost" designation are subject to higher level of scrutiny. Most prime lenders do a high cost check prior to funding the loan so I'm not sure if that's an issue here.
I just down buy the argument that abuses listed here are the major contributors to what caused this problem. If you have investment banks writing guidelines with low levels of due diligence, and they're buying the loans you originate and the rating agencies are assuring you that these loans can be structured in a way that makes them risk free and your helping manking by increasing home ownership is the fact that your paying your underwriters a productivity bonus really a contributing factor to the problem here?
Bitch to high heaven and threaten lawsuits over legal activities. Meanwhile, when actual fraud IS going on (Intercounty Title for example) they're asleep at the switch because there's no political points to be made for stopping a mere 200 customers from being swindled.
Nice to see these beatings have their own tag. Somewhere Tanta has a giant paddle with Ms. Morgenson's name on it, and she's carving another notch in the handle.
The Panglossian reference is not complete until someone says "this is the best of all possible mortgage markets."
Nothing on the Attorney General's website yet. Does anyone have a link instead of baseless speculation on the complaint's contents?
"Officer, why are arresting me now!? I've been driving home drunk for years from this bar...and you never seemed to care before? Besides, I wasn't even the drunkest one there tonight?!"
Until the complaint is actually filed none of us will be able to read it, so I'll withhold judgment.
But many of the practices GM describes became commonplace in the industry.
Also, if a broker inflated income on apps, then it is hard to tie that to CW. Do I believe that in essence the mortgage industry allowed the third-party originations to become a means to blink at fraud? Yes. However it is relatively hard to prove that this was done knowingly in court absent some WaMu type emails.
Unfortunately, not verifying income also became a common industry practice. I've bitched and moaned for years about underwriting standards that magnify the possibility of fraud, so I really don't deserve to be called an industry shill now, and neither does Tanta. The bottom line is that a lot of what is described in GM's article are practices that involve GSE loans as well. That gives me pause and should be of weight in court.
I'm quite interested as to the allegations about servicing misdeeds, so I guess I will try to read the complaint.
I try not to write too much about Countrywide, because I have tremendous loads of malice built up towards it because of stuff I've run into. It's all anecdotal, but after a while when so many borrowers seem to be reporting the same thing, I formed my own opinion of the organization. So I cannot feel sorry about their legal troubles.
However, making low/no downpayment loans to subprime borrowers with affordability features was once considered the "right" thing to do. It was a government-encouraged practice; the idea was that after making a few years of cheap payments the borrower's credit position would be enhanced, plus they would have some equity in the home, and thus they could get a 30 year fixed at a much cheaper rate than the one for which they were originally qualified. This did work for some borrowers! I think many of these loans were badly misused, but how to prove that in court?
To those defending GM, I have to reply that her writing consistently shows a total lack of knowledge about the mortgage industry and also seems to demonstrate an unwillingness to learn about it. A previous Pulitzer doesn't mean jack if you are writing nonsense now.
Interesting that this suit seems to have been inspired by a successful action in Massachusetts against Fremont. Somehow, the lowly Boston journalists had no problem reporting the specific 2004 statute allegedly violated.
I'm very curious about this:
The civil lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present.
Money damages for the state? For what?
And what does it mean to "rescind" questionable loans? Would a recision order require Countrywide to tear up the mortgage docs...in exchange for the borrowers returning the full sum of the check?
I'd think something so remarkable would require a bit of explanation. Unless one doesn't notice that it's remarkable.
Racerx--I'm not suggesting it's really a "contributing factor to the problem"; it's just illegal and thus could be what moves the whole issue from dubious business practices to a statutory violation.
Ctulhu--apparently the complaint hasn't been filed, they've just indicated that they intend to. With a possible merger next week, they're a bit under the gun....
"Officer, why are arresting me now!? I've been driving home drunk for years from this bar...and you never seemed to care before? Besides, I wasn't even the drunkest one there tonight?!"
Wrong analogy. You are dealing with the "selective enforcement" problem.
I am talking about stuff that has never in fact been a crime.
It was, in my view, always stupid and high-risk. But it was never illegal. And it was never HIDDEN.
How often do you find drunk drivers painting the words "I AM DRIVING DRUNK" on their cars in reflective neon paint?
Go read through CFC's old investor road show documents about their "Fast and Easy" programs and their "operational efficiencies" and their customer solicitation programs. That stuff was all front & center on the PowerPoints because it waved dollar signs in front of investors!
Don't think CW has much to worry about tie it up in court forever and even if you did have to actually pay it the damage award will be nil due to inflation.
Well, I didn't expect to see this when I checked my Yahoo! news:
Tanta on the Calculated Risk blog is very skeptical of the attorney general's claims, noting that Countrywide's allegedly deceitful practices were common in the business. Tanta says:
"Nobody has to like any of these business practices. But they have been hiding in plain sight for a long, long time. This ginned-up outraged innocenceall directed at Countrywide, as if everyone else in the industry had never heard of any of thisis truly getting on my nerves."
Well, we may have just proved that strange cases make bad law. Or at least, ill-informed legal opinions. I am afraid I may have "poked the beehive" and lawyers flew out and started stinging people!
My own personal criticism was mainly reserved for the low level of actual information contained in GM's article. And the tendency of readers of said article to forget to ask the kinds of questions some of us are more likely to ask.
I will forgive some of the hastiness, because the complaint was only just filed, and no one has had a chance to read all 78 pages of it yet.
But it is certainly fair for Tanta to point out the deficiencies in the article itself, which is not even close to "talking her book," whatever that means in a case like this, so back off. Tanta is quite correct that the article falls short of identifying just what the Illinois AG is claiming that Contrywide did that was illegal. Maybe the complaint is specific; maybe not; but the article is not very good, which was Tanta's original point.
A few missing bits: Federal court, or state? Violations of federal lending/banking law, or Illinois state tort law? Isn't Countrywide an Illinois corporation? Or at least some part of the beast is an Illinois corporation? Yet it also contains within it a federal savings bank; which is different from some other kinds of banks...And apparently, this is not a criminal case; this is a civil case brought on behalf of Illinois residents... so were the practices in Illinois substantially different from those elsewhere?
Does the complaint allege statutory violations, or is this based primarily in state common law fraud allegations?
See? We don't have the foggiest idea yet. I need all of the lawyers to take a deep breath and remember that the correct answer is always "Maybe."
That, and the first person to quote the UCC loses. It's a rule!
I'm also specualting that the real targetr of Madigan's ire is Bank Of America rather than CFC, motivated by BofA's takeover of LaSalle Bank. There's a lot of distrust of national banks in Illinois, especially when they take over Illinois institutions. BofA has also been putting the brakes on the revolving credit of some long-time Illinois companies that originated with LaSalle, and BofA has also reduced some of LaSalle's philanthropy.
Smacks more and more of the usual political extortion the more I think of it.
is it not fraud to tell your customers they are getting the best loan possible but then put them into a loan that is best for your company, not the customer? is it fraud to falsify information on the paperwork? is it criminal? should they all be investigated, fined with harsh penalties and thrown in jail.. i certainly think so. if you know your company is doing stuff like this and maybe more.... and you do nothing to stop it, are you liable?
"potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywides smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America"
It is now grounds for a lawsuit that you have borrowers in your lowest credit quality product who do not qualify for any alternative product?
Isn't the real problem that these borrowers, not qualifying at the fully-indexed rate, didn't qualify for any product?
In a comment on this point: I point this out not to defend teaser qualifying now or ever. It was always stupid. But if the OTS, OCC, Federal Reserve, etc., weren't willing to come right out and call it "fraudulent inducement," why would anyone think the State of Illinois can slam-dunk that idea?
We're talking about Shrub and Greenspan. They were ideologically opposed to calling any business conduct "fraudulent".
This doesn't mean I find the article convincing...just that I wouldn't conclude Illinois lacks a case without better detail.
I don't care about this lawsuit or any other lawsuits - I think they are all a waste. I agree 'investors' should have known about this behavior.
My issue is with CFC and companies like it. CFC would be nowhere without the alt-a option arm products it pushed for thepast 5 yrs, I believe up until very recently. CFC would have been a BS little mortgage originator without these funny money loans.
Now Wall Street helped in a big way fuel these loans, and no one is sticking up for Wall Street (nor should they). I know a lot of people that have been fired on the Street - not to mention C and WB employees losing a ton on stock they thought was worth X.
Companies like CFC have ruined the US - whether clients should have known or not as a patriot and fan of the US I see CFC as bad - period.
Gretchen Morgenson writes for the Times, the paper of record (and I am not a liberal and I hate reading it but still it is not a 3 yr blog). Some repect is due. She reports the news to the general public and does a decent job. I have personally made a ton of money from her reporting.
If you want to point out that people should have known this was going on - I agree that is a great point. But its also kind of like saying the sky is blue. So what?
I enjoy this blog and I think you guys are all very smart. I just think some times people just agree with Tanta to agree and that is weak.
Yalt - the pattern and practice definition of failing to verify ability to repay is federal. It is in Reg Z and relates to HOEPA loans. Reg Z 226.34(4): Repayment ability. Engage in a pattern or practice of extending credit subject to §226.32 to a consumer based on the consumer's collateral without regard to the consumer's repayment ability, including the consumer's current and expected income, current obligations, and employment. There is a presumption that a creditor has violated this paragraph (a)(4) if the creditor engages in a pattern or practice of making loans subject to §226.32 without verifying and documenting consumers' repayment ability.
However in the type of "affordability" loans that became popular, the issue is not that the loans were high-cost. It is rather that the loans were ARMs with initially below-market loans which were basically made marketable by high resets.
These loans were originally structured with the idea that after a few years of solid payment history, the borrower would have equity in the home and the ability to refinance at much lower rates.
MOM, I hate Countrywide too. I first started really hating them back in the late 90s when they really perfected their strategy of instantly staffing up in a boom, taking everyone else's business with reckless pricing and underwriting, and then instantly laying off employees and shutting down branches at the first hint of a downturn in the latest refi boom. Those of us who just wouldn't--at least back then--treat our people that way couldn't compete with anyone who would. I wouldn't open a branch and hire a bunch of underwriters planning on cutting them lose without severance in six months if interest rates climbed by 100 bps. CFC would and did.
