Bank of America Lawsuit Reveals Why Getting a Mortgage Is So Hard
Bank of America Lawsuit Reveals Why Getting a Mortgage Is So Hard - Rick Newman (Usnews.com)
If you’re still a bit fuzzy about what caused the 2008 financial meltdown, here’s a bit of insight, courtesy of the Justice Dept.
In 2007, mortgage lender Countrywide Financial was trying to figure out how to meet its loan production targets as the housing market—especially the sub-prime segment—began to cool down. So it revamped its lending procedures to eliminate many of the “toll gates” that tend to hold up loans, such as verifying a borrower’s income and eliminating checklists that underwriters must complete before approving a loan. Countrywide met its production targets, but severely degraded the quality of the loans in its portfolio. At one point, the percentage of loans with “material defects” was close to 40 percent—about 10 times the normal rate.
To maximize profits, Countrywide, like many other lenders, packaged its loans into mortgage-backed securities that investors would purchase, a standard practice for more than 20 years. Securities that met certain standards were guaranteed by the federal housing agencies Fannie Mae and Freddie Mac, whose imprimatur acted like insurance if some of the loans defaulted and the securities lost value. But Fannie and Freddie relied on the lenders to validate the quality of their own loans, without doing their own vigorous checking.
As the housing market began to tank, borrowers began to default in record numbers, and many of the loans packaged into mortgage-backed securities turned out to be far riskier than the lenders had acknowledged. That’s the basis for the Justice Dept.’s latest lawsuit against Bank of America, which bought Countrywide in 2008 for $2.5 billion, hoping that its huge mortgage portfolio would make B of A the nation’s premiere housing lender. Instead, the Countrywide deal became one of the worst corporate acquisitions in history, saddling a once-healthy bank with billions in losses and another $40 billion in fees for litigation and restitution, according to estimates by Credit Suisse.