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Florida Suing Countrywide

…Adds Themselves to the Growing List of States

At the beginning of the month, Countrywide was acquired by Bank of America, but that has not stopped the troubles Countrywide got themselves into.  Led by their Chief Executive, Angelo Mozilo (their "perfectly tanned" leader), Countrywide became the Number 1 lender in the nation, and also the Number 1 in scandals surrounding the subprime mortgage meltdown and ensuing credit crunch.  Remember that Angelo Mozilo is under investigation by the SEC as well.

The growing number of states that are suing Countrywide are regarding misleading and unfair trading practices.  States are even naming Angelo Mozilo in the lawsuits, potentially leaving him open to personal liability should they prove gross negligence. 

The Complaint – Purposefully Lending to Unqualified Borrowers

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The 12-page lawsuit claims that Countrywide did no due diligence on applications accepted which were patently fraudulent and reflected the inability of borrowers to make payments.  Further claims stated unsophisticated borrowers were targeted by mortgage brokers who knew Countrywide would write these loans.

The complaint was filed in my backyard (so to speak), in Broward County, one of the leading areas relating to mortgage fraud and foreclosures nationwide.  The complaint states that Countrywide hid the potential negative effects of its so-called "teaser" loans (aka Option ARMs), including increased interest rates and prepayment penalties.

Should Bank of America Acquire Countrywide?

Florida joins California and Illinois in the growing list of states suing Countrywide, as more are likely to be added.  One can only wonder why Bank of America did not back out of the acquisition deal, now that they have assumed all the problems Mozilo and Countrywide created. 

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One thing that has resulted is the end of negative amortization loans by virtually every lender with the remaining lenders backing out in fear of lawsuits as well.  The problem is that the Option ARM was actually one of the most strategic loans for creating wealth for homeowners when used properly.  It is unfortunate that so many homeowners, knowingly or not, abused it and managed to have it eliminated.

Written By

Writer for national real estate opinion column, focusing on the improvement of the real estate industry by educating peers about technology, real estate legislation, ethics, practices and brokerage with the end result being that consumers have a better experience.



  1. Ken Smith

    July 2, 2008 at 2:29 pm

    The Option ARM had so many advantages when used correctly, but the banks opened the product up to way to many unqualified buyers.

  2. Erin Fogarty

    July 2, 2008 at 2:49 pm

    I have to say, I think the buyers themselves should be taking a little more responsibility. Yes, the banks and lenders and whoever else preyed upon these unqualified buyers, but the buyers have to educate themselves as to what they’re getting into, too. It seems to me that many buyers just believed what they were told without investigating for themselves the positives and negatives of such a loan. Even if the lenders hid the negatives, everyone knows there are negatives to everything. A responsible person would take it upon themselves to realize this. I myself bought a house in 2006, so I was offered an ARM on my loan as well. My husband and I declined, opting for a 30 year fixed. Now, I don’t know if that was the best decision, but I do know that my rate has not changed and that I am not facing foreclosure like many other homeowners in SW Florida. I agree, this whole sceanrio is unfortunate.

  3. Ken Smith

    July 2, 2008 at 5:04 pm

    Erin there is no question that the buyers in MOST cases are the ones that should be held responsible. They signed the mortgage, they should have understood their risks, many lied on the mortgage application, many used their homes as an ATM machine, and in the end they agreed to pay back the mortgage.

  4. Robert D. Ashby

    July 2, 2008 at 5:32 pm

    Ken and Erin,

    Nice discussion and you are right that the homowners should have known better. ARMs a very beneficial loan programs, even the Option ARM. I just did a post on the demise of the Option ARM on my own blog (Death of the Best Loan Program Out There) talking about the exact reasons you mentioned and how they have eliminated the Option ARM from most (if not all) lenders’ portfolios. Ken hit the nail on the head as to why most homeowners are facing foreclosure with his last comment.

  5. Dan Connolly

    July 2, 2008 at 7:17 pm

    I also think agents walk a fine line, especially the ones who advertise themselves as Buyer’s agents and offer the clients help navigating the process. Agents frequently promise to hold hands and make it a worry free, no hassle experience. These agents are also responsible if their clients choose an arm they can’t afford!

  6. Ken Smith

    July 2, 2008 at 8:19 pm

    @ Dan – Not sure how an agent can ever be responsible unless they are also originating the loan. We advertise Buyer Agent services, but we do not see the buyers credit report or financial situation as that is all covered by the privacy act. There is no way for me to know if a person is making the correct or incorrect decision with the type or amount of a mortgage no matter how much hand holding we do.

