The Illinois attorney general is suing Countrywide Financial, the troubled U.S. mortgage lender, and Angelo Mozilo, its chief executive, contending that the company and its executives defrauded borrowers in the state by selling them costly and defective loans that quickly went into foreclosure.
The lawsuit, which was expected to be filed Wednesday in Illinois state court, accused Countrywide and Mozilo of relaxing underwriting standards, structuring loans with risky features and misleading consumers with hidden fees and fake marketing claims, like its heavily advertised "no closing costs loan." Countrywide also created incentives for its employees and brokers to sell questionable loans by paying them more on such sales, the complaint said.
In reviewing one Illinois mortgage broker's sales of Countrywide loans, the complaint said the "vast majority of the loans had inflated income, almost all without the borrower's knowledge."
The civil lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present. The attorney general, Lisa Madigan, also asked that Mozilo contribute personally to the damages and that the court give her office 90 days to review loans serviced by Countrywide that were in foreclosure or soon would be.
"People were put into loans they did not understand, could not afford and could not get out of," Madigan said. "This mounting disaster has had an impact on individual homeowners statewide and is having an impact on the global economy. It is all from the greed of people like Angelo Mozilo."
The lawsuit adds to the considerable legal risks facing Bank of America as it prepares to absorb Countrywide in a takeover announced in January. Countrywide and its executives have been named as defendants in shareholder lawsuits, and the company's practices are the subject of investigations by the Securities and Exchange Commission, the FBI and the Federal Trade Commission, which oversees loan servicing companies.
The U.S. Trustee, a unit of the Justice Department that monitors the bankruptcy system, has also sued Countrywide, contending that its loan servicing practices represent an abuse of the bankruptcy system.
Countrywide did not respond to an e-mail message seeking comment. A Bank of America spokesman declined to comment.
Countrywide, once the top mortgage lender in the nation, has watched its fortunes plummet as the housing crisis has spread across the country.
In the last three quarters, the company reported $2.5 billion in losses, and in the first quarter of 2008, total nonperforming assets reached $6 billion, almost five times that of the same period last year.
When Bank of America announced its stock-for-stock deal to buy Countrywide, the acquisition was valued at more than $4 billion.
Because shares of both companies have fallen, the transaction is worth $2.8 billion.
The Illinois complaint was derived from 111,000 pages of Countrywide documents and interviews with former employees. It paints a picture of a lending machine that was more concerned with the volume of loans than their quality.
For example, former employees told Illinois investigators that Countrywide's pay structure encouraged them to make as many loans as they could; some loans with reduced documentation took as little as 30 minutes to underwrite, the complaint said.
The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages requiring minimal payments in the early years, known as hybrid ARMs, would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.
Even more surprising, Madigan said, was her office's discovery of e-mail messages automatically sent by Countrywide to its borrowers offering complimentary loan reviews one year after they obtained their mortgages from the company.
"Happy Anniversary!" the e-mail messages stated. "Many home values skyrocketed over the past year. That means that you may have thousands of dollars of home equity to borrow from at rates much lower than most credit cards."
Madigan said, "I was just struck that on the first anniversary of these people's loans they would get these e-mails luring them into a refinance, into another unaffordable product to generate more fees and originate more loans."