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States file lawsuits against Countrywide

Countrywide Financial Corp.’s shareholders cleared the way Wednesday for the company to be taken over by Bank of America Corp., even as officials in two states filed lawsuits claiming the distressed mortgage lender misled borrowers into taking on risky home loans.
/ Source: The Associated Press

Countrywide Financial Corp.’s shareholders cleared the way Wednesday for the company to be taken over by Bank of America Corp., even as officials in two states filed lawsuits claiming the distressed mortgage lender misled borrowers into taking on risky home loans.

The timing of the lawsuits in California and Illinois as Countrywide prepared to close the books after nearly 40 years underscored the company’s dramatic shift over the past 12 months as the mortgage and housing markets soured, inducing its slide from the nation’s largest originator and servicer of home loans to easy pickings for a takeover.

Less than an hour into the special stockholders meeting at Countrywide’s headquarters in Calabasas, Calif., the company announced that 69 percent of outstanding shares were voted in favor of the deal, which is expected to close July 1.

The outcome was widely expected, even though the deal was second-guessed throughout and plagued by doubts that Charlotte, N.C.-based Bank of America would pull out or look to renegotiate the original terms — an all-stock deal valued at about $4 billion.

In the end, the value of the deal fell to about $2.8 billion as Bank of America’s stock price declined from where it was in January.

Shares of Bank of America slipped a penny to $26.61 on Wednesday. Countrywide shares fell 8 cents, or about 1.7 percent, to $4.58 — that’s a decline of nearly 90 percent from the stock’s most recent five-year peak of $45.03 in February of last year.

The acquisition is expected to give Bank of America control of 20 percent to 25 percent of the home loan market, something the company hopes will pay off handsomely once the housing market recovers.

Some analysts suggest the banking giant may also benefit another way — using tax write-offs to help offset the cost of the acquisition.

But along with Countrywide’s more favorable assets, Bank of America will also have to take on the trove of lawsuits related to Countrywide’s lending practices, among other headaches.

This includes the pair brought Wednesday in California and Illinois.

Both cases accuse Countrywide of systematically deceiving borrowers in order to get them to take on risky loans they couldn’t really afford, and name Chairman and CEO Angelo Mozilo as a defendant.

The California lawsuit also names as a defendant David Sambol, the lender’s president and chief operating officer.

The states both seek unspecified damages and for Countrywide to pay restitution to borrowers who lost their homes or loans.

Meanwhile, Washington Gov. Chris Gregoire accused Countrywide of cheating the state out of $5 million by under-reporting assessments, adding that she plans to seek restitution. Gregoire also said during a news conference that the lender targeted minority borrowers with discriminatory and predatory lending practices.

Representatives for Countrywide and Bank of America did not immediately return calls Wednesday.

The lawsuit brought by the California attorney general’s office stems from information gathered under subpoena after the state launched a probe last year into the company’s business.

In the complaint filed in Los Angeles County Superior Court, California Attorney General Jerry Brown asserts that Countrywide violated the state’s unfair business practices and false advertising laws with just about every action it took to market and originate some of the most popular — and potentially risky — types of home loans in recent years.

“Defendants viewed borrowers as nothing more than the means for producing more loans, originating loans with little or no regard to borrowers’ long-term ability to afford them and to sustain homeownership,” the state claims in the suit.

The lawsuit also contends that Countrywide misled customers about the workings of home-equity loans and some types of adjustable-rate mortgages, including pay-option loans, “hybrid” interest-only loans and low-documentation loans.

These loan types, which many other lenders also offered during the housing boom, featured low initial payments and the potential for sharp increases after a few years. They now account for a large portion of the mortgages that have become delinquent or gone into default in the past year.

The lawsuit alleges that Countrywide obscured the potential risks in the loans, misled consumers about payment terms, prepayment penalties and other obligations, and told borrowers they would be able to refinance before the interest rate on their loans adjusted.

Similar allegations are made in the lawsuit brought by Illinois Attorney General Lisa Madigan, who subpoenaed nearly 100,000 documents from the lender last fall.

“Countrywide pushed to sell more and more loans, clearly without regard to the borrower’s ability to make their payments,” Madigan said Wednesday. “Much of this comes from Countrywide’s greed and their desire to dominate the marketplace. Unfortunately, this came at a very steep price for homeowners.”

Madigan said documents obtained during the state’s investigation showed how Countrywide employees were given incentives to write loans, receiving higher commissions for the riskier products.

“People never understood the loans in the first place and once they couldn’t afford them, they couldn’t get out of the loans,” she said. “This was a strategy engineered from the top down.”