Countrywide Subpoenaed by Illinois Attorney General

Lisa Madigan, the attorney general of Illinois, is investigating subprime mortgage lender Countrywide “as part of the state’s expanding inquiry into dubious lending practices that have trapped borrowers in high-cost mortgages they can no longer afford,” says the New York Times.

Lisa Madigan, the attorney general, has subpoenaed documents from Countrywide relating to its loan origination practices, a person briefed on the matter said. Rick Simon, a Countrywide spokesman, said the company was cooperating with the investigation but declined to comment further.

The inquiry follows an investigation by Ms. Madigan’s office into One Source Mortgage, a Chicago mortgage broker that recently closed its doors. Ms. Madigan sued One Source on Nov. 27, contending that the company misled borrowers by promising low rates on mortgages without advising them that their payments would jump sharply shortly after the loans were made. Countrywide was One Source’s primary lender, according to the lawsuit.

One Source is being investigated for tricking borrowers into signing up for loans in which only a part of the interest is paid, resulting in a mortgage that grows, rather than shrinks as time goes on. These loans are illegal in 25 states, but, of course, not in Illinois—the Sucker State.

The attorney general’s lawsuit contended that One Source put borrowers into loans with terms they did not understand, especially so-called pay option adjustable-rate mortgages. These loans allow borrowers to pay only a fraction of the interest owed and none of the principal, resulting in a growing rather than a shrinking mortgage balance. Countrywide was One Source’s main provider of pay option loans, documents in that case show.

“This company’s conduct is a prime example of unscrupulous mortgage brokers that has led to a foreclosure crisis for many Illinois homeowners,” Ms. Madigan said when she filed the suit against One Source.

One Source mortgage brokers are accused of inflating borrowers incomes, telling customers that they had to close before the terms of the deal were explained, lying about the terms of the mortgages, and closing mortgages in as little as 15 minutes.

Countrywide Subpoenaed by Illinois [NYT]
(Photo:meghannmarco)

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  1. Tracy Ham and Eggs says:

    Im relatively certain that option-arms, while a horrible product for 95% of people, arent illegal in 25 states.

  2. The Kapil says:

    As big a bleeding-heart big-government-is-good liberal as I am, let me be the first one to say that we don’t need any more damn regulation.

    EVERYTHING is disclosed and double disclosed before someone signs by the dotted line…if people would just open their damn eyes and read what they are getting themselves into, there would be no housing crisis.

    And where was the IL AG when the shady mortgage brokers were hawking their wares? It’s a little too late for this, no?

    The AG’s job is to protect Illinoisans from scams, not put up a sham of a trial when everyone has already eaten the cake and gone home!

    Option ARMs are wrong for 95% of the population…but for the other 5%, they’re exactly what the doctor ordered…so why do we need yet another law telling us what we can or cannot do with our lives? Want to crap and wipe for me too?

    What we have here is this:

    1. Mortgage brokers without a fiduciary responsibility to their client, unlike a Realtor. The mortgage broker is “supposed” to look out for the client and get her the best deal – and the vast majority do – but every group has its bad apples.

    2. A populace too eager to make a buck that sees a quick flip as the answer to their financial woes. Just about everyone who is in trouble with their mortgage had no business buying a house in the first place. You can’t spend more than you earn…you learn that as a child when you get your allowance. These people can all live on the street…they made the bad choice now they must reap the results.

    3. “The man”, “The system”, the Republicans, the lobbysists, etc. are all to blame too. When the IL Gov tried to pass a law that would have required prospective homeowners to go through a counseling session before getting a mortgage…everyone was up in arms. Realtors, Mortgage brokers, Republicans, Business people…EVERYONE! Why? Most of the people are smart enough to read the contract…and the ones who aren’t, would have been required to go to a class. What’s wrong with that? …the mortgage broker doesn’t get to rape them?

    4. Lisa Madigan couldn’t help a citizen if her own life depended on it. It’s too little, too late.

  3. The Kapil says:

    I should add, Countrywide is actually one of the more ethical lenders out there. The shady ones went out of business 6 months to a year ago and can no longer be sued. Countrywide is a big name…the AG gets to make a name for herself in the press without actually doing anything to help the Citizens that pay her salary.

  4. Pylon83 says:

    @Tracy Ham and Eggs:
    A cursory search using Google didn’t turn up any indication that these are illegal in any jurisdictions. Can anyone provide a reference for that?

  5. ThomasHobbes says:

    The California Attorney General will be announcing the same things. I think its safe to say that this will be almost as big as the Ameriquest settlement.

    As for the pessimism that I see in other comments, the AG cannot be at the closing table for every loan so like most law enforcement they have to wait until someone is ripped off before they take action.