But that was then and this is now. Now, who is left with enough integrity not to do what CFC does? How many of these brave Wall Street analysts are rewarding companies who refused to adopt as much of that business model as they could?
How often do I see: "I AM DRIVING DRUNK" on their cars in reflective neon paint?
Well you'd be surprised how obvious crime starts getting when you don't enforce it. It doesn't mean it doesn't mean it's less illegal or less damaging.
Secondly, this is a civil suit correct? A suit for damages?
"I am talking about stuff that has never in fact been a crime."
It's not a crime to fail to prune a tree either, but when the branch falls and breaks someone's neck you may have to pay up....especially if you have some "industry insiders" with years of WARNINGS about the danger of that very tree.
Sometimes it takes the actual damage to occur before anyone thinks of suing.
MOM said: This did work for some borrowers! I think many of these loans were badly misused, but how to prove that in court?
Uh...look around, listen to the news, count the forclosures, what's hard to prove? Would any of this occurred it they were'nt? Seems the burden of proof is on Countrywide now.
Stock-Regulator, CFC was Fannie's biggest customer for years. The investment products aren't what made the company they're what brought about it's demise.
Threetorches said: Tanta is quite correct that the article falls short of identifying just what the Illinois AG is claiming that Countrywide did that was illegal.
I'll second that. The mainstream press has this annoying habit of writing for real people, instead of us lawyers.
Threetorches, where was it reported that the complaint is 78 pages?
I like your UCC rule. What's the proper form to cite that in district court?
Racer X - go look at CFC valuation pre 2002. Yes they had a nice little business prior but they weren't important players. They certainly had no influence in congress. Now they bribe congressmen.
I think the problem people have is that with blogs you have a core group of readers and if they start yes-ing each other you get immediate group think. For a high quality blog such as this, that is not good.
Also people read blogs for different reasons and some here don't care about an accounting of history, they are trying to profit from being proactive.
There's a lot of distrust of national banks in Illinois, especially when they take over Illinois institutions.
Why in the world?! Now that the last if its tribe, more or less, is gone? And the acquirers put down such deep local roots.
I'd say that if BofA is any part of Madigan's motivation against CFC then you're darned tootin' it's just theater (though I'll be interested to read the actual complaint).
WSJ apparently reported that the complaint runs 78 pages. Which is more than the Times told us. Other than that, it is still short on detail and focuses on salacious bits about commission sales and refinancing solicitations.
And you cite the UCC rule by simply pointing out that it isn't the law unless specifically adopted by a state legislature!
Which can of course change or modify it, or adopt any one of several alternate passages, proposals, explanations, remedies, or whatever. It's a lot like someone who quotes one of the Restatements instead of an actual law.
I love that, its the legal equivalent of showing up with a knife to a gunfight.
Yalt writes:
Well, I didn't expect to see this when I checked my Yahoo! news:
Tanta on the Calculated Risk blog is very skeptical of the attorney general's claims, noting that Countrywide's allegedly deceitful practices were common in the business.
Ah! The light dawns! I was just wondering why we always have hoards of newbies arriving and explaining Tanta's ignorance of the mortgage, legal and reporting businesses and warning us all that she's a shill for Countrywide whenever she does one of these stories. I thought maybe GM had her own little spy network sending out alerts to her fans. "Quick! Tanta's attacking Gretchen again! Defend the Queen!" Now I see it's another branch of the MSM that we have to blame.
Geez. I knew the American news media was basically dead in the water (mainly due adopting the same business practices as the mortgage industry) but can't they even find anybody able to accurately synopsize a few paragraphs?
...kinda hard to compete with companies or people that lie, cheat and steal their way to the top
I don't think CFC lied, cheated and stole their way to the top (I would not say the same about New Century) but I would say that they sold their soul to do so. Their ruthless and aggressive pursuit of market share created a lot of growth with a corresponding increase in risk. It's taken a while but even the most resolute CFC employees have begun to realize just how much they were taken advantage of.
Okay, I can answer my own question that the 78pg fact comes from the WSJ. And I'm completely in agreement with Tanta on the inferiority of this particular article (whatever the journalist's credentials are).
From the WSJ version, which is slightly shorter, I can at least deduce that this is probably being filed in part under the Illinois state FTC Act equivalent, and I get a much better sense of the scope of rescission relief that the AG may request.
again i ask is making up information on loan applications lying? what is it called when you have a customer who qualifies for a normal loan but since you get a bigger kickback for putting them in an ARM, that is what you put them in? sounds like fraud to me. gaming the system isn't cheating? can i cheat on my taxes if everybody else is doing it? then if caught say i made a mistake.. that was an oversight or my accountant made an error?
Please try to relax and let go of this pent up anger and what is now most likely pent up frustration which is eating away at your shell. Place yourself in a mental space where these assholes can no longer be a part of your concern, then let it go and then fuc-king move on!
And talk about histories - NEW management had a history of bankrupting companies. Then they roll out an ad campaign of "The New Shade of Blue Chip Company" something stupid like that.
Point is all this weakness and pain was obvious but it doesn't excuse people.
One thing that I have been waiting for in the broker world:
When will some AG or consumer advocacy group sue a bank / institution over the incentives offered to brokers.
Here is what I am getting at: when you have a system that can incent brokers with YSP of 2%, 3%, 4% for increased rate on the loan, it isn't totally ridiculous to argue that the banks KNEW the brokers would lie, because there were tens of thousands of dollars in incentive to do so.
When generating a home equity loan as a branch banker, they are paid some nominal sum, say $100. A broker on teh other hand, might be receiveing $10,000 or more for a single deal.
You could argue that the banks were willfully blind to the fact that they were incenting some portion brokers to lie. Or that banks should have expected some of them to lie given the financial reward for doing so.
It is like owning a branch - if I deposit money in the branch, under the assupmption that it was protected, and the branch does not have an alarm system or a lock on the vault, it might be negligent.
I am not saying we should go after the banks - I just find it fascinating that we have all these angles to the problem.
The industry was/is fundamentally broken from so many perspectives. I get as annoyed as Tanta with the suits that imply "This is the reason it went to hell in an handbasket..."
GM/Pulitzer,...even Homer stumbled, of course Bulwer Lytton only wrote one enduring sentence, I don't know which one GM is closer to.
If the suit has no basis as reported, is it possibly a fishing trip under a merger deadline?
Ah well, I must read the latest posts quickly and get out to tend my garden. Work keeps away four great evils,...I'm adding "spending all day at the computer" to Candide's idleness, vice, and want.
I haven't read the indictment (is it out yet, even?) but I can guess where Madigan is going. Countrywide issued a bazillion fraudulent loans in the form of loans at high rates the borrowers couldn't pay back and in the form of fraudulent paperwork. BUT, to sue CW, as opposed to just throwing some brokers in jail, Madigan needs to show CW was intentionally doing this. There's not likely to be a video of Mozillo doing an evil laugh and rubbing his hands together as he tells CW employees to defraud borrowers and file fraudulent paperwork. What happened was that CW business practices induced CW employees to commit fraud on a massive scale. Madigan is trying to show that any informed person would know those practices would induce massive fraud and thus the management was responsible for setting up a fraud machine.
"what is it called when you have a customer who qualifies for a normal loan but since you get a bigger kickback for putting them in an ARM, that is what you put them in? sounds like fraud to me."
So... would you prefer the 12% fixed rate or the adjustable with an 8% start rate?
Yeah, you're right... it was just the lenders forcing/steering their customers into these products.
Nothing up yet but the release from Madigan's office. One thing seems clear, the premise of her case involves some things having been done perhaps without the knowledge of the borrower:
The complaint alleges that Countrywide sales employees and independent brokers selling its products used reduced document loans to inflate incomes of borrowers who otherwise wouldnt 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.
That sounds to me as if the falsification could have occured unbeknownst to the borrower; of course, some could also have turned states' evidence on this matter. Regardless, I must say that a parade of shlubs that lied their way into $200k loans (Illinois is not bubbleland-priced for the most part, especially in subprimeville.) is not the thing that would convince me that now we're finally getting down to it. The engineers of this mess were quite well-informed of the seams in the legal system and appear to have steered just clear of many of them.
Holding of criticism of the Illinois AG: reasonable.
On the other hand, criticizing commentaters who claim to be attorneys but can't tell the difference between a "mortgage" is a "good" is certainly appropriate.
In fact, in many states, pretending to be an attorney is a crime...
FYI to quiet the voices, here is the complaint filed by the state of California against countrywide today. I do not expect the Illinois version is any different:
It appears Tanta is completely correct, and CFC is being taken to task for the business model all mortgage lenders followed in the past few years. There's a hilarious section about how CFC (Sambol and Tan Man in particular) hatched a plan to become the biggest reseller of mortgages into the securitized secondary market. Really? How nerfarious! Who could have known what they were up to? I'm sure they did it all behind closed doors and shredded the evidence like Enron.
Anyway, that they could do this is, like Tanta said, unfortunate. Criminal? I'm not holding my breath. This is political grandstanding at its finest.
Before anyone gets uptight about lawyers (any more than they already have), I'd like to say that A. Gretchen Morgenstern is indeed a fool. B. Defending Gretchen Morgenstern isn't quite as silly or hopeless as defending Lou Dobbs, but it might be as silly and hopeless as defending Eliot Spitzer.
Now I haven't read the Illinois complaint, (yet, I'll post again when I get around to it), so I won't comment on it specifically. I will comment on the comments of AnnS, etc., who if they are lawyers ... well ... let's just say not all lawyers deserve the reputation of the profession, but some do.
The Uniform Commercial Code, for instance, and in particular the "fitness for a particular purpose" contractual doctrine, taken from Art. 2, is applicable to the sale of goods, not to mortgages. Even if it were applicable to mortgages, the UCC is (emphatically!) not a regulatory set of laws. It might (but doesn't, I suspect) give a right of action to a mortgagee. The state doesn't have any UCC rights, because it isn't a party to the contract.
