How Countrywide Profited on Foreclosures

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Countrywide is an apt name for the nation’s largest lender – in 2006, it financed 20 percent of all mortgages in the country. Now it will pay the largest amount ever imposed in a mortgage-servicing case.

The Federal Trade Commission has ordered Countrywide – now owned by Bank of America – to set aside $108 million to pay back some of its customers. Why? Because the FTC says Countrywide overcharged them at their most vulnerable time: when their homes were being foreclosed on.

Check out this video explaining the alleged scam, then meet me on the other side for more…

Since that story was only 90 seconds long, you may not have gotten the gist of exactly what Countrywide was accused of. So here’s a bit more detailed explanation.

When a home is foreclosed on, the mortgage servicing company steps in to protect the lender’s collateral – the house that secures the mortgage. They do things like order a title report to see if other liens have been placed on the house, hire someone to drive by to inspect it; even cut the grass or otherwise make sure the property is properly maintained. The bill for these services is paid by the mortgage servicer, but like the attorney’s fees and court costs related to foreclosures, these expenses are ultimately the responsibility of the homeowner. If the mortgage servicing company can’t collect from the homeowner, these charges simply reduce the proceeds the mortgage holder receives when the house is sold at a foreclosure auction.

Now, back to what Countrywide is accused of: let’s use cutting the grass as an example. What the mortgage servicing company should do is simply pay a local yard service say, $50, to cut the grass, then add that $50 to the foreclosure expenses. What Countrywide allegedly did instead, however, was create another, different company to handle these types of expenses. That company would pay the local yard service $50 to cut the grass, but then it would send an inflated bill – say, $100 – to Countrywide, its parent company. Countrywide then added the inflated amount to the foreclosure tab.

In short, Countrywide is accused of artificially marking up foreclosure-related services through a wholly-owned subsidiary for no other reason than to create extra profit for itself.

The FTC didn’t go easy on Countrywide. In announcing the reimbursements, the FTC declared, “even as the mortgage market collapsed and more homeowners fell into delinquency, Countrywide earned substantial profits by funneling default-related services through subsidiaries that it created solely to generate revenue.”

“Life is hard enough for homeowners who are having trouble paying their mortgage. To have a major loan servicer like Countrywide piling on illegal and excessive fees is indefensible,” FTC Chairman Jon Leibowitz said. “We’re very pleased that homeowners will be reimbursed as a result of our settlement.”

Read the FTC’s press release about the settlement here.

Read the FTC’s complaint here. (PDF)

Read the Consent Judgement and Order here. (PDF)

In agreeing to the settlement, Countrywide – now owned by Bank of America – neither admitted nor denied wrongdoing.

As I mentioned at the end of the video above, if you were a Countrywide customer that was affected by these overcharges, you don’t have to do anything. The FTC is in the process of uncovering those due a refund and mailing out checks.

How this might affect your 401k

If you followed the explanation above, you might be a little confused. After all, the result of charging excessive foreclosure fees is that the owner of the mortgage receives less money when the house is sold at auction. So if Countrywide was the mortgage holder, didn’t they just hurt themselves? The answer would be yes – if Countrywide was still holding the mortgage. But very few mortgages stay with the company that originate them: more often than not, they’re bundled with other mortgages and sold on Wall Street as mortgage-backed securities. So the lender – in this case Countrywide – still remains on the mortgage as the servicing company, but it no longer owns the mortgage: the owner of the mortgage is the investor in the mortgage-backed securities. And those investors may very well include some bond mutual funds that those of us here on Main Street use as investments in our 401ks.

So even if you’ve never missed a mortgage payment in your life, much less been foreclosed on, if you invested in mutual funds that include mortgage-backed securities that included Countrywide’s marked up fees, you might still have theoretically lost money.

This is one incidence of mortgage servicers being accused of lining their pockets at the expense of homeowners. If you’re blood’s not boiling yet, see Next Bank Scandal? Forced-Place Homeowners Insurance.

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