Research support for this article was provided by the Investigative Fund at The Nation Institute.
Just as the American housing market was starting to recover from its worst battering since the Great Depression, a new scandal, an epidemic of flawed or fraudulent mortgage documents, threatens to send not just the housing market but the entire economy back into a tailspin. As we go to press, forty-nine state attorneys general have announced an investigation of the mortgage-servicing industry, in the wake of decisions by Bank of America, JPMorgan Chase, Ally Financial’s GMAC and other banks to suspend some foreclosures, and amid demands by some lawmakers for a nationwide moratorium on all foreclosures.
It’s impossible to tell at this early stage how deep the new crisis extends, but as they begin their investigation, the attorneys general would do well to re-examine the deeply flawed 2008 agreement with Bank of America in resolving the Countrywide Financial scandal, the largest anti–predatory lending settlement in US history. If they do, maybe they’ll get it right this time.
On October 6, 2008, a scant three weeks after Lehman Brothers filed for bankruptcy, with the financial crisis in full swing, California Attorney General Jerry Brown called a press conference in San Francisco. He announced that day, to great fanfare, "the biggest loan modification in American history." Brown joined Illinois Attorney General Lisa Madigan in leading negotiations for eleven states that had sued Countrywide, the largest mortgage lender in the country. He held up Countrywide, which had been acquired by Bank of America some months earlier, as a symbol of all that had gone wrong in the housing bubble.
"Countrywide exploited the American dream of homeownership," Brown said in announcing his lawsuit the previous June. He charged the lender with deceiving borrowers by misrepresenting loan terms, hiding scheduled payment increases and persuading people to sign up for loans they couldn’t afford. "Countrywide was, in essence, a mass-production loan factory, producing ever increasing streams of debt without regard for borrowers," he said. "Californians…were ripped off by Countrywide’s deceptive scheme."
When Madigan announced her state’s lawsuit, she took to the stage with a single mother who’d lost her home after refinancing a fixed-rate loan with one from Countrywide featuring a ballooning adjustable rate. "Borrowers were in loans that they didn’t understand, they couldn’t afford and they couldn’t get out of," Madigan said. "The failure of these loans is what has caused the foreclosure crisis here in Illinois and across our country. And the aim of today’s lawsuit is to hold Countrywide accountable."
If all fifty states were to sign on to the settlement, Brown’s office estimates (forty-four have so far), it would provide $8.68 billion in reduced payments and fee waivers to some 400,000 Countrywide borrowers struggling to stay in their homes. And a small Foreclosure Relief Fund of $150 million would provide direct payments to Countrywide borrowers who have already lost their homes to foreclosure. Various media called the settlement a "landmark," "a win for homeowners" and "the nation’s most comprehensive mortgage-modification program," reporting that 8,000 homeowners in Ohio, 13,000 in Arizona, 57,000 in Florida and 120,000 in California would all "escape foreclosure" through major loan modifications. Relief Is in Sight, read one headline.
But two years later, many Countrywide borrowers facing foreclosure have not even been notified that they may qualify for the settlement. It has kept, at best, about 134,000 families in their homes, and most of these only temporarily. Countrywide and its parent company, Bank of America, have blocked many subprime borrowers from access to the best aspect of the deal—principal reduction—in favor of short-term fixes that could easily spell disaster down the road. The settlement is silent on the question of second liens—home equity loans—which have played such a significant part in the foreclosure crisis, jeopardizing the possibility of truly affordable modifications. And the biggest loophole of all? Bank of America has the right to foreclose on the victims of Countrywide’s predation whenever its analysts determine—using an undisclosed formula—that it can recoup more money through foreclosure than by modifying the loan.