Calling people who can't pay their mortgages "victims" is silly. Now, a predatory lending scenario where the bank is trying to take people's houses is one thing; that's fraud and it's bad. But if there was fraud in the vast majority of these cases, it was committed by the -borrower- or at most, by the originator -against those who bought the loan- in teh upstream market. The borrower was told the interest rates, payments, etc. and told to sign on the dotted line, and they did. It may win votes to try to stretch products liability to fit mortgages, but it won't win lawsuits, because it makes shockingly little sense.
On the other hand, it would make lots of work for lawyers like AnnS, Okielawyer, and myself, so you can see why they think it's a great idea.
Fraud writes:
again i ask is making up information on loan applications lying? what is it called when you have a customer who qualifies for a normal loan but since you get a bigger kickback for putting them in an ARM, that is what you put them in?
The first sounds like fraud, the second sounds like typical sales. I qualify to buy a Cadillac but the salesman makes more by (attempting to) sell me the Hummber because he makes more. Maybe I should figure out for myself what I want to drive?
And since making up information on loan apps is lying, the broker/rep who entered falsehoods should be tried and punished. So should the consumer who entered falsehoods, or signed an application with falsehoods on it.
The first 40 pages of the California complaint are just background; the real questions are (1) whether, and how often, they or their brokers misrepresented the terms of the loans and to what extent they can be held liable for misrepresentations made by their brokers, and (2) whether and to what extent they made misrepresentations to the secondary market.
Since the complaint doesn't seem to contain any evidence on either point, it's a bit hard to say. I guess that's what you get when a preliminary draft of a complaint gets rushed into action to beat a merger deadline.
I'm a lawyer, and hopefully something of an antidote to AnnS and Okielawyer.
Keep up the good work. Pillory GM until your fingertips bleed. GM wears glasses permanently tinted with the notion that greed, hubris and malice are the only attributes business and businessmen carry.
And at this stage of the game, picking on Countrywide or Angelo Mozillo is utterly banal. Anyone can do it.
Fraud is fraud, but there have always been remedies for that.
Pretending you can repay a loan when you can't doesn't qualify as a product liability problem subject to the UCC. It'd be like trying to make a product liability suit out of purchasing a car that you pretended to know how to drive, and then realizing later on that you can't, so the car's no good.
Everything the borrowers agreed to was there in black and white for them to see. If it was a refinance, they had copies they could carry home and study for three business days to decide if the deal was really the best for them.
Abrogation of contracts, as this suit seeks as a remedy, is a very serious thing. So long as no fraud was involved, (which would void the contract anyway), it should be summarily rejected.
Enforcement of valid contracts is one of the foundations of civil society. If Illinois is allowed to rewrite these contracts, it will likely destroy the ability of Illinois residents to get a mortgage, and could have much bigger implications for the society at large. In any event, if this suit is allowed to proceed and it succeeds, it will have as its consequence the exact opposite of its intent: The residential real estate market in Illinois will be set reeling, as all but the GSE's flee the state.
Of course, the GSE's are about the only game in the business right now, so perhaps that figured into Illinois' calculation. I suppose President Obama could order the GSE's to issue contracts in Illinois that no one has any intention of honoring. The long-term implications of that sort of thing would be disastrous.
My bill: Keep calling bullshit on GM, inter alia (like the DPA for FHA), and it's pro bono.
One last point regarding alleged misrepresentations of the loan officers: The law is very reluctant to admit parole evidence that contradicts the written terms of a contract. This is especially true in contracts concerning real estate, and in fact, in many states, an unwritten contract to purchase or sell real estate is generally held to be unenforceable per se.
Of course, these were not contracts for purchase, but the principle is the same. How can a borrower claim to have been misled when the terms of the contract were in plain sight on the page he signed?
The vociferous outraged response to your current post is somewhat ironic. After all, you have (in some instances) indirectly cultivated a nutty left wing following by taking an anti-business stance whereby the lender is a vicious money-grubbing evil-doer that deserves to be punished for preying on the little guy. One past post stands to mind: the one on the CA couple that was proven to have lied about their income yet the judge ruled that the lender had no claim because it was unreasonable for them to believe the fictitious income figure.
The message shapes the crowd. This is the crowd that you are attracting: "AnnS" and "OkieLawyer" and others.
...and for the sake of clarity - I think that your point in this particular case is spot on.
I think Nemo put it best: "And then -- get this -- one year after I bought my TV, they sent me an offer to trade it in and buy a newer model! I am absolutely speechless. Who do these people think they are? Somebody ought to go to jail."
Lisa Madigan has her job because of who her daddy is.
The idiot Republicans in Illinois elected a corrupt official like George Ryan as governor and after the drivers' license scandal broke, which involved the sitting governor, the Democrats were able to take over the state-wide offices in addition to the lock hold they have on Chicago.
It will be interesting to see how long the lawsuit lasts in court.
If 25% of borrowers could not have qualified for other CFC products, then presumably 75% could have qualified for lower cost but were nonetheless put in loans meant for only the weakest borrowers; seems someone might have a cause for complaint there. Not this this is news as we have already seen reported several times that many people who qualified for prime or near prime were nonetheless steered into sub-prime loans.
That is what the securities/secondary markets wanted to buy and those loans gave salesman the highest commissions,
"Countrywide repeatedly qualified borrowers for mortgage loans based on salaries that were significantly higher than what they really made, Madigan said.
Under penalty of perjury, I hereby acknowledge that my annual income of eleventy jillion dollars is correct.
... also ran Alan Keyes for Senator when they discovered Jack Ryan enjoyed having sex with his wife before they got divorced. Thus conceding the seat to anyone the Democrats ran that could fog a mirror. President Obama thanks the Illinois GOP every day of his life.
Off topic, but the national GOP spiked a solid candidate(Jim Oberweiss) in the IL primary because of his opposition to the White House's view on immigration. Leading to Keyes, who led to Obama, who will probably defeat McInsane.
"Prudent underwriting is how investors are protected against the risk that their investment will be loaned to borrowers lacking the verified capacity to repay."
I can see both sides of this issue-- both the individual consumer protection aspect & the collective stability of the financial markets aspect.
Both are extremely important, but I gotta say, I think it's quite illogical for many here to moralize about "caveat emptor" views. It's one thing if you buy an item at the Dollar Store & it doesn't work-- you bought a cheap, sub-prime item & the only person hurt in the end is you.
But its another to apply purist "caveat emptor" principles to mortgages, simply because of the large amount of money involved. Mortgages are such hydra transactions with each dollar of a 300K mortgage snaking its way into other after-market transactions. If the initial transaction was originated in bad faith-- whether from the borrower or broker-- the harm expands way beyond those 2 inital players.
"Bad" money drives out good by introducing unstable risk & unmerited rewards into the system as a whole-- which is what's happened now.
So in the "whotablame" game I gotta blame the lending industry. They endangered themselves and all the rest of us, and they-- unlike most borrowers-- knew full well the risks they were running.
Much as I'd love to, I can't even fully blame Congress-- from watching C-span congressional hearings on the mortgage mess, it's obvious from the caliber of questions asked that many in Congress don't know a tranche from a rhubarb. (I don't know what a tranche is either, for that matter, but I shouldn't have to. Just because I'm an American citizen does not mean that I must know every last single esoteric arcane bit of info about other people's jobs.)
The lenders bear ultimate blame for this mess because they failed to self-police within their industry. Nor did the majority use the vast amount of clout they've got to go to Congress & get Congress to do it for them. They grabbed short-term profit & to hell with the long view.
Since 2002, at least, there've been experts in the economics & finance spheres jumping up and down about the implicit danger, to us all, from an unchecked housing bubble. And they were blown off by their fellow professionals within their industries.
So now we're all screwed. (and in such a disappointingly sub-prime way.)
Countrywide has significantly contributed to a collapse of the national economy by way of reducing consumer confidence. Greedy, sleazy, and unlawful: They deserve everything that's coming at them dont allow powerful corporation heads escape our legal system. Vote for them at Corporate Accountability International's Corporate Hall of Shame.
Now why would any company extend credit to someone who was not credit worthy? The answer lies in the policies of the government. Were lenders told that subprime mortgages would be honored by the government? I'd bet that Fannie Mae and Freddie Mac got a go ahead to push bad loans from the usual suspects.
We have just seen the nationalization of the mortgage industry, and another layer in the financial house of cards has been built. Tough times are coming so I hope you all learn about how to sell apples. The next collapse will make Weimar look like a picnic.
I don't care, my family can feed itself and is more or less self sustaining. The city folk created this mess. They deserve what they have created.
I am from illinois
Do not underestimate the stupidity of Lisa Madigan.
This is pure political theatre. Nothing else.
I saw that by-line this morning and was like, "oh, it's time for a picking on poor Gretchen post today, isn't it?" =)
Let's not forget that if the gravy train of absurd housing price increases had continued, nobody would have complained. It is "good for Amerika" to have absurdly unaffordable housing, and it is good for business when deadbeats with no financial sense are given huge loans while savy savers and investors are punished by having to compete against idiots wielding NINJA loans. Bubbles are "good" until the pyramid scheme collapses; then, everyone is "shocked - just shocked" to see what was happening in plain sight all along.
Whatever - just more of the same pandering from politicians.
That said, it seems it would be fair for Mozilo to lose all funds obtained from his stock sales and have that money go towards paying off the mortgages which have gone bad shortly after their creation. Otherwise a punk like Mozilo destroys the debt market for future transactions. Someone holding the paper created by Mozilo's company the past few years must be VERY ticked.
This is a weak complaint. It almost makes me think it's weak on purpose.
And I wonder what soaring oil costs are going to do to those remaining in arms created in the past few years? Should become a boom market for rentals.
I am going to assume ... just for the time being, mind you, as I fully expect more information to make this all seem even more ridiculous ... that the actual legal proceedings are much, much more nuanced and, well, based on actual law than one can infer from Gretchen's write-up.
People should rapidly be learning that getting an opinion on a legal case or lawsuit or criminal indictment from someone with absolutely no training in the law can be somewhat problematic.
Might as well let your neighbor fix your car. Oh, wait ... people do that, too.
(Once the Congress gets involved, this will all get even more divorced from reality and law. I can't wait. Snark.)
I am also from Illinois.
Do not underestimate the ambition of Lisa Madigan.