    Also this story is about much more than option ARMS.

  6. ThomasHobbes says:

    Countrywide has been ethical but they got caught up in the frenzy like everyone else. You’re going to see internal documents that show managers pushing loan officers to make the worst loans possible.

  7. Snarkysnake says:

    Okay,I’ve seen enough articles now on how these unscrupulous mortgage brokers have tricked the masses into taking on a more mortgage that they can reasonably afford.This won’t be popular,but here goes…

    Why doesn’t Consumerist do some articles on predatory borrowers ? In my business,I see people all the time that took out one of these “cash out at closing , borrow more than the house is worth and we’ll dummy up the paperwork for you” loans,spent the cash, and never made a payment.(They knew that it would take a minimum of 8-12 months to evict them,in the meantime they got “free” rent) Should these people jerk our tears ? I mean,yeah, there are a lot of dirtbag brokers out there,but wasn’t there a lot of collusion and shared interest between bad borrowers and bad lenders ? A lot of borrowers knew that they were signing loan documents that were at best fantasy and at worst fraudulent. But to read the popular press,you would think that everyone that took out an other than standard 30 year mortgage in the last five years was the unwitting victim of pirates in neckties (and ill fitting suits)…

    Even assuming that they themselves were not out to pull a fast one,did these people not fucking READ what they were signing ? Unequivocally no. For all of their complexity,mortgage documents do lay out certain facts in plain english with charts and numbers.How hard is it to tell a mortgage company that you want unattached advice before signing.Not hard at all,but that didn’t seem to occur to a lot of these poor victims.Boo Fucking Hoo.

    Finally,a lot of this problem is the same old,same old. These borrowers asked the tricky mortgage broker
    “What loan will give me the lowest payment”? That’s when the fun began (for the broker).These are the products that were rigged to explode well after the money was made on the loan orgination.Those,for the most part,are the ones blowing up now.The fun’s over,it’s time to pay it back and these people are crying foul.Their cries are being heard and it remains to be seen just who will take the biggest hit from the blast- The borrwers themselves,the lenders,or you and me,the taxpayers…

  8. JustRunTheDamnBallBillick. says:

    @Pylon83: Cause they arent. That was my point. Bad loans doesnt mean illegal loans. I refused to ever sell them back in my broker days, but I had dozens of customers ask for them.

  9. ThomasHobbes says:

    You know what…. Stop the “Im a taxpayer & and Im not paying for a bailout” bullsh** arguments. You see you already did. While Wall Street firms made huge profits on subprime mortgages, you paid a higher percentage of your income in taxes while these guys enjoyed huge capital gains. Good luck with that one.

  10. ceejeemcbeegee is not here says:

    @ThomasHobbes: What! Rich people getting richer? Preposterous!

  11. HawkWolf says:

    I think part of this whole subprime mortgage problem is the relentless push to property ownership. You must own a home. it’s the Right Thing To Do. Own your own land and home, have that precious equity that’s So Good, etc etc.

    So when you’re supposed to open a home, but thought you can’t, and then suddenly YOU CAN!!!!!…. what do you do? You do it.

    In order to buy a home, I need around a 10% down payment to avoid going upside down, right? That’s going to put me buying a home around 8 to 10 years from now. Whee!

  12. wacky864 says:

    The problem with this discussion is that there is no one participating who is knowledgeable on the subject.

    Try a Google search for “option arm state restrictions” and you’ll find *plenty* of lists of states that do not allow option ARM mortgages.

    Every broker or lender will disclose immediately if you live in a state that does not allow option ARM financing on property.

    Yes, checking facts is good, and there should have been a reference on this kind of a claim, but if you read any financial journals, it’s so common knowledge that references are not necessary for that audience.

  13. Wormfather says:

    @HawkWolf: Seriously, I have this conversation with my fiancee at least once a month about how a mortgage at $2700 is not better than rent at $1500 in the short term or long term.

    That’s $1,200 a month for 30 years to purchase a $500,000 home. Ok, now if we put that in a 401K and get 9% annual return, that’s just over 2,000,000.

    I’d rather never own a home and retire 5 years earlier.

  14. rhombopteryx says:

    @Pylon83:

    The inadequate disclosure or conditions of qulaification is probably what’s illegal, not the loan itself. The article is just (mis)summarizing soundbites. Selling certain types of “high risk” or “high rate” mortgages without certain additional disclosures is probably the violation. The “25 states” mumbojumbo is probably referring to a threshold interest rate that triggers some additional disclosure obligations, which Ill. apparently doesn’t have. It’s not some “big gubmint’ tryin to keep me from the free market loans I want” conspiracy so much as it is a sensible disclosure obligation (as more information ultimately makes free markets even more efficient.) That detail apparently gets lost in the press.

