Tag Archives: REO

Judge Rules Mozilo and Countrywide Execs Must Face Multi-Million Dollar Federal Lawsuit

Angelo R. Mozilo, the perennially smiling and suntanned CEO of subprime giant Countrywide Financial Corp., may have finessed the recent Congressional hearingson the millions in compensation given to the executives of financially devastated subprime lenders even as their investors lost billions, but he hasn’t been able to escape a multi-million dollar shareholder lawsuit filed against him in federal court.

The shareholder derivative action was filed on behalf of Countrywide by the Arkansas Teacher Retirement System, the Fire & Police Pension Association of Colorado, the Louisiana Municipal Police Employees Retirement System, the Central Laborers Pension Fund, and the Mississippi Public Employees Retirement System, against Mozilo and other senior Countrywide officers and the members of Countrywide’s board of directors.

The lawsuit alleges misconduct by the defendants and disregard for their fiduciary duties, including lack of good faith and lack of oversight of Countrywide’s lending practices, improper financial reporting and internal controls, as well as the unlawful sale by Citywide’s officers and directors of over $848 million of Countrywide stock between 2004 and 2008 at inflated prices while in possession of material inside information.

You can read the complaint here

Last week, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles rejected the attempt by Mozilo and other defendants to dismiss the case and ruled that the case could go forward.

Judge Pfaelzer didn’t buy the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults.  Instead, she found that confidential witness accounts in the shareholder complaint were credible and suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

The judge found that the plaintiffs identified “numerous red flags” that should have warned directors of increasingly risky loans made by Countrywide.  “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

In fact, rather than taking corrective action, the judge found that Countrywide executives made numerous public statements, proxy statements, and SEC filings that falsely stated both the financial condition of the company and the efforts being made to control potential loses.

The judge concluded that the evidence presented by the plaintiffs “create a cogent and compelling inference that the Individual Defendants misled the public with regard to the rigor of Countrywide’s loan origination process, the quality of its loans, and the Company’s financial situation – even as they realized that Countrywide had virtually abandoned its own loan underwriting practices.”

“During the relevant period, Plaintiffs assert that Countrywide began to approve even more risky loans that departed significantly from its established underwriting guidelines. While this increased the volume of loans originated by Countrywide and inflated its market share, this strategy also drastically lowered the quality of the loans and retained interests that Countrywide held for investment, as well as the quality of the mortgage-backed securities it sold into the secondary market. Plaintiffs contend that these low quality mortgages, many of which were approved with low or no documentation from the borrower, exposed Countrywide to a vast amount of undisclosed risk because loan quality is essential to virtually every facet of Countrywide’s business operations. Plaintiffs further assert that the Individual Defendants, due to their roles as members of certain Committees, proceeded with actual knowledge of these problems, or at least deliberate recklessness.”

It is expected that Mozilo’s $474 million in stock sales between 2004 and 2007 will get particular attention because he repeatedly changed the terms of his 10b5-1 prearranged stock-sale program to allow more shares to be sold. “Mozilo’s actions,” the judge wrote, “appear to defeat the very purpose of 10b5-1 plans.”

In addition to Mozilo, the defendants include David Sambol (Countrywide Director since Sept. 2007, President and Chief Operating Officer, and various other executive positions), Jeffrey M. Cunningham Director since 1998), Robert J. Donato (Director since 1993), Martin R. Melone (Director since 2003), Robert T. Parry (Director since 2004), Oscar P. Robertson (Director since 2000), Keith P. Russell Director since 2003), Harley W. Snyder (Director since 1991), Henry G. Cisneros (Director from 2001-Oct. 2007), Michael E. Dougherty (Director from 1998-Jun. 2007), Stanford M. Kurland (President and Chief Operating Officer until 2006, and various other executive positions), Carlos M. Garcia (several executive positions and former Chief Financial Officer), and Eric P. Sieracki (Chief Financial Officer and Executive Managing Director).

One of the defendants, Countrywide Director Henry G. Cisneros, has had a particularly shaddy record since being forced to resign as President Clinton’s Secretary of Housing and Urban Development in 1997. Cisneros pled guilty to making false statements to federal officials in an investigation of illegal payments he made to his mistress. He was pardoned by Clinton in January 2001.

You can read the judge’s decision here.

UPDATE:

Read about Bank of America’s firing of David Sambol, Countrywide’s president and COO (and a principal defendant in the shareholder lawsuit).

