Next week, Attorney General Lisa Madigan will visit Boston and learn to which federal court her lawsuit against the former mortgage giant Countrywide Financial will be assigned. As you may remember, Madigan filed a suit against Countrywide in June for engaging in deceptive lending practices. Does she have a shot of winning? The Reader's Whet Moser points us to an excellent Columbia Journalism Review piece by Dean Starkman
that suggests Madigan's case is pretty tight. The whole article is
worth your time, but here is one choice excerpt after the jump in which Starkman explains how "the evidence is becoming overwhelming of a
profound structural shift in the U.S. lending industry -- one that
institutionalized widespread deceptive practices and outright fraud
perpetrated on borrowers":
And while they are only allegations, few would argue with California when it asserts that the more onerous the terms of a loan for the borrower—e.g. higher rates, prepayment penalties, etc.—the more global bond investors would pay for it; and is it really in doubt that everyone in the loan-supply chain, including the sales force, got higher pay the more onerous the terms? Or, as California puts it: “The value on the secondary market of the loans generated by a Countrywide branch was an important factor in determining the branch’s profitability and, in turn, branch manager compensation.”
Such incentives would logically set the table for the creation of vast call centers—“loan factories,” where retail sales staff were trained in “high-pressure” sales tactics, complete with scripts, cold calls, databases, etc., to “steer borrowers into riskier loans,” as California alleges. The eighty-one-page Illinois complaint, filed June 25, similarly describes a culture in which traditional banking values were turned on their heads and were aimed overwhelmingly toward “selling” loans, which is the opposite of traditional underwriting.
From 2004, Countrywide led the market in rolling out new “products” that were basically bureaucratic ways of approving a loan to anybody. The complaint said Countrywide threatened to fire underwriters for (my emphasis) “attempting to verify a borrower’s ability to pay.” [...]
The mortgage mania appears to have entered its Baroque phase sometime around 2004. That year, Countrywide approved a brokerage known as One Source Mortgage, Inc., owned by five-time felon Charles Mangold, which proceeded to embark on “rampant” fraud, Illinois says, including the wholesale doctoring of loan files.
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