Countrywide Mortgage, now owned by its buyout rescue savior, Bank of America. earned a reputation for bilking borrowers. Now, the lender may be atoning for its sins by creating a model for loan modifications that may save homeowners, even if Countrywide isn't doing it voluntarily.
Countrywide was at the epicenter of investigations into corrupt mortgage lending practices last year, as its CEO retired with hundreds of millions of dollars in newly acquired income. But now it's paying part of the price for that inequity. According to the terms of a fraud-related court settlement, the mortgage giant, now owned by Bank of America, will do loan modifications to help the 395,000 homeowners who it allegedly misled when it put them into risky and expensive mortgages.
Resolving the lawsuits
Fraud complaints covered in the settlement will cost Countrywide and its parent company, Bank of America, about eight and a half billion dollars. But the money, which will be lost on loan modifications that reduce what the borrowers owe Countrywide, will help settle the score with states across the U.S. who took action against them on behalf of those consumers. The settlement resolves lawsuits filed by attorneys general in California, Connecticut, Florida, and Illinois. Seven other states made complaints that didn't wind up
as outright lawsuits, and those states are also satisfied with the results of this agreement.
The settlement, which has a positive impact on a large number of borrowers, also calls for Countrywide to provide relocation assistance for homeowners who lost homes due to foreclosure. Borrowers who defaulted on mortgages before their sixth payment may also have their closing costs refunded.
Loan modification milestone
But in paying back its own customers through loan modifications, Countrywide is also setting an example of the kinds of loan modifications that other lenders could implement to help stop foreclosures and regain stability in the mortgage markets. White House officials have recently insinuated, for example, that a new program rumored to be in the works would be designed to prevent foreclosures by having lenders reduce delinquent borrowers' mortgage payments. In exchange. the government would guarantee some percentage of each loan to protect lenders if borrowers fail to keep up with payments after the loan modifications.
If enacted, the White House plan could help up to 3 million homeowners, and become the most successful of the various loan modification proposals seen so far. Various other strategies involving loan modifications will likely emerge as the Fed begins to spend its $700 billion in rescue capital .