AG Brown Sues Countrywide

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.