 

Foreclosures Up 57% — REOs Up 100% From March 2007

For the third month in a row, U.S. foreclosure activity registered at more than 50 percent above the level it was at a year ago, according to the March 2008 RealtyTrac U.S. Foreclosure Market Report.

And for the second month in a row, the number of bank repossessions, or REOs, was up more than 100 percent year over year.

RealtyTrac’s latest report shows that foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 234,685 properties nationwide during the month, a 5 percent increase from the previous month and a 57 percent increase from March 2007.

The report also shows one in every 538 U.S. households received a foreclosure filing during the month.

“The March numbers show that overall foreclosure activity so far this year continues to run nearly 60 percent above the levels we saw last year,” said James J. Saccacio, chief executive officer of RealtyTrac. “On a year-over-year basis, default notices were up nearly 57 percent and bank repossessions were up nearly 129 percent, but auction notices were up only 32 percent, indicating that more defaulting homeowners are simply walking away and deeding their properties back to the foreclosing lender. This deed-in-lieu-of-foreclosure process allows the lender to take possession of a property without putting it up for public foreclosure auction.”

Nevada, California, Florida posted the top state foreclosure rates.

California, Florida, Ohio reported the highest foreclosure totals.

Even more homeowners are expected to go into default and foreclosure in the third and fourth quarters of this year, as the number of adjustable-rate mortgages (ARMs) resetting to higher rates peaks in May and June.

Countrywide Closer to Indictment — And Still Making Zero Down-Payment Loans

Countrywide Home Loans is one step closer to possible federal criminal indictment following a bankruptcy judge’s decision to allow the Justice Department wide authority to investigate whether the largest U.S. mortage lender has serially cheated bankrupt borrowers in bankruptcy cases.

Judge Thomas P. Agresti of the U.S. Bankruptcy Court for the Western District of Pennsylvania said U.S. Trustee Kelly Beaudin Stapleton has the power to subpoena documents and question Countrywide officials under oath about questionable actions the lender allegedly took in borrower-bankruptcy cases.

Countrywide had argued that the U.S. trustee had limited authority to investigate specific issues in particular cases or proceedings and could not seek discovery related to general policies and procedures Countrywide followed in its business affairs.

The U.S. Trustee contends that Countrywide filed inaccurate proofs of claim, filed unwarranted motions for relief from the bankruptcy stay, inaccurately accounted for funds, and made unfounded payment demands to debtors after discharge.

According to Judge Agresti’s opinion in In re Countrywide Home Loans Inc., No. 07-00204, 2008 WL 868041 (Bankr. W.D. Pa. Apr. 1, 2008), similar allegations have been raised against Countrywide in at least 293 separate borrower-bankruptcy cases just in the Western District of Pennsylvania.

In addition, Countrywide has been accused of similar abuses against borrowers across the country, and faces additional trustee lawsuits in Georgia, Ohio and Florida.

The judge’s decision in Pennsylvania does not bind other bankruptcy courts, but it could influence judges in other courts as the Justice Department pursues alleged abuses by Countrywide in other states.

In rejecting Countrywide’s claim that allowing the probe would cause chaos in the mortgage industry, the judge wrote that “The U.S. Trustee has made a showing of a common thread of potential wrongdoing.”

“The apparent point of Countrywide’s argument is that recognizing the authority of the U.S. Trustee to conduct these examinations could have the unintended consequence of leading to an unregulated ‘free-for-all,”’ he continued. “The court find’s Countrywide’s argument … to be without merit.”

In 2006 Countrywide financed 20% of all mortgages in the United States.

Countrywide itself narrowly avoided bankruptcy due to its exposure to subprime mortgages when Bank of America agreed to purchase the home mortgage giant in January for $4.2 billion.

Countrywide is still in the business of making home loans, and according to a recent article in Slate.com, it is still making zero down-payment loans.

In some instances, according to the article, Countrywide is foreclosing on properties, then offering new buyers zero down-payment mortgages plus their own free appraisal of the foreclosed property.

According to the Countrywide Foreclosure Blog, Countrywide’s own website currently lists 14,541 bank-owned (REO) properties for sale with a combined asking price of $2,984,273,174.  The largest number of these properties, by far, are in California, with 4,493 properties with a combined asking price of $1,294,972,540.

UPDATE:

For an update on the federal judge’s decision to allow a multi-million dollar shareholders’ lawsuit against Angelo R. Mozilo and other Countrywide executives to proceed, click here.