|Countrywide Financial Corp. and United Guaranty Corp. are suing each other over denied mortgage insurance claims. United alleges that Countrywide misrepresented the quality of loans it insured and encouraged mortgage fraud. Countrywide claims that the mortgage insurer is just tired of paying out claims tied to the sour economy and deteriorating real estate market.
The litany of litigation started in a lawsuit filed Wednesday by Countrywide in Los Angeles superior court. The loans outlined in the lawsuit were part of 15 first-lien securitizations issued between June 2005 and May 2007 for $2.5 billion and 22 policies on $15.0 billion in second-liens securitized or acquired between August 2002 and November 2006. The maximum cumulative liability on the second liens was capped at $1.3 billion.
One day later, United Guaranty Mortgage Indemnity Co. filed a complaint in U.S. District Court for the Central District of California against Countrywide and the Bank of New York Trust Company, N.A., which was the trustee in the transactions.
United's lawsuit cited 11 securitizations from 2006 and 2007 backed by loans originated, securitized and serviced by Countrywide.
Countrywide, which will begin operating as Bank of America Home Loans on April 27, is accused by the mortgage insurer of abandoning compliance with its own its underwriting standards and guidelines to maximize its massive market share, according to a copy of United's complaint provided by parent American International Group Inc.
Shoddy underwriting dramatically altered the risk profile of loans insured by United, its complaint said. As the Calabasas, Calif.-based lender rushed securitizations through in just 10 days, it hindered United's ability to perform due diligence and made loan-level reviews impossible.
However, United allegedly reviewed loan-level details from data tapes supplied by Countrywide prior to issuing policies. It also audited closed loans prior to default and rejected some loans for insurance -- including 4,244 loans from one proposed pool of 20,045 loans. Countrywide noted that United insured many loans even though they fell outside its guidelines.
An internal audit conducted by the United on a sample of loans reportedly revealed that 40 percent of the loans were not compliant with Countrywide's own guidelines.
"In many cases, Countrywide's files note that the sole justification for granting an underwriting exception was to increase its market share by matching a competitor's offer," United's complaint says.
But Countrywide said United allegedly had no problems with its "underwriting practices until after the real estate market collapsed and claims started to be made at an increasing rate."
Countrywide's lawsuit cited an October 2007 quote by United Guaranty President and Chief Executive Officer William V. Nutt where he blamed home-price appreciation -- exacerbated by aggressive lending -- for credit losses. He reportedly said that his company knew a crisis was imminent.
"United Guaranty has even implied that its own eligibility criteria for second-lien business was too loose during the time period it was selling insurance to cover various mortgages products and borrowers, reporting in 2007 that 'an estimated 60-70 percent of what was insured in 2006 would not be eligible for coverage going forward,'" Countrywide alleges.
Countrywide, which had been a customer of the mortgage insurer since 1963, utilized mortgage insurance to boost the credit ratings on its residential mortgage-backed securities, according to United. Countrywide said it was publicly known that it operated on an originate-to-sell basis.
Countrywide allegedly took advantage of the long-standing relationship involving traditional mortgages to induce United to provide policies on subprime loans.
However, Countrywide noted that the AIG-subsidiary started insuring stated-income loans despite the higher risk associated with them. By 2004, nearly two-thirds of United's limited documentation business was stated-income. United reported that performance on that business was better than on full-documentation loans because of the higher credit scores for those borrowers.
United claims that more than 40 percent of the loans it audited contained material defects such as missing documentation, misrepresented credit scores or false social security numbers. In some instances, Countrywide used artificial credit scores, conflicting or fraudulent social security numbers and verifications made by parties tied to the transactions. Other allegations included overstated income, understated debt and inflated appraisals. In all, 55 percent of the sampled loans were either out of compliance or contained some material defect.
United said it has already paid out $30 million in claims on loans it would not have insured had the loans been accurately represented. In addition, its is exposed to "several hundred million dollars" in additional claims.
Countrywide pointed to $342 million in premiums collected for policies on pools backed by the loans in question. In addition, United continues to collect ongoing monthly premiums of $6 million.
But United said it would not have insured the loans at the same rate of premiums if Countrywide had truthfully represented them.
"Instead, it would have issued a different insurance policy at a different rate of premium, or refused to insure the loans at all," the lawsuit says. "Either way, United Guaranty would not be exposed to the huge losses it faces today."
Unqualified borrowers were often encouraged by Countrywide's employees and mortgage brokers to commit mortgage fraud, according to United -- which also claims Countrywide either misrepresented or committed fraud on tens-of-thousands of securitized mortgages that it insured with loan amounts totaling more than $1 billion. The rate of mortgage fraud caused United to deny half the claims submitted on the loans by Countrywide in 2007. All other loans insured by United Guaranty had just an 11 percent rescission rate that same year.
But the terms of the policies do not allow United to unilaterally deny coverage, Countrywide's lawsuit said.
Countrywide alleges that United is manufacturing excuses and has indicated it will stop paying claims because "it had already paid too much." Financial problems at AIG -- where the fourth-quarter loss of $62 billion was the biggest U.S. history -- also impacted United's decision to stop paying claims.
"Since the collapse of the real estate market, United Guaranty has desperately attempted to deny coverage as evidenced by its unreasonable claims handling position," Countrywide's lawsuit states. "Now that the market has turned, the economy is in a deep recession and the number of defaults has substantially increased, United Guaranty is seeking to blame Countrywide for the risks United Guaranty knowingly underwrote and run from coverage."
United referenced several lawsuits against Countrywide, as well as other pending private and public actions, in its action.
United is asking for the court to relieve it of further liability on mortgage insurance claims and make Countrywide pay for its legal costs. It also seeks punitive damages.
Countrywide hopes to force United to pay the claims, eliminate the unilateral denial of coverage and pay $43 million in losses and legal expenses. It is also asking that premiums which have been refunded for denial of coverage be applied to future claims.
Countrywide Bank, FSB, a federal savings bank; Countrywide Home Loans Inc., a corporation; and Countrywide Home Loans Servicing, LP, a limited partnership, Plaintiffs, vs. United Guaranty Mortgage Indemnity Company, a North Carolina corporation; United Guaranty Residential Insurance Company, a North Carolina corporation; United Guaranty Residential Insurance Company of North Carolina, a North Carolina corporation; and Does 1 Through 100, inclusive, Defendants.
Case No. 8C409996, March 18, 2009 (Superior Court of the State of California County of Los Angeles)
UNITED GUARANTY MORTGAGE INDEMNITY COMPANY, Plaintiff, vs. COUNTRYWIDE FINANCIAL CORP., COUNTRYWIDE HOME LOANS, INC., and THE BANK OF NEW YORK TRUST COMPANY, N.A., Defendant.
March 19, 2009 (U.S. District Court for the Central District of California)