Yesterday, Bank of America announced that they would settle their lawsuit with a parade of states Attorneys General that began before BofA bought out the defendant, Countrywide Financial.  The initial suit alleged that Countrywide engaged “in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.”  At the time I thought it would be difficult to hold Countrywide responsible for what the mortgage market is intended to do, but I suppose they didn’t want to face a jury at a time when the financial industry is melting down.

This settlement, which could provide up to $8.68 billion dollars for as many as 400,000 homeowners nationwide (and up to $3.5 billion in California), has some very laudable parts to it:

Under the terms of the settlement, eligible subprime and pay-option mortgage borrowers with loans from Countrywide will be able to avoid foreclosure by obtaining modified and affordable loans. Here is the information released by Brown’s office:

The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:

• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;

• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;

• Waiver of late fees of up to $33.6 million;

• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;

• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and

• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.

This is exactly what should have been in the bailout bill – a large-scale workout for homeowners on the brink of foreclosure to modify their loans and stay in their homes.  It’s arguably costlier to the bank at this point for the mortgages to go completely bust and to deal with the foreclosure.  In addition, BofA is SUSPENDING subprime loans and negative amortization loans as well as loans with little or no documentation from the borrower, which is in a way more significant because that’s at the root of the financial crisis.

These are also the kind of steps that Ted Lieu sought in his AB 1830 which was vetoed by the Governor – banning predatory lending and unsustainable mortgage loans.  Ultimately, Attorney General Brown was forced to seek remedy in the courts because the regulatory structure had broken down and the Congress was unable or, more likely, unwilling to give struggling homeowners a hand.  

This shouldn’t be Jerry Brown’s job, but the systemic failure fell to him, and he performed brilliantly.  And he’s not done:

And this is not the end of this chapter. The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute separately his case against Mozilo and Sambol.

Lawmakers like Dianne Feinstein and others should be a little ashamed that they were able to do so little in the wake of this crisis while Jerry Brown did so much more.

Here’s a statement from the Attorney General’s office:

California Attorney General Edmund G. Brown Jr. today sued Countrywide Financial, its chief executive Angelo Mozilo, and president David Sambol, for engaging in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.

“Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market,” Attorney General Brown said. “The company sold ever-increasing numbers of complex and risky home loans, as quickly as possible. Countrywide was, in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers. Today’s lawsuit seeks relief for Californians who were ripped off by Countrywide’s deceptive scheme.”

It is certainly true that lenders like Countrywide had to feed the beast of mortgage-backed securities, which investors were gobbling up at the height of the housing boom.  They absolutely valued getting a mortgage into the secondary market over securing a mortgage that the buyer could actually pay back.  The question is the level of criminality here.  Atrios, an economist who’s been following “Big Shitpile” for quite a while, isn’t fully convinced:

We do know that at some point the product that mortgage companies were selling essentially flipped. They went from providing mortgages to people, to providing bundled mortgage securities to Wall Street. While it’s quite possible that there was actual fraud going on with respect to mortgage borrowers, the greater fraud might have been perpetrated against the investors which eagerly bought up their chunks of big shitpile. Obviously I sympathize less with the latter who are paid big money to, you know, have some idea what they’re doing.

Tanta at Calculated Risk is similarly unimpressed with a similar lawsuit out of Illinois, saying that it it trying to sue over established industry practice.

Volume-based compensation structures? There have been volume-based compensation structures in this business since long before Tanta got into it. Does it create perverse incentives? Sure. Do we have to like it? No. Has it operated all these years in plain sight of regulators, investors, and the public? Yes. Is CFC’s pay structure all that different from anyone else’s? I profoundly doubt it.

And if anyone who has ever underwritten a loan in 30 minutes has to go to jail, the jails will be full indeed. I wonder if they’ll let me take my new Kindle. Jesus H. Christ on a Process Re-engineering Consultant Binge, folks, anybody who didn’t tell the analysts on the conference calls that they’d got their average underwriting time down to 30 minutes was Nobody back in 2000. Not to mention the AUS side of the business where underwriting had gotten down to 30 seconds.

The problem with Countrywide valuing volume over quality is that they appear not to have to pay the price for that.  In a traditional system, Countrywide getting stuck with a lot of bad loans would hurt them, creating a disincentive.  Now, they’re passing on that pain to investors, and the feds are swooping in to bail the financial institutions out anyway, so it’s guilt-free.  I don’t know that the remedy here is a lawsuit, other than allowing the market to punish bad actors, something we never do in this country, because for decades we have socialized risk and privatized profits.

Let me clear out my Inbox and set you on your weekend way:

• The Megan’s Law website apparently is being used as a hit list and may have led to at least one death.  This is the downside of a “what about the children?” über alles mentality.

• I’m not entirely certain about this claim that state lawmakers could have solved the mortgage crisis back in 2001 by cracking down on predatory lending practices.  It’s a boilerplate story, a typical “they bought off the politicians” frame.  But the problem, as Paul Krugman notes today, is that home prices lowered, leading to negative equity for homeowners.  Not sure what the lawmakers could have done about that.  This is a national crisis that required federal action.  And what action could be taken on the state level is in the purview of the Attorney General.  Jerry Brown is investigating home loans from Countrywide Financial for improprieties, particularly forcing buyers with good credit into subprime mortgages.

• For all the talk about Steve Poizner, he is doing his job in suing Blue Shield for their loathsome practice of dropping patients retroactively after they seek coverage.  Blue Shield’s response?

The state’s interpretation of laws governing policy cancellations “is simply wrong.”

Stupid state, not knowing their own laws as well as a private entity!

• Nancy Pelosi is under fire for saying that Republicans like this war.  Juan Cole is right to slam her for assuming that Republicans would act in good faith and help to end the war after the 2006 elections.  What Republican Party was she talking about?

• Anthony Wright has the new amendments released to the public on the new health care reform.  I should have a lot more on this over the weekend.

• I know that I didn’t execute a House roundup in November, but honestly there wasn’t a whole lot going on in the races.  So I postponed it and will have a December roundup in the next few days.

• And finally, I would be remiss if I didn’t mention the California Democratic Party buying three grand in French wine from Fabian Nuñez, who’s now a wine salesman, I guess.  I have to acknowledge Kevin Spillane (two Republicans in one day, I know) from the No on 93 campaign for the funny move of sending a bottle of Two Buck Chuck to Nuñez’ office.  It is an award winner.

It’s an open thread.