Battle Of The Most Hated Companies: Countrywide Sues AIG

Last year’s Worst Company in America winner, Countrywide Home Loans, has sued AIG for not paying their claim on losses from failed real estate loans that they had insured with the company.

Apparently, Countrywide had paid $342 million in premiums to insure the loans, but AIG still has not compensated them for $43 million in losses.

Why did Countrywide insure the loans? Well, it apparently improved their credit rating — and was just another step in the process that turned garbage loans into fancy securities.

From the LA Times:

Critics complained that Countrywide systematically steered borrowers into loans they could not afford, then bundled the loans and sold them for profit as securities. By insuring the loans, Countrywide was able to improve the ratings it received from rating agencies, making the securities more attractive to mortgage bond investors.

Countrywide sues AIG unit over its failure to cover loan losses [LA Times]

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  1. dragonfire81 says:

    Ugh, is there anyway they can both lose this one??

  2. albear says:

    CHL paid $342 million in premiums to insure . . . loans, but AIG still has not compensated them for $43 million in losses?

    I don’t get why they paid 342M to insure 42M This is confusing.

    • noone1569 says:

      @albear: No No, that’s just the amount of loss, there was significantly more principal.

    • mac-phisto says:

      @albear: they likely paid the $342 million to insure billions in loan dollars, but have realized $42 million in losses to date & have not received any payment for those losses.

    • dorianh49 says:

      @albear: Countrywide probably wanted to look more attractive to investors/potential buyers, and determined that a better credit rating, among other things, would help. I think a better credit rating also helps get a higher federal lending limit, leading to more liquidity, but I could be talking out my ass due to only semi-reading Consumerist’s financial headlines over the past year.

    • jeffbone says:

      @albear: Someone at Countrywide (and AIG, too, I suppose) needs some remedial actuarial training, or else they really expected the losses to be much higher. Either case is not good news.

      It doesn’t make sense to pay $342M to insure expected losses of equal to or less than than amount. Heck, it probably doesn’t even make sense if the expected losses are double that amount, if the company holds sufficient cash.

      I don’t carry collision coverage with a $500 deductible that costs me $200/year on a car that’s worth less than $1000. I can self-insure that risk myself (collision is not mandatory here) and be money ahead in two years, less if I plan to tap into existing emergency funds to cover a loss.

  3. Erwos says:

    Whoever loses… we win.

  4. LegoMan322 says:

    Isnt there any other story than AIG, CountryWide bullshit that both companies suck ass that we can talk about? Hasn’t someone done a good thing lately? All this news about huge Corps are seriously making me hate the internet and ill…:: pukes::

  5. Kounji says:

    Actually.. if aig loses then the tax payers lose. This is so wierd…

  6. Jeff Newman says:

    It doesn’t sound like the article understands the issue.

    The article names United Guaranty Mortgage Indemnity as the party sued, which is a mortgage insurance subsidiary of AIG.

    This isn’t bond insurance, its mortgage insurance, applied to an individual loan. At least, that is what it sounds like based on my knowledge of the companies involved.

    The deal is, mortgage insurance has a “no fraud” cause. If fraud was committed by the borrowers (and in some cases 1st party involvement on behalf of the closing agent, loan officer, appraiser, etc. is required), then the loan is not covered. This includes things like overstated income on stated loans.

    So, if Countrywide was doing their job, they would have understood that a large amount of their insured loans (like, a strong majority of the stated loans) would really not be covered as fraud was committed to obtain the loan. The “insurance” coverage was a sham because they had to know if the loans started going bad, the insurance wasn’t worth jack.

    And they made the loans anyways.

    AIG is a vile company, but I see them in the right here.

    • consumerd says:

      @Jeff Newman:

      …. The deal is, mortgage insurance has a “no fraud” cause. If fraud was committed by the borrowers (and in some cases 1st party involvement on behalf of the closing agent, loan officer, appraiser, etc. is required), then the loan is not covered. This includes things like overstated income on stated loans.

      So, if Countrywide was doing their job, they would have understood that a large amount of their insured loans (like, a strong majority of the stated loans) would really not be covered as fraud was committed to obtain the loan. The “insurance” coverage was a sham because they had to know if the loans started going bad, the insurance wasn’t worth jack.

      And they made the loans anyways.

      AIG is a vile company, but I see them in the right here.

      I agree with you completely. If Countrywide did the fraud why should AIG have to reward fraud? as much as I am angry at AIG, they really can’t do wrong here if they can prove there was fraud. Truthfully, both should be burned at the stake but this is one where I hope AIG wins. Plus since the american people own 80% of AIG, technically that could make Countrywide subject to an IRS audit if they push it too far.

    • ZukeZuke says:

      @Jeff Newman: You nailed it on the head. I was about to respond with the same comment.

      Although, secretly I wish we could stick all these execs in an octagon with knives and let them work it out for themselves. Whoever wins, we hit them on the head with a baseball bat. Not that I’m condoning violence…

  7. TheRedSeven says:

    @albear:

    Not sure the details, but presumably Countrywide paid $342 million to insure, say, $4 billion in loans (or $4,000 million)*. About $42 million of those loans went bad, and are eligible for a claim, or so Countrywide contends.