This is pure political theater. Of course it is.
We have a Governor who is hemorrhaging into shark-filled water. We have a Lt. Gov. who is a good guy, but without a constituency to go any further.
This lawsuit isn't for the merits. It's for the campaign commercials.
Tanta - you really really need to stop obsessing on Morgensen, It makes you shrill, it makes you oblivious to the underlying story and it makes you childish - and a whole LOT less credible.
Now, from the quick summary of the case as reported, it looks like the AG is relying on some standard UCC principles. (And you could get off your backside and go read the entire complaint rather than merely whining that the media doesn't report it word for word or to your satistfaction - whatever that may be. The media NEVER gets it 100% accurate on reporting legal concepts since to be accurate takes more than a soundbite or summary. And that includes you.)
One UCC rule that appears to be in play in the case is in the allegation that Countrywide sold loans to borrowers that they knew or should have known that borrowers could not repay on their income - and did so solely to generate fees. That brings into play the aspects of fraud as in selling the borrower a product which was 'not fit for its intended purpose' - ie: a loan they could repay and thus purchase a house. As a merchant in the business of lending money, Countrywide is held to the standard of not palming off garbage loans that will not work for the borrower and thus selling a defective product.
All the stuff about volume, commissions, churning new loans etc is merely the means by which they peddle garbage loans to consumers in order to generate fees lke a snake oil salesman.
BTW, a merchant in the business of selling a good is presumed to know more about it that the garden-variety consumer, and is thus held to the implied warranty of fitness for an intended purpose.
The allegations that Countrywide made loans where the borrowers income was misstated WITHOUT the borrower knowing about it, is very very serious and part of the fraudulent pattern of inducing the borrower to take out a loan they couldn't pay. It also has aspects of forgery and uttering in this allegation.
And the part about CW making loans to those who could not qualify for anything else? Try working on your reading comprehension. That appears to be related to the allegation that CW sold these unsuitable loans to borrowers who would never be able to repay them after the reset - and COuntrywide KNEW it but sold the consumer junk anyhow.
(If you want more details on the legal concepts, my rates are $300 an hour or you could go to lawschool.)
You're right, Tanta, it isn't just Countrywide.
The whole industry should be hog-tied, tarred, sprinkled with sugar and placed near an anthill. Fire ants, preferably.
For all those aserting 'his is a weak complaint', HAVE YOU READ THE ENTIRE COMPLAINT?
Or have you just read the media snippets? (In which case you have zero credibility on the matter.)
You really need to get alll the information - and not jsut what themedia reports, before passing judgement on the validity of a case.
It could be weak or it could be strong but without reading the actual complaint, you are speaking from utter ignorance.
Sorry if this has been noted in an earlier set of comments, but the Washington Post has an article today by Jeffrey Birnbaum which essentially morphs "BOA wrote the new law" to "Credit Suisse wrote the new law."
It's one of those long, well-researched pieces that the New Yorker, WaPo and the NYT like - must have been working on it for a while.
Sorry - link
Vital Part of Housing Bill Is Brainchild of Banks - washingtonpost.com
Well the second block DOES contain a (poorly expressed) nugget IMHO. Qualifying borrowers on their ability to make payments that are non-or-negatively ammortizing or at a teaser* rate when they would't qualify otherwise IS a bad thing.
*for thoroughness we'll define a teaser rate as any initial ARM rate that has a lower margin over the index than that specified for the later years of the loan. I feel that it's only prudent to approve based upon margin plus some sort of reasonable average of the index rate, but even if people can hang themselves with it, we DO need the hardware stores to stock rope.
Just a couple of comments. First, the UCC doesn't apply to Real Estate. RE law is completely different. Not saying that the same principles don't apply, but it can't be used as a source.
Secondly, I am surprised at all the outrage by Tanta and the posters. This is typical behavior for a merger. It happens in every bank merger. Lawsuits come out of the woodwork, many without merit. They are simply there for two purposes:
For example, ACORN will almost always file predatory lending suits as soon as a bank merger is announced.
Now, it is entirely possible that there is another motive here, and I am sure politics is one. That said, expect these things to continue. It is just a fact of mergers and banks.
Recriminations and even criminal proceedings concerning what had previously been "normal" and "acceptable" business practices that "everyone knew about" and "openly and enthusiastically participated in" is what has always happened in the aftermath of a financial mania.
Read a little history for a change. ("Once in Golconda" is my current favorite. Pay particular attention to the Pecora Commission.)
This is as predictable as the rising of the sun this morning (and Tanta complaining about Gretchen Morgenson.)
Of course the issue isn't UCC (Uniform Commercial Code, civvies), unless we're talking mobile homes or maybe co-ops. I wouldn't pay AnnS $300 an hour for advice on this subject, myownself.
One big issue is that the Interagency Guidance on Nontraditional Mortgage Loans didn't see print until October of 2005. Before that document, the federal bank regulators had never said squat about "teaser qualifying." After that doc, they still hadn't criminalized it.
I point this out not to defend teaser qualifying now or ever. It was always stupid. But if the OTS, OCC, Federal Reserve, etc., weren't willing to come right out and call it "fraudulent inducement," why would anyone think the State of Illinois can slam-dunk that idea?
RiskMgrMarc, I saw this less as a merger-related stunt as just the political posturing for the citizens of Illinois stunt.
"That brings into play the aspects of fraud as in selling the borrower a product which was 'not fit for its intended purpose' - ie: a loan they could repay and thus purchase a house. As a merchant in the business of lending money, Countrywide is held to the standard of not palming off garbage loans that will not work for the borrower and thus selling a defective product."
You're shitting me right? Making a stupid business decision and giving money to a deadbeat is fraud or a violation of the UCC? Seriously? It never ceases to amaze me how many folks actually think subprime borrowers are somehow 'victims' in this situation. They got loans at rates much lower than their lousy credit deserved!
This is as predictable as the rising of the sun this morning (and Tanta complaining about Gretchen Morgenson.)
And fred complaining about Tanta complaining about GM.
I love you Tanta, you called someone a Pangloss. =)
And the part about CW making loans to those who could not qualify for anything else? Try working on your reading comprehension.
I read just fine, you know.
Look. Every lender with more than one product has borrowers who only fit in the bottom product. If CFC eliminated its subprime product, it would have "near prime" borrowers who only fit in that product. If it eliminated "near prime," it would have "standard prime" who only fit in that product. If it eliminated "standard prime," then only super-wealthy borrowers with an 800 FICO and 60% equity would qualify for a loan.
Do you understand my point? It would be WORSE if these borrowers qualified for other products (but didn't get them). Not better.
I love you Tanta, you called someone a Pangloss. =)
One day it's Borat, the next it's Voltaire. And I can always count on our commenters to get whatever it is, which is the really cool part.
With all the rescue-bailout-scapegoating crap being spewed lately by the political class, it helps to have someone call a spade a spade.
FWIW, I'm sure there's plenty of real criminal behavior that AM, FOAM, and CFC in general are guilty of. Thanks Tanta, for keeping us focused.
I don't live in Illinois, but this sure makes me want to live there.
And hell, AnnS, I wouldn't pay you squat. So you're a lawyer, so what?
Get over yourself.
This ginned-up outraged innocence--all directed at Countrywide, as if everyone else in the industry had never heard of any of this--is truly getting on my nerves.
I don't know if I can handle all this honesty and intellectual integrity.
I mean, it takes more than just a lender to create a housing bubble, doesn't it? As a renter in New York (despite having read most of the UberNerd posts) I will admit my ignorance about buying a house. And before AnnS attacks me, no, I haven't read the indictment nor do I intend to. (Flaubert had a nervous breakdown when he went to law school. Enough said about that.)
I understand it isn't very nice to criticize people who are already suffering, but, surely, overweening greed wasn't just confined to the Tan Man and his cronies?
It sure sounds like lying when they make up bullshit information to put on the loan paperwork. It is the duty of the underwriter to know if it is producing fraudulent paperwork isn't it? If they are doing it on purpose and this can be proven, why shouldn't they be put in jail?
FRAUD
O/T to Justin from last thread.
If you want to short actual tickers, consider the mall owners.
I can hardly wait for Cunégonde's entrance here.
Gee, if they couldn't get a product they couldn't afford, Countrywide might be guilty of "red lining" and/or racism, etc., etc.
I think the subprime folks have been "unfaired upon".
well, that worked nicely.
It sure sounds like lying when they make up bullshit information to put on the loan paperwork.
Well, yes. And last I knew fraud was, like, a crime. (But I didn't go to law school, so my opinion on that subject may be worthless.)
If Madigan has a good case on application fraud, then she should go to town on it.
But why is she larding this thing up with charges of aggravated advertising with intent to speed up underwriting?
well, that worked nicely.
That's Haloscan for ya. On those rare occasions I am willing to punctuate comme il faut, I type the word in Word and then copy it into Halo. You can write the tags perfectly correctly, even see it in preview, but then it ends up displaying garbage. I have no idea why.
Ah, life is good - I was feeling a mite deprived - perked right up with a nice dish o' snark, tartly served... thanks T!
Last week when the BSC indictments were announced we went from:
"This seems a little flimsy for a criminal charge"
"Election year grandstanding"
"Yeah, if the Fed can indict and convict these two guys, they might as well do the same for the entire financial industry.
The case is not that strong."
based on the Journal article, to a consensus that it seemed a pretty well constructed case after all once we had a chance to read the indictment itself.
Could we, maybe, suspend judgment this time until we've seen the indictment?
I don't know why we'd assume Madigan's public comments are a good summary of the case, either. Public comments by attorneys about a case are always grandstanding.
I just learned that the sales guy at Circuit City is paid by the amount of product he sells and not for helping me find the right product! It's completely outrageous!!!
And then -- get this -- one year after I bought my TV, they sent me an offer to trade it in and buy a newer model! I am absolutely speechless. Who do these people think they are? Somebody ought to go to jail.
P.S. To AnnS: Thank you for validating all of my favorite stereotypes about lawyers.
Sorry, "Anonymous" at 9:40 was me.
