Countrywide Financial Under Investigation, Facing Lawsuit

Countrywide Financial Corporation, the nation’s largest mortgage lender, is currently under investigation in California and Illinois due to its subprime lending practices.

Calabasas, California-based Countrywide received subpoenas from attorneys general in both states. The company is cooperating with the investigation but refuses to discuss details of the investigation.

California Attorney General Jerry Brown said that he is investigating the yield spread premiums connected with a number of Countrywide’s subprime loans.

The Illinois Attorney General is also investigating Countrywide’s lending practices, and may decide to expand the investigation to include an examination of how borrowers were approved for mortgages that they were later unable to afford.

Deborah Hagan, chief of the Illinois Attorney General’s Consumer Protection Division, said that the Illinois probe will take a close look at why homeowners who can’t afford their mortgage payments were approved for their loans in the first place, and how Countrywide contributed to their situations.

Like many other mortgage lenders, Countrywide is suffering with higher foreclosure rates due to so many of their subprime customers finding that they can no longer pay their mortgage payments, and subsequently defaulting on their mortgage loans.

Most of these subprime loans are adjustable-rate mortgages that were made to borrowers with past credit problems.

Subprime loans usually give the borrowers a fixed rate for the first two or three years before converting to an adjustable rate after the initial period. This conversion, and the resulting higher interest rates and higher mortgage payments, are the cause of many of the foreclosures.

To exacerbate Countrywide’s problems, several of their customers are suing the company, claiming that they were convinced to accept unnecessarily risky loans with the built-in possibility of payment hikes, resulting in ultimate bankruptcy or foreclosure.

Seven plaintiffs recently filed an amended complaint against the mortgage giant and several of its subsidiaries.

Allegations are that Countrywide attempted to "induce as many borrowers as possible into expensive and dangerous subprime loans, because such loans are the most lucrative for Countrywide."

The lawsuit seeks unspecified damages and class-action status, and was filed in U.S. District Court in Los Angeles in September.

Countrywide has been criticized by a number of consumer groups and is the subject of legal action from shareholders and others in recent months, following the recent subprime fiasco.

The company has responded to critics by partnering with community groups that are dedicated to helping beleaguered borrowers to avoid foreclosure.

Countrywide said that its home loan production increased in November by five percent from October, but dropped 40 percent from the same month last year.

The increase came despite continuing upheaval in the mortgage industry caused by increasing defaults, foreclosures, and decreasing home prices.

The company generated $23 billion in mortgage loans in November, and said that 6.34 percent of its loans were delinquent during that period, up from 4.57 percent during the same period last year.

Countrywide has begun to decrease the number of subprime mortgages that it funds. November’s subprime figures were $17 million, down from $3.06 billion in November of 2006.