    It’s like having car insurance on your Porche. Since the car is worth $180k, you insure it for a lot of money, and pay about $8000 a year in premiums. Then, you take it to Circuit City to get a stereo installed, and the teenager dents the door while taking it for a joyride. Because of this, you file a claim for $2000 with your insurance to cover the repairs. You insured $180k, paid $8k for the insurance, and filed a claim for $2k.

    Same thing here, except everyone involved is a douchebag.

    *Note: I’m making that number up. I’m too lazy to go look for the real number they had insured through AIG.

  8. rbb says:

    Cage Fight! Two broken companies enter, (hopefully, no)one comes out…

    • SynMonger says:

      @rbb:

      AIG hate technology,
      Countrywide hate the AIG,
      They will fight eternally,
      AIG Versus Countrywide!
      AIG Versus Countrywide!

  9. edwardso says:

    Does this remind anyone else of the Simpsons where homer sells his soul to the devil for a donut and they hold court in the living room?

    mmmm, forbidden donut

    • Chairman-Meow says:

      @edwardso: Even better was the jury comprised of Lizzy Bordan, Blackbeard the Pirate, and the 1976 Philadelphia Flyers.

      Of course, Ned Flanders as the Devil is icing on the cake.

  10. JulesNoctambule says:

    Come on, steel cage death match!

  11. Trai_Dep says:

    It’s like someone jabbed malanine-laced chocolate in my salmonella-fortified peanut butter!

  12. nwaasob says:

    Certainly “the enemy of my enemy is my friend” does not apply here since I wouldn’t share my toys with either, but I am at such a loss as to which to root for. Could jury nullification come into play? Could it be an infinite loop of evil consuming evil?

  13. nakedscience says:

    I just get more confused each day.

  14. gttim says:

    AIG had a AAA rating. Countrywide was issuing sub prime and Alt A loans, and needed to get rid of them before they defaulted. Countrywide took those crappy loans and bundled them up into securities. Then AIG issued a credit swap on them- in essence insuring the loans. However, since AIG had the credit swap on them, the securities suddenly became AAA rated securities- AIG was backing them. Now they could get suckers, I mean investors, to buy these things- nobody would have bought them without the AAA rating. It was a big shell game, like putting cologne on dog crap, so they could sell the securitized loans. Everybody should go to jail over this. It was a big elaborate con. Both companies got wiped out over these games, and both deserve to go under. This all happened because everything was unregulated.

    • johnva says:

      @gttim: I’d like to see some more of the AIG-style outrage directed against the asshats who gave out those credit ratings.

      Question: do credit ratings for insurance companies like AIG take into account things like their balance sheet? Or is it just their history of making good on claims? Because if it includes the former, someone was MAJORLY negligent and/or committing fraud.

  15. bastion72 says:

    Like any other insurance company after a large payout, they should cancel their policy as was standard for most of the companies providing policies in Florida.

  16. TaraMisu says:

    Man I am so screwed. AIG is my current home/auto insurer and Countrywide was/is my mortgage company. I received a notice in the mail yesterday our mortgage was sold to HSBC ….. I guess because I have really good credit CHL decided to give me up ha!

  17. TakingItSeriously is a Technopile says:

    I wonder if AIG wrote a “BInding Mandatory Arbitration” clause into the insurance policy with Countrywide. . .

  18. FuryOfFirestorm says:

    This is like watching Nixon and Hitler fight to the death.

  19. pal003 says:

    Countrywide paid premiums to insure loans . . .

    No – Countrywide forced the loan borrowers “to pay insurance premiums on loans.”

    Anyone in the Loan business knows that Countrywide made their customers pay those premiums – and Countrywide has lost no money. If they get paid by AIG – that is just more profit for them.

    Why aren’t Countrywide’s and AIG’s and many other CEOs in Jail yet?

  20. KMan13 still wants a Pontiac G8 says:

    they just want a piece of the government bailout.

  21. INsano says:

    I thought it was announced it was AIG who was suing Countrywide yesterday?

  22. JasonRyanIsaksen says:

    The real breakdown was that Countrywide and many others bundled them into securities, and the ratings companies were under great pressure to label these AAA so institutional buyers could buy them. They wrote them up under the assumption since home prices were going up 6-8 percent a year that they would continue to do so for the life of the security, which of course was impossible. The housing bubble had to break soon and they knew this but wrote them up anyway.
    I see the real problem here was that mortgage brokers get their commissions up front, not over the life of the loan. This way they want to sell a mortgage whether someone can afford it or not, they get paid anyway.
    It’s as much greed as the failure to regulate these kind of businesses. In one month Countrywide froze over 110,000 home equity lines of credit. Even on the news we heard of the housing bubble and when would it burst. You’d think that since they were in the business and wrote those no documentation loans that they knew it was coming as well.

    Jason Ryan Isaksen

  23. ageshin says:

    It is interesting to note that in reality Country Wide is suing us i.e. the government as we own about 80% of AIG. I don’t remember, as everyone seems to be paid by the government these days, but it could be that we are paying the company that is suing us! Lets see how does it go, If I were my own grandfather…..