  15. econobiker says:

    @Snarkysnake:

    Snark,
    These are the same people who buy cars (the 2nd most expensive purchase most people make) only based on the monthly payment they can afford…and get screwed with the pricy paint protection/cloth treatment add ons to boot.

    What makes anyone think they could understand and comprehend a mortgage document other than the part about “monthly payment” especially when the increase in payment is not specifically listed – prime plus X%?

  16. Wormfather says:

    @Snarkysnake:

    +1

    My mom sold her house a few years back and was looking to buy a new one, she closed on the home she owned one morning and then went to close on the new one that afternoon. She read the contract and didnt understand the terminology. She GOT UP AND CALLED A LAWYER!!! and it turned out that the language had been changed to make it a loan with negative annuity that had a baloon payment lurking down the road that she wouldnt be able to pay.

    Was what they did illigal? No, but that wouldnt have helped her any when the house would have been forclosed on.

    But here’s the kicker…she somehow thinks that the people losing their homes are somehow absolved of any wrongdoing/ignorance on their parts…old people, eh.

  17. mac-phisto says:

    @Snarkysnake:

    Why doesn’t Consumerist do some articles on predatory borrowers ?

    they have. a simple search for the infamous man whose name shall no longer be mentioned should return the results you seek.

    there are most certainly borrowers who purposely misstated income, or took loans as “owner-occupied” when they didn’t live in the house for a single day.

    there are most certainly brokers who purposely manipulated apps to insure that a loan would go thru, or sold products based on commission yield as opposed to what was best for the borrower.

    regardless, this subprime nonsense is just that. foreclosures are too widespread for this to just be a subprime problem. there’s something worse going here that people only whisper about in back rooms.

    here’s some interesting testimony from the mortgage bankers association (aug, 2006) that points to higher instances of traditional reasons for foreclosure (job loss, death, divorce, medical issues) as the main reason for our troubles:

    [www.mortgagebankers.org]

    could “subprime meltdown” be a smokescreen for a much worse reality?

  18. n/a says:

    We have one of those countrywide loans offices right down the street from me.

  19. Sam_Spade says:

    While Countrywide has made subprime loans, *they* have made many prime loans. I am fairly certain most of their loans were prime loans.

    I have not nor do not work for Countrywide nor own stock in them.

  20. grado says:

    WORMPAPA-while a agree with short term about the rent vs own especially in CA where a decent 2Bd/2bath is still waaayy too expensive. But you may need to consider:

    You get a tax credit on the mortgage interest so the $1200 spread is somewhat overstated depending on your tax bracket. For example $500K 30 yr. mortgage fixed rate (assume 6.5%) $3,160 per month payment.

    Usually your 401K is pretax $’s and you get some employer match. This is good.

    Rent can increase with inflation and you pay it forever (could be bad). Buy and eventually most of your monthly stop. This is good but you still have to consider cost of ownership. Another plus in my apt. landlord covers trash and water.

    Real Estate also appreciates and usually is low risk (3-4% per yr historical national avg.). After 30yrs $1.6M.

    Maybe a little off topic but usually in the long run buy beats rent. But you have to run all the numbers to trully decide. You can find Buy vs Rent calculators all over the web, but I can’t seem to find a buy vs rent + 401K model.

  21. Snarkysnake says:

    @mac-phisto:
    Please , somebody explain to me what this guy is alluding to. Really,what are they whispering about only in “back rooms”? Could they be whispering about the fact that borrowers that don’t read what they are signing are dumbasses ? Could they be making weird hand signals about the average American that spends $1.03 for every dollar they earn and borrow the difference ? Or maybe “they” are passing coded notes about how “we” sit staring at Britney Spears shake her ass in our face from quittin’ time until midnight every night on ET instead of working a second job or going to class to get the skills to make the money we need to afford all of this lifestyle crap . Nah. Couldn’t be that. Couldn’t be that because the sub prime meltdown is just a smokescreen for a much worse reality.The reality that we have stopped taking responsibility for being retards when it comes to the most basic laws of finance (spend less than you make/save the difference).Nah It’s that mysterious “them” that Kevin Trudeau is always fighting on our behalf.Couldn’t be our own damn fault.

  22. mac-phisto says:

    @Snarkysnake: you really need to work on your reading comprehension. what are they whispering about in back rooms?

