A landmark, multi-state settlement has been reached with Countrywide Home Loans, Countrywide Financial Corporation and Full Spectrum Lending that is expected to provide up to $8.68 billion of home loan and foreclosure relief nationally.
"With this settlement, homeowners will receive direct relief from the catastrophic damage caused by Countrywide," said Attorney General Edmund G. Brown Jr., a co-leader of the negotiations for the states. "Countrywide's lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn't understand and ultimately couldn't afford."
The Countrywide settlement will likely become the largest predatory lending settlement in history, dwarfing the nationwide $484 million settlement with Household Finance Corporation in 2002.
The settlement marks a swift resolution of the lawsuit alleging that Countrywide, the nation's largest mortgage lender prior to its July 2008 acquisition by Bank of America, deceived borrowers by misrepresenting loan terms, loan payment increases, and borrowers' ability to afford loans.
In a nutshell, this settlement will enable eligible subprime and pay-option mortgage borrowers to avoid foreclosure by obtaining a modified and affordable loan. The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America's foreclosure crisis.
The modification program covers subprime and pay-option adjustable-rate mortgage loans in which the borrower's first payment was due between January 1, 2004 and December 31, 2007. The program will be available for loans in default that are secured by owner-occupied property and serviced by Countrywide Financial or one of its affiliates. In addition, the borrower's loan balance must be 75% or more of the current value of the home, and the borrower must be able to afford adjusted monthly payments under the terms of the modification.
The terms of the modification will vary based on the type of loan, including:
• "Pay-option ARM loans," in which loan balances increase each month if a borrower makes only a minimum payment. Borrowers may be eligible to have their principal reduced to 95% of their home's current value and may also qualify for an interest-rate reduction or conversion to an interest-only payment.
• Subprime adjustable-rate loans, such as 2/28 loans. Borrowers may have their interest rate reduced to the initial rate. If the borrower still cannot afford it, the borrower may be eligible for further interest-rate reductions to as low as 3.5%.
• Subprime fixed loans. Borrowers may be eligible for interest-rate reductions.
• "Hope for Homeowners Program." If they qualify, some borrowers may be placed in loans made through this federal program.
• Alt-A and prime loans. Borrowers who are in default, but have Alt-A and prime loans, may also be considered for modifications, depending on circumstances.
In addition to the settlement's direct relief to borrowers, Bank of America, who negotiated the settlement following its acquisition of Countrywide, has agreed that it will suspend offering, under its own name or through Countrywide, subprime loans or loans that can negatively amortize.
The bank has significantly restricted the circumstances under which it will make so-called "no doc" or low-documentation loans, in which borrowers do not fully document their ability to repay their mortgages.
The settlement involved AGs in 11 states, including Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington. The Countrywide parties to the settlement include parent Countrywide Financial Corporation, Countrywide Home Loans and Full Spectrum Lending.
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. The case against them will continue.
