SACRAMENTO, Calif. – California Attorney General Jerry Brown filed a lawsuit Wednesday against the nation’s largest home loan lender, charging Calabasas, Calif.-based Countrywide Financial Corp. with deceptively pushing homeowners into risky, mass-produced loans that have caused thousands of residents across the state to lose their homes.

Brown joined the state of Illinois, which filed a similar lawsuit Wednesday against the lender. Both states are alleging that Countrywide’s practices are liable for thousands of foreclosures that have damaged their economies and housing markets.

“Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market,” Brown said in a statement Wednesday.

He called Countrywide, “in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers.”

The lawsuit, filed in Los Angeles Superior Court, seeks unspecified financial damages for homeowners who lost homes or money as a result of the company’s loan practices. It also seeks civil penalties of $2,500 per violation.

Countrywide could not immediately be reached for comment.

The Florida attorney general has also subpoenaed Countrywide for an investigation into its loan practices.

The lawsuit came on the same day that Countrywide shareholders approved a takeover of the embattled firm by Charlotte, N.C.-based Bank of America. The merger is expected to be completed by July 1.

Shares of Countrywide closed down 1.72 percent, at $4.58 a share, in Wednesday trading on the New York Stock Exchange. The firm’s 52-week high is $37.59.

During the housing boom, Countrywide became the nation’s largest lender.

But Brown charges its success resulted from “deceptive advertising” and intense pressure and financial incentives for managers and sales staff to sell risky loans without regard to the borrower’s ability to repay them. He alleged that Countrywide also pushed pre-payment financial penalties that boosted profits and kept people from refinancing out of the loans.

The lawsuit singles out a variety of “teaser rate” loans that Countrywide and other lenders specialized in as housing prices rose. Those offered interest rates as low as 1 percent.

The state said many borrowers mistakenly assumed those were permanent rates because Countrywide often offered that impression. Borrowers then quickly found themselves making higher monthly payments than they expected or could afford.

Now thousands of borrowers across California are defaulting on those loans. The lawsuit notes that 20,000 Californians lost their homes in May alone and 72,000 were in default, meaning they were at least two months behind on payments, though not all were Countrywide borrowers.

The lawsuit also cited Countrywide’s own February 2008 records that 27 percent of its subprime loans given to borrowers with spotty credit histories were delinquent.

Six pages of the lawsuit deal with an especially risky type of Countrywide loan called pay option ARMs. That “highly profitable” loan offers borrowers lower initial interest rates and several payment options. But most borrowers chose the least expensive, which makes the loan grow instead of getting paid off. Eventually, in industry parlance, the loan “explodes,” raising the monthly payment beyond what many borrowers can afford.

The lawsuit says that 19 percent of Countrywide’s 2005 loans were pay option ARMs, many made in California.


Some fear those loans may become the next wave of foreclosures in California when the subprime loan problem begins to wane early next year.

Statistics show that thousands of those loans were made in the capital region. In 2005, pay option ARMs were 18.7 percent of all purchase loans and refinancings in El Dorado, Placer, Sacramento and Yolo counties, according to data from First American Core Logic, LoanPerformance.

That rose to 26.7 percent of all loans in the first nine months of 2006, according to the firm.

Brown’s lawsuit alleges that Countrywide lowered its lending standards to place large numbers of its loans in the “secondary market,” a term for packaging them into profitable mortgage-backed securities and selling them to global investors. The suit alleges that the company set up a division in Texas to grant exceptions to even those standards.

Countrywide and its affiliates was the largest home loan lender from June 2005 to June 2007 in El Dorado, Placer, Sacramento, Sutter, Yolo and Yuba counties.

The lender made 34,304 loans during that period, 7.5 percent of all home purchase loans, refinancings and home equity loans, according to statistics from DataQuick Information Systems.

About 20,000 homeowners in the region have lost their homes since the beginning of 2007, according to Fair Oaks-based researcher Foreclosures.com and DataQuick of La Jolla. Thought not all are Countrywide loans, the foreclosures have caused home prices to plunge throughout the region. In May, more than half of all existing home sales in the region were heavily discounted bank-owned foreclosure properties, DataQuick reported.

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(c) 2008, The Sacramento Bee (Sacramento, Calif.).

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AP-NY-06-25-08 1755EDT