    …higher instances of traditional reasons for foreclosure (job loss, death, divorce, medical issues) as the main reason for our troubles

    please, take 5 minutes to read the report that i linked to, you might learn something. hell, you don’t even need to read it…scroll to the last few pages & you’ll see pretty pictures that spell it all out for you: foreclosure rates are highest in areas of the country that are hemorrhaging jobs (big surprise). it’s not rocket science. it’s also not as catchy as OMG! SUBPRIME MELTDOWN!!1! but it’s a reality.

    & the spreading of higher instances of foreclosure throughout the country could be exclusive to OMG! SUBPRIME MELTDOWN!!1!, or it could mean that job loss, unemployment & underemployment are spreading throughout the country.

    there’s a wealth of statistics on unemployment & this one graph certainly doesn’t paint a complete picture, but it’s worth taking a look:
    [www.bls.gov]

    northeast: unemployment up
    south: unemployment steady
    midwest: unemployment up
    west: unemployment up

  23. Chamber005 says:

    Ho-kay, so someone asked for a professional opinion.

    I’ve seen a lot of stuff regarding the whole “subprime” crisis, but what everyone not seeing behind the curtain has failed to ask is one question: Who Benefits From the “Subprime Crisis”?

    2 months before the first subprime red flag was waved, FHA changed its policies. Used to be (during the boom of the early nineties and all the way up until early 2007), the 1.5% upfront insurance premium that FHA charges in additional fees on each of its loans was refundable during the first 5 years of the loan. Hence, if you might have refinanced or sold your home, you’d get that money back from the government.

    Suddenly, because the administration wanted to give the interpretation of a stronger economy, it became cheaper to own a home than to rent one — this possibilty came via subprime. Mortgage brokers everywhere sent out mailers telling borrowers to refi out of FHA to get their refund and secure an even lower rate and payment. With the FHA refund and the elimination of FHA’s mandatory monthly insurance premium (which does NOT go away like traditional MI at 90% loan-to-value), it made a lot of sense for millions upon millions of current (and potential) government loan holders to refi into their subprime brethern.

    Everything was rolling smoothly. Average Joe Borrower refi’s into a 2/28 ARM for the lowest possible rate; gets a bunch of cash out to payoff debts that are straining his pockets and FICO score; Average Joe Borrower comes back to lender with better FICO and better Debt-to-Income Ratios and secures a prime loan at a low 30 year fix rate (or a 10 year interest only — whichever fits his purpose)

    But something happened, and it happened for no real reason. Suddenly subprime was labled “bad”. There hadn’t been any real increases of defaults (certainly not porportionate to how many new homeowners there were between 1998-2006), but suddenly it was everywhere: SUBPRIME CRISIS! SUBPRIME MELTDOWN! DON’T BUY THESE SECURITIES WALL STREET! THEY’LL SINK YOU!

    And why? Most borrowers DID make their monthly payments on time during the fixed 2-3 year period of their loan, but whereas a person with a 520 FICO and 85% LTV in 2004 might have qualified for a 7.5% interest rate, suddenly that same borrower at a 620 in 2007 at 90% can’t even secure a 9% rate from the Alt-A lender side…

    Once institution will benefit greatly from this debacle. The Federal Housing Authority positioned itself to gain billions of upfront fees and secure 70% of all current subprime mortgages from borrowers who never would be in this position if that little birdy (from where? who knows?) came out and scared everyone into not backing subprime loans. I applaued the banks still supporting these loans and these borrowers. The only wool that’s been pulled has come from FHA.

    While you do some research on them, you might want to also look at its cousin, the Federal Reserve.

    Stop being sheep, people.

    Who has the most to gain here?

  24. Etoile2465 says:

    I worked for Countrywide for several years, before becoming very ill and having to stop working all together. I can assure those of you pointing fingers at Countrywide and Full-Spectrum that we were routinely told that we were to be careful with how we sold our products. I saw an entire office lose their jobs because they were more concerned about their own financial well-being than the integrity of the industry. It simply wasn’t tolerated!!!

    This is the second time I have lived through an economic nightmare – remember the 80s and Lyons Savings & Loan???? The difference is Countrywide does everything they can to keep the companies name in good standing.

    Babs and her hubby did everything they could to live the high life and many paid the ultimate price – the feds shutting us up. I was in the Wacker branch when the feds came in and shut our doors in what became one of the largest ever bailouts. I was just a young college student at the time, but it scared me into never playing games in the future.

    I was very happy the years I worked for Countrywide because of their integrity. I discouraged selling the pay-option and a couple other loans, regardless of the customers assuring me in many cases they could manage their own money. These take an extremely savvy and disciplined investor, which is not always the case. I couldn’t sleep at night knowing that the dreaded “anything can happen,” would happen to a loan I sold.

    I do miss Countrywide and wish all of you who are still there luck in the next year as the market works toward stabilization.