The complaint filed in federal court in Los Angeles by United Guaranty Mortgage Indemnity Co., the mortgage insurer subsidiary of A.I.G., against Countrywide Financial Corp., Countrywide Home Loans, Inc. and the Bank of New York Trust Company is posted below. As discussed previously, United Guaranty (UG) seeks rescission of mortgage insurance coverage and $30 million in damages from Countrywide as a result of its alleged fraudulent acts, misrepresentation, and negligence in inducing UG to insure over $1 billion in subprime mortgage loans.
Having now had a chance to take a closer look at the Complaint, I note several items of interest regarding the approach taken by United Guaranty (UG) attorneys Quinn Emanuel:
- At page 3, UG alleges that Countrywide’s own loan files often note that “the sole justification for granting an underwriting exception was to increase its market share by matching a competitor’s offer.” If true, this is compelling evidence that Countrywide (and likely many other lenders) completely and explicitly abandoned underwriting standards in their efforts to pump out greater and greater volumes of subprime residential mortgage loans.
- As expected, UG attempts to confront the loss causation issue (also discussed previously here) head-on, by arguing that its losses were caused, not by the economic downturn itself, but by Countrywide’s underwriting failures. Interestingly, however, UG attempts to depict Countrywide’s failures as a major cause of the larger economic downturn, arguing that:
“it has become clear that the prolifieration of high risk mortgages combined
with inadequate and fraudulent underwriting processes is largely responsible for
the historically high rate of default in the mortgage industry…Countrywide’s
combination of high risk loan products and fraudulent or willfully blind
underwriting created a perfect storm that has lead to massive defaults in the
Mortgage Loans…” (pages 3-4)
- UG also identifies a practice allegedly pursued by Countrywide of “keep the best and sell the rest,” (pages 4, 28) meaning that Countrywide would keep the good loans on its books, and securitize or sell the worst loans to investors. I have heard that this policy was actually driven by market demand for riskier (and thus higher return-generating) bonds, but I’d be interested if anyone has any insight into whether and why this may have been done.
- UG recounts, in detail, the various lawsuits against Countrywide filed by the Attorneys General of eleven states. UG notes that the complaints contain numerous allegations of fraud or reckless lending similar to its own findings, and that Countrywide agreed to settle the suits for an estimated cost of $8.6 billion in loan modifications within four months of the filing of the first suit (pages 5, 23-27). Yet, while UG notes that Bank of America acknowledged when it acquired Countrywide that “[t]he cost of restructuring these loans is within the range of losses we estimated when we acquired Countrywide” (page 27), the complaint make no mention of the fact that Countrywide will not actually bear the costs of these modifications because it no longer owns most of the loans. I can understand why UG is attempting to frame the settlement as an acknowledgment of wrongdoing, but it would seem even more powerful to be able to argue that Countrywide (and BofA) has thus far largely escaped the consequences of its irresponsible lending.