...Countrywide sold loans to borrowers that they knew or should have known that borrowers could not repay on their income
If this is the standard for negligence then what lender is not guilty? Should we sue Fannie Mae for some of the Dumbass EA-III loans they approved? It's like Rip Van Winkle is the prosecutor here
I am going to second AnnS' comments. Tanta, your anti-Gretchen Mortgenson (GM) fixation is hurting your credibility with me as well -- and I have been a fan of yours in the past. GM is working under a severe limitation of space and editor's overview. She is a Pulitzer Prize-winning reporter (which she won because of her reports about Wall Street). So I think she has some idea of what she is talking about. She may not get all the details right, but from what I read, the general thrust is correct. Financial institutions harmed unsuspecting borrowers by selling them products to which all of the terms were not disclosed.
It makes me start to wonder if you are "talking your book" instead of dispassionately rendering your opinions on these matters.
The current case in Illinois involved only the Petition and is only one part of legal proceedings against Countrywide and Mozilo. The Petition can always be amended to reflect legal theories found during the discovery process. I once had a judge order me to amend the pleadings at trial. (Interestingly enough, that case involved a rogue banker.)
I think that in addition to the legal theories AnnS has flushed out, there are also the legal theories involving "products liability." Although I am unaware of it being used in the context of financial instruments, the principles involved are certainly applicable to financial products, in my opinion. It is simply a fact that the law regarding financial instruments have failed to keep up with developments in other areas of the law. Just because that is the case, that does not absolve the wrongdoing done by financial institutions in general and Mozilo in particular. For some reason in this country we seem to "blame the victim" in financial crimes cases when we don't do it in any other scenario.
And I can always count on our commenters to get whatever it is, which is the really cool part.
And our trolls to conspicuously not get it-- while advising you to 'work on your reading comprehension'. Also good fun.
Yalt, I may never actually arrive at an opinion regarding the merits of the indictment, but the issue is this tissue of indignation.
And the willingness of the Grey Lady to abet.
Could we, maybe, suspend judgment this time until we've seen the indictment?
Well, we can. But I wonder how many readers of the Times will.
Let's assume it's a solid indictment with real charges therein. The question becomes, why does Morgenson blather on about 30-minute underwriting? Does she want us to think the indictment's fluff?
On the BSC thing, I had it in the back of my mind that the original WSJ report probably did want us to think it was fluff, the WSJ having something of a reputation for defending Wall Street reflexively. But GM has a big stake in establishing the credibility of attacks on CFC. So what gives? We know she read the complaint.
Loans are tools for acquiring real estate.
All tools can be misused.
Drawing a parallel to guns, these loans need controls on their distribution. You punish the end users for their misuse, and you regulate who is given the privilege of their ownership.
Ignorance is no more of an excuse now than it ever has been. You would think that people would read the docs and insist on complete understanding of what they are buying when it amounts to 5-7 figures....but then again....
Okie,
That may merely reflect poorly upon the Pulitzer committee - and not for the first time.
maybe those things really paint a good picture of how a predatory underwriting system can defraud thousands of lower income people.
and countrywide knew it. and did it anyway. so did many others.
Drawing a parallel to guns, these loans need controls on their distribution.
And that's why I keep the house title safely locked up and away from the children.
the shear weight of it could kill them..
It makes me start to wonder if you are "talking your book" instead of dispassionately rendering your opinions on these matters.
Darlin', what "book" do you think I'm talking? I'm sorry, but that accusation is the second-to-last refuge of a scoundrel.
I have spent years and years openly criticizing industry practices like volume-based commissions, "streamlined" underwriting, stated income, toxic products, etc. Long before it was cool, long before the bottom fell out. Back when one actually risked being wrong in one's predictions about where this would all end up.
So forgive me for having no patience for everybody who now just "knows" how obviously illegal this all was.
Well one thing is nice to see and that's that people still have their 'opinions' intact....
You'll get no argument on that from me, Tanta.
Any case like this typically includes (1) actual allegations of violations of existing statutes, and (2) allegations of questionable conduct that isn't actually illegal but establishes a pattern that might indicate that the statutory violations were deliberate acts and not just errors. Public reporting on the Bear Stearns case focused on (2), leaving the impression that there weren't any actual violations alleged.
I wonder if something similar is happening here? It's no surprise that the AG, in public comments, would skip over the legal details to focus on the stuff that would get the lynch mob going.
But now I'm speculating too...I think I'll shut up until the actual documents get posted.
GM's reporting is flawed because it's missing the scope of the problem. We wouldn't be in the mess we're in if this was just a Countrywide issue, this is an industry wide issue. Picking on productivity incentives or some of the other sweatshop like tendencies of a particular lender doesn't lead to the real crux of the problem. How did so many parties (from the brokers/LOs to the lenders to the investment banks to the rating agencies) complictly act to make such terrible lending possible.
Racer X writes:
...Countrywide sold loans to borrowers that they knew or should have known that borrowers could not repay on their income
If this is the standard for negligence then what lender is not guilty?
In some states, and I think Illinois is one, that is the precise definition of one form of illegal predatory lending. Typically it only applies to certain loans defined as "high cost", with interest rates or origination fees above specified levels.
(2) allegations of questionable conduct that isn't actually illegal but establishes a pattern that might indicate that the statutory violations were deliberate acts and not just errors.
I do understand that.
But that is why I refuse to let anyone get away with the implication that the contents of item (2) are just a CFC problem.
Look, if all that stuff is really a pattern of questionable conduct, then indeed every mortgage lender in this country except two backwoods community banks and a couple of nickel and dime credit unions have to do time. I'm not necessarily saying I have problems with that, at least on my better days.
But I can't help wondering why the statute of limitations hasn't run out on some of it. AUS was invented in the 80s and widespread by the mid-90s. Loan officers have been on volume based commissions since the 70s, at least. And the only reason the email solicitations are new is because email is new; we used to put "statement stuffers" out and anyone who has ever had any kind of mortgage loan has gotten one.
You are right that we need to be careful with speculating, but I'm just trying to keep hold of the fact that all those things were considered perfectly legitimate "competitive practices" for decades. I have a lot more respect for those who criticized them back then, taking the long view of where the industry was headed, than these mouthy politicians who, apparently, got some mortgage loans from CFC themselves while the gettin' was good and now want to pile on Nobody But CFC.
I don't really understand, if nobody much likes these practices and yet they have been hiding in plain sight, isn't it about time they were discussed very openly and perhaps changed?
and what better company to use as exhibit "A" in this discussion than than one that is safely in transition to a new owner already because of all the dodgy products it sold?
Nobody is going to change anything absent a big messy court case. So bring it on..
Just short Bucky!
Ah Tanta, I have missed you...I may still buy a Kindle yet based on your reporting.
Jim and Sarge6 up top have a key element of this story nailed, and I'm not even a resident of their fair state, just a neighbor to the north who does quite a bit of work down in their fair state. If you can't follow the money, follow the politics. Oh wait, methinks there's some relationship between the two...
RacerX brings up the word "sweatshop." Where was all the outrage during the boom for these poor CFC employees? Who were constantly subject to speed-ups, being put on less and less plausible "incentive" plans, who were not allowed to do their jobs right because some metric-obsessed manager needed them to cut another 1.7 minutes per loan off this month so management bonuses would get paid?
OK, so everyone wants the Tanned One to cough up ill-gotten gains. Fine. But he took that off the backs of his own employees as much as the borrowers. I doubt Madigan really understands what these ex-CFC employees are trying to tell her.
Maybe someday someone will sue on behalf of the workers who got screwed in all this, instead of just the borrowers. Yeah, right, Pangloss.
"For some reason in this country we seem to "blame the victim" in financial crimes cases when we don't do it in any other scenario."
Wow, I think only an ignorant newbie, and I mean that objectively, would include a we all blame the victim statement into a critique of Tanta.
While I'm loath to criticize a prize-winning reporter and terrified of losing my "credibility" among pompous Internet attorneys, I must say the problem with Gretchen is that she has New York Times disease, i.e., flattering one's sources to protect access at the expense of accuracy. (See also: Judith Miller.) The regulators, politicians and prosecutors now supplying such juicy quotes are never asked where they were while the barn door was ajar.
Tanta, Your comments show how little you know about the kind of business that Coutrywide, and companies like them, engage in. Not every borrower has a degree from Harvard.
Many of their borrowers are good people with good credit, or have no other choices, who get suckered into signing papers they don't understand by someone who knows exactly what they are doing. All so that some paper pusher can make a quota or receive a larger bonus. To them the people are nameless. There is no empathy, no morals, just like most Wall Street types.
Why do you think that 1% of the population in the U.S. control 90% of the wealth ? They found a way to take it. Notice I didn't say earn it. Look at the obscene amounts given to Countrywides CEO, the "Oompa Lumpa". That is nothing more than legalized? theft.
His tanness is not only going to beat this rap, it will become some great marketing fodder in the future...I can see it now:
"We're so quick and easy, it's almost criminal"!
oh, and by the way, since nobody's said it yet:
SHILL!!11!!ONE!!
I guess I don't get the outrage at the outrage Tanta.
They are suing for damages right?
You've known and complained all along that these things were bad,
And now damages are being felt by the states because of it,
And now they want compensation.
Seems reasonable if late.
Are you saying that it's better "never than late."
sounds like they have evidence of wrongdoing. even if they think everybody is doing the same illegal acts, without evidence sitting in front of them, they don't have a case.
they can still investigate the others.
Ah Tanta, I have missed you...I may still buy a Kindle yet based on your reporting.
Just do some browsing in the Kindle bookstore first before you buy the Kindle. You don't have to own one first to do that.
My take is, if you are happy enough with the book selections (and prices), you'll be happy. The device itself is nifty.
Maybe someday someone will sue on behalf of the workers who got screwed in all this, instead of just the borrowers.
I have seen a few wrongful termination lawsuits brought against lenders for firing or constructively terminating underwriters and QC workers who wouldn't play ball. I don't know if any have been successful.
I am not innocent to what has been going on and I will tell you CFC will end like ENE. Mozillo is a crook and CFC deserves every ounce of bad press.
Yalt, I agree that loans with a "high cost" designation are subject to higher level of scrutiny. Most prime lenders do a high cost check prior to funding the loan so I'm not sure if that's an issue here.
