Allstate Sues Countrywide Financial over Mortgage Security Scandal
Allstate Corp. has decided to sue Bank of America and Countrywide Financial over $700 million in residential mortgage backed securities that dramatically depreciated in value in 2008. Between 2005 and 2007 Allstate purchased the securities from Countrywide, a well respected mortgage originator, with the understanding that they were safe and highly rated. Now we know that Countrywide issued some of the worst mortgages during the mortgage crisis of 2008.
Allstate claims that Countrywide brass knew the securities were precarious, made from irresponsible loans given to subprime borrowers who could not afford the property and were likely to default on their
home loan mortgages. The lawsuit states that Countrywide officials began to ignore the loan standards and underwriting principals they stood by and that Countrywide was more focused on increasing profit than providing legitimate and responsible financial products.
Allstate is not the first major investor to accuse Countrywide of purposely selling risky investments. In October
Freddie Mac, the Federal Reserve Bank of
New York, Pacific Investment Management Co, and Black Rock Inc sent a joint letter to Bank of America (who owns Countrywide) asking the bank to cover losses on investments on the basis that the company knowingly practiced shady underwriting standards.
The last several months have been embarrassing for Bank of America and Countrywide financial. In October it was discovered that BoA was using robo signers and under qualified employees to sign off on foreclosure documents that are supposed to be reviewed carefully before being passed on. This caused all BoA foreclosure proceedings to be halted while the matter was investigated by several government agencies and state attorney generals.
Adding to the debacle, it was also discovered that all these mortgages that Countrywide was originating and pooling into securities were not properly being transferred. When a mortgage changes hands from an originator to a security they are supposed to exchange ownership documents. Countrywide was holding on to the documents, therefore making it difficult to discern who actually owns these mortgages. Without the mortgages billions of dollars in securities are essentially backed by nothing.
Also in October Countrywide Financial's CEO, Angelo Mozilo, agreed to pay $67.5 million to settle fraud and insider-trading charges stemming from the housing collapse crisis.
Bank of America is facing lawsuits of around $31 billion over mortgage-backed securities.
By: Javi Calderon