    There have been more then a few times that people surprise me with the type of mortgage they take out. When we are out looking at homes they are talking about a 30 year fix and then at the closing table I find out they switched loan products to an ARM. They make the decision, not the agent.

    Maybe I am missing something and the type of promises you are talking about go beyond what we see in our market.

  7. Dan Connolly

    July 2, 2008 at 10:39 pm

    Ken, I think that there are a lot of situations where agents walk new first timers through the entire process and happily look at the sky and whistle when the Buyers opt for a ARM to buy more house. It is not about the privacy act, it is about Yay! higher sales price! You don’t have to know anything about how much money they make or what the credit score is to explain how high the payments can go. Most lenders aren’t going to do it.

    I have heard over the years, many of the Buyers tell me that the lender was selling the ARM loans with the idea that if the payment got too high they could always refinance to a fixed rate or just sell the house (in the days leading up to this market). At which point I would tell them that that works unless the market goes flat (like if world war 3 starts), or if the loan programs end.

    I know a lot of Brokers tell their agents to stay out of areas like financing and inspection, but I think if you take the fiduciary obligations seriously you have to offer advice based on your experience and expertise. I think there is more danger of lawsuit by not sticking your nose in. The privacy act only means you need their permission to look at their credit and income.

    If you can make money without getting involved, more power to you. I have been selling for 22 years. I have a lot of clients on their 3rd or 4th house. I won’t let anyone make mistakes with their loans, at least not with out hearing what I think about it!

  8. Ken Smith

    July 2, 2008 at 11:22 pm

    Dan without full disclosure of all financial information and future plans no agent can know if an ARM is the best product for their client or not. There are some real solid reasons to use an ARM and these days everyone seems to be forgetting about that. The buyer just needs to understand how high the rates, more important the payment, can go and when. If someone preaches “get a 30 year mortgage” and thinks that ARM’s are evil then they are costing many of their clients a lot of money. An ARM is not a “mistake” if used correctly.

    Agree that most brokers really want their agents to stay away from talking about mortgages. A large part of this is that most agents don’t have a clue about loan products. I have talked to more “experienced” agents that after 30+ years in the business still don’t know about mortgages then ones that do.

    Personally we get very involved with the financial side of the business, but not every client is willing to talk about it with us (that is when the privacy thing is a real issue). Even with educating buyers about mortgage products including the risks and advantages of these products, and telling them not to put themselves into a position to be mortgage poor, not every client listens. Wish they all did, but you can only lead a horse to water as they say.

    Pretty sure we agree that an agent should educate their clients, naturally after educating themselves. What I was taking issue with is I just don’t feel an agent can ever make a client take a loan product therefor how can the agent be “responsible” for their clients choice.

  9. Dan Connolly

    July 2, 2008 at 11:31 pm

    Ken, I agree that for the educated Buyer, an ARM may be a perfect solution. As long as they are fully aware of the risks. I have just talked to too many (smart) people close to foreclosure who really didn’t have a clue, and I don’t think the agents are entirely blameless.

  10. Glenn fm Naples

    July 3, 2008 at 6:17 am

    Even though the state of Florida has decided to sue Countrywide, the consensus of opinion that it will be a fruitless suit while very little or nothing gained for the consumers.

    I totally agree that an Option ARM when used correctly was a good financing vehicle.

    As Ken, pointed there were people that thought their homes were an ATM, hence they may not have the financial skills to handle the option ARM or any mortgage for that matter.

    As real estate agents we should as much as we can to explain the pro’s and con’s of loan programs that are out there or that our clients are considering – we have to be educators, not just salespeople.

  11. Jennifer in Louisville

    July 3, 2008 at 10:14 am

    I’m a big believer in people taking responsibility for their own actions. It shouldn’t be a government’s (or anyone else’s) responsibility to eliminate all possible downsides. If I go to Las Vegas and bet the house on black, and it comes up red – that stinks, but its my own fault. I was greedy. And if I didn’t understand the rules, or potential downsides – I should have asked questions until I did understand, or not play the game. I recognize that not all persons caught up in this mess were greedy – but quite a few probably were. They were so anxious to jump into the “hot real estate market” that they took a chance, and were relying mostly on appreciation to build an equity position in the property – and if they took an ARM, they could get an even more expensive property than they could otherwise, and build more equity because the rate of appreciation was working off a much larger number. It didn’t work out for them, which is a shame. But at some point you should put some of the responsibility back on the people that took the big risks in the first place.

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