I just down buy the argument that abuses listed here are the major contributors to what caused this problem. If you have investment banks writing guidelines with low levels of due diligence, and they're buying the loans you originate and the rating agencies are assuring you that these loans can be structured in a way that makes them risk free and your helping manking by increasing home ownership is the fact that your paying your underwriters a productivity bonus really a contributing factor to the problem here?
Sounds typical of Illinois.
Bitch to high heaven and threaten lawsuits over legal activities. Meanwhile, when actual fraud IS going on (Intercounty Title for example) they're asleep at the switch because there's no political points to be made for stopping a mere 200 customers from being swindled.
Nice to see these beatings have their own tag. Somewhere Tanta has a giant paddle with Ms. Morgenson's name on it, and she's carving another notch in the handle.
The Panglossian reference is not complete until someone says "this is the best of all possible mortgage markets."
Nothing on the Attorney General's website yet. Does anyone have a link instead of baseless speculation on the complaint's contents?
I seem to have heard similar arguments before....
"Officer, why are arresting me now!? I've been driving home drunk for years from this bar...and you never seemed to care before? Besides, I wasn't even the drunkest one there tonight?!"
So I am to do what with this info? Let him go?
Until the complaint is actually filed none of us will be able to read it, so I'll withhold judgment.
But many of the practices GM describes became commonplace in the industry.
Also, if a broker inflated income on apps, then it is hard to tie that to CW. Do I believe that in essence the mortgage industry allowed the third-party originations to become a means to blink at fraud? Yes. However it is relatively hard to prove that this was done knowingly in court absent some WaMu type emails.
Unfortunately, not verifying income also became a common industry practice. I've bitched and moaned for years about underwriting standards that magnify the possibility of fraud, so I really don't deserve to be called an industry shill now, and neither does Tanta. The bottom line is that a lot of what is described in GM's article are practices that involve GSE loans as well. That gives me pause and should be of weight in court.
I'm quite interested as to the allegations about servicing misdeeds, so I guess I will try to read the complaint.
I try not to write too much about Countrywide, because I have tremendous loads of malice built up towards it because of stuff I've run into. It's all anecdotal, but after a while when so many borrowers seem to be reporting the same thing, I formed my own opinion of the organization. So I cannot feel sorry about their legal troubles.
However, making low/no downpayment loans to subprime borrowers with affordability features was once considered the "right" thing to do. It was a government-encouraged practice; the idea was that after making a few years of cheap payments the borrower's credit position would be enhanced, plus they would have some equity in the home, and thus they could get a 30 year fixed at a much cheaper rate than the one for which they were originally qualified. This did work for some borrowers! I think many of these loans were badly misused, but how to prove that in court?
To those defending GM, I have to reply that her writing consistently shows a total lack of knowledge about the mortgage industry and also seems to demonstrate an unwillingness to learn about it. A previous Pulitzer doesn't mean jack if you are writing nonsense now.
...Where was all the outrage during the boom for these poor CFC employees
Amen Sister!
Interesting that this suit seems to have been inspired by a successful action in Massachusetts against Fremont. Somehow, the lowly Boston journalists had no problem reporting the specific 2004 statute allegedly violated.
I'm very curious about this:
The civil lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present.
Money damages for the state? For what?
And what does it mean to "rescind" questionable loans? Would a recision order require Countrywide to tear up the mortgage docs...in exchange for the borrowers returning the full sum of the check?
I'd think something so remarkable would require a bit of explanation. Unless one doesn't notice that it's remarkable.
Racerx--I'm not suggesting it's really a "contributing factor to the problem"; it's just illegal and thus could be what moves the whole issue from dubious business practices to a statutory violation.
Ctulhu--apparently the complaint hasn't been filed, they've just indicated that they intend to. With a possible merger next week, they're a bit under the gun....
"Officer, why are arresting me now!? I've been driving home drunk for years from this bar...and you never seemed to care before? Besides, I wasn't even the drunkest one there tonight?!"
Wrong analogy. You are dealing with the "selective enforcement" problem.
I am talking about stuff that has never in fact been a crime.
It was, in my view, always stupid and high-risk. But it was never illegal. And it was never HIDDEN.
How often do you find drunk drivers painting the words "I AM DRIVING DRUNK" on their cars in reflective neon paint?
Go read through CFC's old investor road show documents about their "Fast and Easy" programs and their "operational efficiencies" and their customer solicitation programs. That stuff was all front & center on the PowerPoints because it waved dollar signs in front of investors!
Exxon Valdez $2.5 billion oil spill ruling overturned
Exxon Valdez $2.5 billion oil spill ruling overturned
| Reuters
Don't think CW has much to worry about tie it up in court forever and even if you did have to actually pay it the damage award will be nil due to inflation.
Plenty of blame to go around here on this one.
Well, I didn't expect to see this when I checked my Yahoo! news:
Tanta on the Calculated Risk blog is very skeptical of the attorney general's claims, noting that Countrywide's allegedly deceitful practices were common in the business. Tanta says:
"Nobody has to like any of these business practices. But they have been hiding in plain sight for a long, long time. This ginned-up outraged innocenceall directed at Countrywide, as if everyone else in the industry had never heard of any of thisis truly getting on my nerves."
Expired
Well, we may have just proved that strange cases make bad law. Or at least, ill-informed legal opinions. I am afraid I may have "poked the beehive" and lawyers flew out and started stinging people!
My own personal criticism was mainly reserved for the low level of actual information contained in GM's article. And the tendency of readers of said article to forget to ask the kinds of questions some of us are more likely to ask.
I will forgive some of the hastiness, because the complaint was only just filed, and no one has had a chance to read all 78 pages of it yet.
But it is certainly fair for Tanta to point out the deficiencies in the article itself, which is not even close to "talking her book," whatever that means in a case like this, so back off. Tanta is quite correct that the article falls short of identifying just what the Illinois AG is claiming that Contrywide did that was illegal. Maybe the complaint is specific; maybe not; but the article is not very good, which was Tanta's original point.
A few missing bits: Federal court, or state? Violations of federal lending/banking law, or Illinois state tort law? Isn't Countrywide an Illinois corporation? Or at least some part of the beast is an Illinois corporation? Yet it also contains within it a federal savings bank; which is different from some other kinds of banks...And apparently, this is not a criminal case; this is a civil case brought on behalf of Illinois residents... so were the practices in Illinois substantially different from those elsewhere?
Does the complaint allege statutory violations, or is this based primarily in state common law fraud allegations?
See? We don't have the foggiest idea yet. I need all of the lawyers to take a deep breath and remember that the correct answer is always "Maybe."
That, and the first person to quote the UCC loses. It's a rule!
I'm also specualting that the real targetr of Madigan's ire is Bank Of America rather than CFC, motivated by BofA's takeover of LaSalle Bank. There's a lot of distrust of national banks in Illinois, especially when they take over Illinois institutions. BofA has also been putting the brakes on the revolving credit of some long-time Illinois companies that originated with LaSalle, and BofA has also reduced some of LaSalle's philanthropy.
Smacks more and more of the usual political extortion the more I think of it.
is it not fraud to tell your customers they are getting the best loan possible but then put them into a loan that is best for your company, not the customer? is it fraud to falsify information on the paperwork? is it criminal? should they all be investigated, fined with harsh penalties and thrown in jail.. i certainly think so. if you know your company is doing stuff like this and maybe more.... and you do nothing to stop it, are you liable?
"potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywides smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America"
It is now grounds for a lawsuit that you have borrowers in your lowest credit quality product who do not qualify for any alternative product?
Isn't the real problem that these borrowers, not qualifying at the fully-indexed rate, didn't qualify for any product?
In a comment on this point: I point this out not to defend teaser qualifying now or ever. It was always stupid. But if the OTS, OCC, Federal Reserve, etc., weren't willing to come right out and call it "fraudulent inducement," why would anyone think the State of Illinois can slam-dunk that idea?
We're talking about Shrub and Greenspan. They were ideologically opposed to calling any business conduct "fraudulent".
This doesn't mean I find the article convincing...just that I wouldn't conclude Illinois lacks a case without better detail.
I don't care about this lawsuit or any other lawsuits - I think they are all a waste. I agree 'investors' should have known about this behavior.
My issue is with CFC and companies like it. CFC would be nowhere without the alt-a option arm products it pushed for thepast 5 yrs, I believe up until very recently. CFC would have been a BS little mortgage originator without these funny money loans.
Now Wall Street helped in a big way fuel these loans, and no one is sticking up for Wall Street (nor should they). I know a lot of people that have been fired on the Street - not to mention C and WB employees losing a ton on stock they thought was worth X.
Companies like CFC have ruined the US - whether clients should have known or not as a patriot and fan of the US I see CFC as bad - period.
Gretchen Morgenson writes for the Times, the paper of record (and I am not a liberal and I hate reading it but still it is not a 3 yr blog). Some repect is due. She reports the news to the general public and does a decent job. I have personally made a ton of money from her reporting.
If you want to point out that people should have known this was going on - I agree that is a great point. But its also kind of like saying the sky is blue. So what?
I enjoy this blog and I think you guys are all very smart. I just think some times people just agree with Tanta to agree and that is weak.
SR
Yalt - the pattern and practice definition of failing to verify ability to repay is federal. It is in Reg Z and relates to HOEPA loans. Reg Z 226.34(4):
Repayment ability. Engage in a pattern or practice of extending credit subject to §226.32 to a consumer based on the consumer's collateral without regard to the consumer's repayment ability, including the consumer's current and expected income, current obligations, and employment. There is a presumption that a creditor has violated this paragraph (a)(4) if the creditor engages in a pattern or practice of making loans subject to §226.32 without verifying and documenting consumers' repayment ability.
However in the type of "affordability" loans that became popular, the issue is not that the loans were high-cost. It is rather that the loans were ARMs with initially below-market loans which were basically made marketable by high resets.
These loans were originally structured with the idea that after a few years of solid payment history, the borrower would have equity in the home and the ability to refinance at much lower rates.
