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Calif., Ill. file lawsuits against Countrywide

The Baltimore Sun

SACRAMENTO, Calif. - California Attorney General Jerry Brown filed a lawsuit yesterday against the nation's largest home loan lender, charging Calabasas, Calif.-based Countrywide Financial Corp. with deceptively pushing homeowners into risky, mass-produced loans that have caused thousands of residents across the state to lose their homes.

Brown joined the state of Illinois, which filed a similar lawsuit yesterday against the lender. Both states are alleging that Countrywide's practices are liable for thousands of foreclosures that have damaged their economies and housing markets.

"Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market," Brown said in a statement.

He called Countrywide, "in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers."

The lawsuit, filed in Los Angeles Superior Court, seeks unspecified financial damages for homeowners who lost homes or money as a result of the company's loan practices. It also seeks civil penalties of $2,500 per violation.

Countrywide could not immediately be reached for comment.

The Florida attorney general has also subpoenaed Countrywide for an investigation into its loan practices.

The lawsuit came on the same day that Countrywide shareholders approved a takeover of the embattled firm by Charlotte, N.C.-based Bank of America Corp. The merger is expected to be completed by July 1.

Stock in Countrywide closed down 1.72 percent, at $4.58 a share, in trading yesterday on the New York Stock Exchange. The firm's 52-week high is $37.59.

During the housing boom, Countrywide became the nation's largest lender.

But Brown charges that its success resulted from "deceptive advertising" and intense pressure and financial incentives for managers and sales staff to sell risky loans without regard to the borrower's ability to repay them. He alleged that Countrywide also pushed prepayment financial penalties that boosted profits and kept people from refinancing out of the loans.

The lawsuit singles out a variety of "teaser rate" loans that Countrywide and other lenders specialized in as housing prices rose. Those offered interest rates as low as 1 percent.

The state said many borrowers mistakenly assumed those were permanent rates because Countrywide often offered that impression. Borrowers then quickly found themselves making higher monthly payments than they expected or could afford.

Now thousands of borrowers across California are defaulting on those loans. The lawsuit notes that 20,000 Californians lost their homes in May alone and 72,000 were in default, meaning they were at least two months behind on payments, though not all were Countrywide borrowers.

The lawsuit also pointed to Countrywide's own February 2008 records that 27 percent of its subprime loans given to borrowers with spotty credit histories were delinquent.

Six pages of the lawsuit deal with an especially risky type of Countrywide loan called pay option ARMs. That "highly profitable" loan offers borrowers lower initial interest rates and several payment options. But most borrowers chose the least expensive, which makes the adjustable-rate mortgage grow instead of getting paid off. Eventually, in industry parlance, the loan "explodes," raising the monthly payment beyond what many borrowers can afford.

The lawsuit says that 19 percent of Countrywide's 2005 loans were pay option ARMs.

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