AIG Sues Countrywide

Thanks to Justin Owings @ ML-Implode for the graphic

It was only a matter of time before this train started selling tickets.

AIG Sues Countrywide for Misrepresenting Mortgages

Countrywide, under the stellar direction of Angelo Mozilo and David Sambol, began to lower their guidelines for "prime" loans sometime in 2004. Countrywide, then the largest mortgage lender in the nation, decided to up their profits by allowing people with low credit scores, putting little or no money down, into loans designed for people with good credit scores.

"United Guaranty said in the complaint that it had reviewed loan files that showed that most mortgages covered by 11 policies for asset-backed securities were either underwritten in violation of Countrywide’s own guidelines or contained defects, such as missing documents, misrepresented credit scores or false social security numbers."

The problem is well beyond AIG. All of these loans, and there are a few trillion dollars worth of them, are scattered around the world in MBS, CDO's and other credit derivatives. That means the fallout is only beginning. FNMA and FHLMC alone hold about $1.5 Trillion in these loans from Countrywide on their books. The default rates from the Countrywide originations are far greater than any other group, including subprime.

What AIG is accusing them of is selling loans as prime that were actually subprime or worse. Because the borrowers were able to get terms reserved for those that have the best credit scores, it means those terms can lead to financial difficulty sooner for someone with less financial resources.

Of course these loans would blow up sooner and at a greater rate.

Countrywide didn't care. They were making huge profits, and Wall Street loved them for the constant supply of loans they could securitize and turn into derivatives.

I have been talking about this problem for years. In 2005, I received a nasty letter from the Countrywide legal team telling me to stop representing Countrywide's guidelines and accounting procedures as "unethical." Well, I have never stopped, and have been asked twice to present, in court proceedings, against Countrywide on behalf of plaintiffs. Both cases were settled, out of court, of course, in favor of the plaintiffs.

Countrywide has gone through great efforts to conceal its behavior. Many people like me were intimidated into silence. As were many former employees. Countrywide's customer service is abysmal, their double billing and lost payment records legendary. There will be many more stories on this subject, and I expect the number of companies suing Countrywide, now Bank of America, to increase.

My big question is this - If Fannie and Freddie together have $5 Trillion in loans, and $1.5 Trillion are from Countrywide with false underwriting standards, what will the end result for them be?