MOM, I hate Countrywide too. I first started really hating them back in the late 90s when they really perfected their strategy of instantly staffing up in a boom, taking everyone else's business with reckless pricing and underwriting, and then instantly laying off employees and shutting down branches at the first hint of a downturn in the latest refi boom. Those of us who just wouldn't--at least back then--treat our people that way couldn't compete with anyone who would. I wouldn't open a branch and hire a bunch of underwriters planning on cutting them lose without severance in six months if interest rates climbed by 100 bps. CFC would and did.
But that was then and this is now. Now, who is left with enough integrity not to do what CFC does? How many of these brave Wall Street analysts are rewarding companies who refused to adopt as much of that business model as they could?
Firstly,
How often do I see: "I AM DRIVING DRUNK" on their cars in reflective neon paint?
Well you'd be surprised how obvious crime starts getting when you don't enforce it. It doesn't mean it doesn't mean it's less illegal or less damaging.
Secondly, this is a civil suit correct? A suit for damages?
"I am talking about stuff that has never in fact been a crime."
It's not a crime to fail to prune a tree either, but when the branch falls and breaks someone's neck you may have to pay up....especially if you have some "industry insiders" with years of WARNINGS about the danger of that very tree.
Sometimes it takes the actual damage to occur before anyone thinks of suing.
MOM said: This did work for some borrowers! I think many of these loans were badly misused, but how to prove that in court?
Uh...look around, listen to the news, count the forclosures, what's hard to prove? Would any of this occurred it they were'nt? Seems the burden of proof is on Countrywide now.
MOM asked
Many on Wall Street were and still are short names like CFC - everyone isnt a fan. In fact many funds are very short these guys.
Again not sticking up for lawsuits but pointing out it was all obvious doesn't really help. And atttacking GM for reporting the news is odd.
Either way easy money loans will be gone for a while and that is great for everyone.
SR
What should be examined is the insider stock sales from Mozilo versus CFC reporting and guidance.
And while the SEC is at it they can look at the same with New Century - ohh wait I think they are.
CEOs of Qwest and WCOM did the same thing in early 2000 during the telecom boom.
SR
Thanks, MOM. Some state statutes have this language too, with differing definitions of what constitutes a "high cost/high fee" loan.
I don't know the legal situation in Illinois and I said I was going to shut up until I could read the complaint....
kinda hard to compete with companies or people that lie, cheat and steal their way to the top.
god bless america.. where ethics are for losers.
Stock-Regulator, CFC was Fannie's biggest customer for years. The investment products aren't what made the company they're what brought about it's demise.
wasn't the sec defunded and told to scale back all operations?
essentially, look the other way?
Threetorches said:
Tanta is quite correct that the article falls short of identifying just what the Illinois AG is claiming that Countrywide did that was illegal.
I'll second that. The mainstream press has this annoying habit of writing for real people, instead of us lawyers.
Threetorches, where was it reported that the complaint is 78 pages?
I like your UCC rule. What's the proper form to cite that in district court?
Racer X - go look at CFC valuation pre 2002. Yes they had a nice little business prior but they weren't important players. They certainly had no influence in congress. Now they bribe congressmen.
SR
Tanta,
Do you think you'll be posting on the FBI arrests at some point?
I think the problem people have is that with blogs you have a core group of readers and if they start yes-ing each other you get immediate group think. For a high quality blog such as this, that is not good.
Also people read blogs for different reasons and some here don't care about an accounting of history, they are trying to profit from being proactive.
SR
There's a lot of distrust of national banks in Illinois, especially when they take over Illinois institutions.
Why in the world?! Now that the last if its tribe, more or less, is gone? And the acquirers put down such deep local roots.
I'd say that if BofA is any part of Madigan's motivation against CFC then you're darned tootin' it's just theater (though I'll be interested to read the actual complaint).
Cthullu, props!
WSJ apparently reported that the complaint runs 78 pages. Which is more than the Times told us. Other than that, it is still short on detail and focuses on salacious bits about commission sales and refinancing solicitations.
Illinois Plans to Sue Countrywide, CEO - WSJ.com
And you cite the UCC rule by simply pointing out that it isn't the law unless specifically adopted by a state legislature!
Which can of course change or modify it, or adopt any one of several alternate passages, proposals, explanations, remedies, or whatever. It's a lot like someone who quotes one of the Restatements instead of an actual law.
I love that, its the legal equivalent of showing up with a knife to a gunfight.
Yalt writes:
Well, I didn't expect to see this when I checked my Yahoo! news:
Tanta on the Calculated Risk blog is very skeptical of the attorney general's claims, noting that Countrywide's allegedly deceitful practices were common in the business.
Ah! The light dawns! I was just wondering why we always have hoards of newbies arriving and explaining Tanta's ignorance of the mortgage, legal and reporting businesses and warning us all that she's a shill for Countrywide whenever she does one of these stories. I thought maybe GM had her own little spy network sending out alerts to her fans. "Quick! Tanta's attacking Gretchen again! Defend the Queen!" Now I see it's another branch of the MSM that we have to blame.
Geez. I knew the American news media was basically dead in the water (mainly due adopting the same business practices as the mortgage industry) but can't they even find anybody able to accurately synopsize a few paragraphs?
...kinda hard to compete with companies or people that lie, cheat and steal their way to the top
I don't think CFC lied, cheated and stole their way to the top (I would not say the same about New Century) but I would say that they sold their soul to do so. Their ruthless and aggressive pursuit of market share created a lot of growth with a corresponding increase in risk. It's taken a while but even the most resolute CFC employees have begun to realize just how much they were taken advantage of.
Okay, I can answer my own question that the 78pg fact comes from the WSJ. And I'm completely in agreement with Tanta on the inferiority of this particular article (whatever the journalist's credentials are).
From the WSJ version, which is slightly shorter, I can at least deduce that this is probably being filed in part under the Illinois state FTC Act equivalent, and I get a much better sense of the scope of rescission relief that the AG may request.
again i ask is making up information on loan applications lying? what is it called when you have a customer who qualifies for a normal loan but since you get a bigger kickback for putting them in an ARM, that is what you put them in? sounds like fraud to me. gaming the system isn't cheating? can i cheat on my taxes if everybody else is doing it? then if caught say i made a mistake.. that was an oversight or my accountant made an error?
fraud.. everybody is doing it..
jump on the bandwagon..
if caught, tell mommy jimmy did it first..
Tanta,
Re: "I hate Countrywide too"
Please try to relax and let go of this pent up anger and what is now most likely pent up frustration which is eating away at your shell. Place yourself in a mental space where these assholes can no longer be a part of your concern, then let it go and then fuc-king move on!
And talk about histories - NEW management had a history of bankrupting companies. Then they roll out an ad campaign of "The New Shade of Blue Chip Company" something stupid like that.
Point is all this weakness and pain was obvious but it doesn't excuse people.
SR
One thing that I have been waiting for in the broker world:
When will some AG or consumer advocacy group sue a bank / institution over the incentives offered to brokers.
Here is what I am getting at: when you have a system that can incent brokers with YSP of 2%, 3%, 4% for increased rate on the loan, it isn't totally ridiculous to argue that the banks KNEW the brokers would lie, because there were tens of thousands of dollars in incentive to do so.
When generating a home equity loan as a branch banker, they are paid some nominal sum, say $100. A broker on teh other hand, might be receiveing $10,000 or more for a single deal.
You could argue that the banks were willfully blind to the fact that they were incenting some portion brokers to lie. Or that banks should have expected some of them to lie given the financial reward for doing so.
It is like owning a branch - if I deposit money in the branch, under the assupmption that it was protected, and the branch does not have an alarm system or a lock on the vault, it might be negligent.
I am not saying we should go after the banks - I just find it fascinating that we have all these angles to the problem.
The industry was/is fundamentally broken from so many perspectives. I get as annoyed as Tanta with the suits that imply "This is the reason it went to hell in an handbasket..."
Sorry for not being more succinct.
GM/Pulitzer,...even Homer stumbled, of course Bulwer Lytton only wrote one enduring sentence, I don't know which one GM is closer to.
If the suit has no basis as reported, is it possibly a fishing trip under a merger deadline?
Ah well, I must read the latest posts quickly and get out to tend my garden. Work keeps away four great evils,...I'm adding "spending all day at the computer" to Candide's idleness, vice, and want.
I haven't read the indictment (is it out yet, even?) but I can guess where Madigan is going. Countrywide issued a bazillion fraudulent loans in the form of loans at high rates the borrowers couldn't pay back and in the form of fraudulent paperwork. BUT, to sue CW, as opposed to just throwing some brokers in jail, Madigan needs to show CW was intentionally doing this. There's not likely to be a video of Mozillo doing an evil laugh and rubbing his hands together as he tells CW employees to defraud borrowers and file fraudulent paperwork. What happened was that CW business practices induced CW employees to commit fraud on a massive scale. Madigan is trying to show that any informed person would know those practices would induce massive fraud and thus the management was responsible for setting up a fraud machine.
"what is it called when you have a customer who qualifies for a normal loan but since you get a bigger kickback for putting them in an ARM, that is what you put them in? sounds like fraud to me."
So... would you prefer the 12% fixed rate or the adjustable with an 8% start rate?
Yeah, you're right... it was just the lenders forcing/steering their customers into these products.
Please.
If this Lisa were doing the right thing, she would also be indicting the lying FB's as co conspirators.
Further all sub prime CC credit lines should be immediately reduced to the current balance to avoid further fraud.
Nothing up yet but the release from Madigan's office. One thing seems clear, the premise of her case involves some things having been done perhaps without the knowledge of the borrower:
That sounds to me as if the falsification could have occured unbeknownst to the borrower; of course, some could also have turned states' evidence on this matter. Regardless, I must say that a parade of shlubs that lied their way into $200k loans (Illinois is not bubbleland-priced for the most part, especially in subprimeville.) is not the thing that would convince me that now we're finally getting down to it. The engineers of this mess were quite well-informed of the seams in the legal system and appear to have steered just clear of many of them.
Holding of criticism of the Illinois AG: reasonable.
On the other hand, criticizing commentaters who claim to be attorneys but can't tell the difference between a "mortgage" is a "good" is certainly appropriate.
In fact, in many states, pretending to be an attorney is a crime...
FYI to quiet the voices, here is the complaint filed by the state of California against countrywide today. I do not expect the Illinois version is any different:
http://online.wsj.com/public/resources/documents/CWideCalifComplaint20080625.pdf
It appears Tanta is completely correct, and CFC is being taken to task for the business model all mortgage lenders followed in the past few years. There's a hilarious section about how CFC (Sambol and Tan Man in particular) hatched a plan to become the biggest reseller of mortgages into the securitized secondary market. Really? How nerfarious! Who could have known what they were up to? I'm sure they did it all behind closed doors and shredded the evidence like Enron.
Anyway, that they could do this is, like Tanta said, unfortunate. Criminal? I'm not holding my breath. This is political grandstanding at its finest.
On the Economics of Dr. Pangloss:
Before anyone gets uptight about lawyers (any more than they already have), I'd like to say that A. Gretchen Morgenstern is indeed a fool. B. Defending Gretchen Morgenstern isn't quite as silly or hopeless as defending Lou Dobbs, but it might be as silly and hopeless as defending Eliot Spitzer.
Now I haven't read the Illinois complaint, (yet, I'll post again when I get around to it), so I won't comment on it specifically. I will comment on the comments of AnnS, etc., who if they are lawyers ... well ... let's just say not all lawyers deserve the reputation of the profession, but some do.
Fraud writes:
again i ask is making up information on loan applications lying? what is it called when you have a customer who qualifies for a normal loan but since you get a bigger kickback for putting them in an ARM, that is what you put them in?
The first sounds like fraud, the second sounds like typical sales. I qualify to buy a Cadillac but the salesman makes more by (attempting to) sell me the Hummber because he makes more. Maybe I should figure out for myself what I want to drive?
And since making up information on loan apps is lying, the broker/rep who entered falsehoods should be tried and punished. So should the consumer who entered falsehoods, or signed an application with falsehoods on it.
The first 40 pages of the California complaint are just background; the real questions are (1) whether, and how often, they or their brokers misrepresented the terms of the loans and to what extent they can be held liable for misrepresentations made by their brokers, and (2) whether and to what extent they made misrepresentations to the secondary market.
Since the complaint doesn't seem to contain any evidence on either point, it's a bit hard to say. I guess that's what you get when a preliminary draft of a complaint gets rushed into action to beat a merger deadline.
.
jim writes:
I am from illinois
Do not underestimate the stupidity of Lisa Madigan.
This is pure political theatre. Nothing else.
jim | 06.25.08 - 8:31 am |
I also live in Illinois and I echo that statement, except it applies to most of the state government, especially the governor.
Tanta,
I'm a lawyer, and hopefully something of an antidote to AnnS and Okielawyer.
Keep up the good work. Pillory GM until your fingertips bleed. GM wears glasses permanently tinted with the notion that greed, hubris and malice are the only attributes business and businessmen carry.
And at this stage of the game, picking on Countrywide or Angelo Mozillo is utterly banal. Anyone can do it.
Fraud is fraud, but there have always been remedies for that.
Pretending you can repay a loan when you can't doesn't qualify as a product liability problem subject to the UCC. It'd be like trying to make a product liability suit out of purchasing a car that you pretended to know how to drive, and then realizing later on that you can't, so the car's no good.
Everything the borrowers agreed to was there in black and white for them to see. If it was a refinance, they had copies they could carry home and study for three business days to decide if the deal was really the best for them.
Abrogation of contracts, as this suit seeks as a remedy, is a very serious thing. So long as no fraud was involved, (which would void the contract anyway), it should be summarily rejected.
Enforcement of valid contracts is one of the foundations of civil society. If Illinois is allowed to rewrite these contracts, it will likely destroy the ability of Illinois residents to get a mortgage, and could have much bigger implications for the society at large. In any event, if this suit is allowed to proceed and it succeeds, it will have as its consequence the exact opposite of its intent: The residential real estate market in Illinois will be set reeling, as all but the GSE's flee the state.
Of course, the GSE's are about the only game in the business right now, so perhaps that figured into Illinois' calculation. I suppose President Obama could order the GSE's to issue contracts in Illinois that no one has any intention of honoring. The long-term implications of that sort of thing would be disastrous.
My bill: Keep calling bullshit on GM, inter alia (like the DPA for FHA), and it's pro bono.
One last point regarding alleged misrepresentations of the loan officers: The law is very reluctant to admit parole evidence that contradicts the written terms of a contract. This is especially true in contracts concerning real estate, and in fact, in many states, an unwritten contract to purchase or sell real estate is generally held to be unenforceable per se.
Of course, these were not contracts for purchase, but the principle is the same. How can a borrower claim to have been misled when the terms of the contract were in plain sight on the page he signed?
Tanta,
The vociferous outraged response to your current post is somewhat ironic. After all, you have (in some instances) indirectly cultivated a nutty left wing following by taking an anti-business stance whereby the lender is a vicious money-grubbing evil-doer that deserves to be punished for preying on the little guy. One past post stands to mind: the one on the CA couple that was proven to have lied about their income yet the judge ruled that the lender had no claim because it was unreasonable for them to believe the fictitious income figure.
The message shapes the crowd. This is the crowd that you are attracting: "AnnS" and "OkieLawyer" and others.
...and for the sake of clarity - I think that your point in this particular case is spot on.
I think Nemo put it best: "And then -- get this -- one year after I bought my TV, they sent me an offer to trade it in and buy a newer model! I am absolutely speechless. Who do these people think they are? Somebody ought to go to jail."
Shall we start picketing Best Buy, everyone?
Lisa Madigan has her job because of who her daddy is.
The idiot Republicans in Illinois elected a corrupt official like George Ryan as governor and after the drivers' license scandal broke, which involved the sitting governor, the Democrats were able to take over the state-wide offices in addition to the lock hold they have on Chicago.
It will be interesting to see how long the lawsuit lasts in court.
If 25% of borrowers could not have qualified for other CFC products, then presumably 75% could have qualified for lower cost but were nonetheless put in loans meant for only the weakest borrowers; seems someone might have a cause for complaint there. Not this this is news as we have already seen reported several times that many people who qualified for prime or near prime were nonetheless steered into sub-prime loans.
That is what the securities/secondary markets wanted to buy and those loans gave salesman the highest commissions,
Uncle Felix thinks this is a big deal.
Illinois Countrywide Potentially Devastating - Market Movers - Portfolio.com
"Countrywide repeatedly qualified borrowers for mortgage loans based on salaries that were significantly higher than what they really made, Madigan said.
Under penalty of perjury, I hereby acknowledge that my annual income of eleventy jillion dollars is correct.
Signed__________________ Date_____
"The idiot Republicans in Illinois "
... also ran Alan Keyes for Senator when they discovered Jack Ryan enjoyed having sex with his wife before they got divorced. Thus conceding the seat to anyone the Democrats ran that could fog a mirror. President Obama thanks the Illinois GOP every day of his life.
Off topic, but the national GOP spiked a solid candidate(Jim Oberweiss) in the IL primary because of his opposition to the White House's view on immigration. Leading to Keyes, who led to Obama, who will probably defeat McInsane.
AnnS was laying into Tanta and others about this suit and "advised" reading the filing.
Well I did. You could summarize the Attorney General's lawsuit with this line I copied from about half way through:
"Prudent underwriting is how borrowers are protected from the risk that they will be given a mortgage that they will not be able to repay."
I bet you this comes as surprise to many mortgage underwriting and other financial service professionals.
Oberweis wasn't solid, he couldn't even win Hastert's district.
Spiv- thanks for quote. Let's "flip" it:
"Prudent underwriting is how investors are protected against the risk that their investment will be loaned to borrowers lacking the verified capacity to repay."
I can see both sides of this issue-- both the individual consumer protection aspect & the collective stability of the financial markets aspect.
Both are extremely important, but I gotta say, I think it's quite illogical for many here to moralize about "caveat emptor" views. It's one thing if you buy an item at the Dollar Store & it doesn't work-- you bought a cheap, sub-prime item & the only person hurt in the end is you.
But its another to apply purist "caveat emptor" principles to mortgages, simply because of the large amount of money involved. Mortgages are such hydra transactions with each dollar of a 300K mortgage snaking its way into other after-market transactions. If the initial transaction was originated in bad faith-- whether from the borrower or broker-- the harm expands way beyond those 2 inital players.
"Bad" money drives out good by introducing unstable risk & unmerited rewards into the system as a whole-- which is what's happened now.
So in the "whotablame" game I gotta blame the lending industry. They endangered themselves and all the rest of us, and they-- unlike most borrowers-- knew full well the risks they were running.
Much as I'd love to, I can't even fully blame Congress-- from watching C-span congressional hearings on the mortgage mess, it's obvious from the caliber of questions asked that many in Congress don't know a tranche from a rhubarb. (I don't know what a tranche is either, for that matter, but I shouldn't have to. Just because I'm an American citizen does not mean that I must know every last single esoteric arcane bit of info about other people's jobs.)
The lenders bear ultimate blame for this mess because they failed to self-police within their industry. Nor did the majority use the vast amount of clout they've got to go to Congress & get Congress to do it for them. They grabbed short-term profit & to hell with the long view.
Since 2002, at least, there've been experts in the economics & finance spheres jumping up and down about the implicit danger, to us all, from an unchecked housing bubble. And they were blown off by their fellow professionals within their industries.
So now we're all screwed. (and in such a disappointingly sub-prime way.)
Countrywide has significantly contributed to a collapse of the national economy by way of reducing consumer confidence. Greedy, sleazy, and unlawful: They deserve everything that's coming at them dont allow powerful corporation heads escape our legal system. Vote for them at Corporate Accountability International's Corporate Hall of Shame.
addiction help geriatric abuse at stopcorporateabusenow.org
Now why would any company extend credit to someone who was not credit worthy? The answer lies in the policies of the government. Were lenders told that subprime mortgages would be honored by the government? I'd bet that Fannie Mae and Freddie Mac got a go ahead to push bad loans from the usual suspects.
We have just seen the nationalization of the mortgage industry, and another layer in the financial house of cards has been built. Tough times are coming so I hope you all learn about how to sell apples. The next collapse will make Weimar look like a picnic.
I don't care, my family can feed itself and is more or less self sustaining. The city folk created this mess. They deserve what they have created.