California’s Solo Mortgage Probe Complicated by 2008 Deal

California Attorney General Kamala Harris objects to giving banks broad releases of liability for predatory lending. At the same time, she may be locked into her predecessor’s 2008 settlement with the largest lender in the state during the mortgage boom that does exactly that.

Facing a Feb. 6 deadline to join a proposed multistate agreement over foreclosure practices said to be worth as much as $25 billion if California joins, Harris has said she won’t sign onto a deal blocking her from investigating whether the five largest U.S. mortgage servicers misled homeowners about the terms of their loans, among other issues.

One of the five lenders involved in the talks, Bank of America Corp., reached an agreement in 2008 with Harris’s predecessor, Jerry Brown, who is now governor, that bars its Countrywide Financial unit’s mortgage holders from pursuing claims of the type that Harris wants to investigate.

Based on the “broad release” contained in the agreement, “it is unclear on what grounds Kamala Harris would pursue lending violations by Countrywide,” said Guy Cecala, publisher of Inside Mortgage Finance, an industry publication.

Harris, 47, whose state is the most populous and leads the nation in foreclosure filings for housing units, has described as “inadequate” the proposed settlement state and federal officials have been negotiating for more than a year with Charlotte, North Carolina-based Bank of America, JPMorgan Chase & Co., Citigroup Inc., Wells Fargo & Co. and Ally Financial Inc.

The foreclosure probe, which had involved attorneys general from all 50 states, began in October 2010 following disclosures that banks were using faulty documents to seize homes.

Principal Writedowns

The proposed accord would set requirements for how lenders conduct home foreclosures and mandate that the banks fund loan principal writedowns for homeowners and provide refinancings, said a person familiar with the matter who didn’t want to be identified because the terms aren’t public.

With California’s share of the settlement said to be at least $6 billion, a decision by Harris to opt out would put pressure on her to extract more favorable terms from the banks, Ken Scott, a Stanford University law professor, said in a phone interview.

For Harris, “the rationale has to be, ‘We’re going to get so much more it will have been worthwhile, and that’s a gamble’” Scott said. While the attorney general may “get the glory,” he said, “the risk and the possibility that isn’t the outcome is being born by the borrowers.”

Credit Crisis

Countrywide, which was based in Calabasas, California, and was acquired by Bank of America in 2008, was “by far the largest mortgage lender in the state” before the credit crisis, Cecala said. In 2006, Countrywide reported that while residential loans in the U.S. had tripled since 2000, from $1 trillion to $2.9 trillion, Countrywide’s origination business grew about three times faster, from $62 billion in 2000 to $463 billion in 2006, according to a court filing.

Based on the liability release in the 2008 settlement, in which Bank of America resolved fraud complaints in 11 states by agreeing to pledge $8.7 billion in assistance to Countrywide borrowers, “BofA wouldn’t seem to have much reason to pay still more for the benefit of anyone already covered by it,” Scott said.

Harris, through spokesman Shum Preston, declined to comment on the Countrywide settlement or the multistate negotiations.

Gil Duran, a spokesman for Brown, had no immediate comment.

2008 Accord

The 2008 accord required Countrywide to reduce amounts owed by borrowers, cut their interest rates, and provide relocation assistance for homeowners who lost or almost lost their homes to foreclosure. In exchange, borrowers who received payments from the deal were required to release Countrywide from liability, preventing them from pursuing “remedies of whatever kind” arising under “any source whatsoever,” meaning any statute, regulation, rule or common law.

The releases covered “without limitation, the origination of that loan and any representations or omissions made during that origination process,” according to the agreement.

The release went further, requiring borrowers to waive any potential liability concerning the “servicing or administration of that loan following its origination.”

An Obstacle

Another person familiar with negotiations in the multistate deal said that while the 2008 agreement may present an obstacle to an investigation of origination claims by Harris, her lawyers have identified ways in which Countrywide may be violating the accord. The compliance failures may be grounds to terminate the settlement, said the person, who didn’t want to be identified because the negotiations aren’t public.

The agreement requires the bank to meet a quota of loan modifications, the person said. Bank of America may be overstating its compliance by taking credit for modifications on loans even though it later sought foreclosure against those homeowners when they fell behind on payments, the person said. The person also said that while the settlement may bar investigation of any predatory lending by Bank of America before 2008, such behavior after the date of the agreement is fair game.

Bank of America has “adhered to the letter and spirit of our agreements with the attorneys general since 2008,” Richard Simon, a spokesman for the bank, said in an e-mail.

Since 2010, 46 U.S. states have signed onto the settlement, he said, and are partaking in the National Homeownership Retention Program providing loan modification, foreclosure relief and relocation assistance, Simon said.

$5.3 Billion

Bank of America is “performing at or above the program expectations,” Simon said. The company expected it would offer as much as $3.4 billion in principal and interest savings to California homeowners, and through the third quarter of last year the offers have exceeded $5.3 billion, he said in the e-mail.

At least one state, Nevada, already has sought to undo an agreement over home-loan modifications tied to Countrywide, claiming the lender failed to meet its obligations. Nevada Attorney General Catherine Cortez Masto sued Bank of America in December 2010. The two sides are now in a dispute over pretrial evidence gathering, or discovery, in federal court in Reno, Nevada. The bank seeks to dismiss the case, according to court filings.

In a Jan. 30 status report on the case, Masto’s lawyers accused the bank of stalling tactics that they said “underscores the gamesmanship” the state faces.


“Given the critical, time-sensitive issues in this case -- whether Nevada consumers will continue to lose their homes while they wait for or are denied help promised by the defendants -- the state urges that the solution is not simply to extend discovery deadlines,” attorneys for Masto wrote in the court filing.

Jennifer Lopez, a spokesman for Masto’s office, declined to comment on the case.

Bank of America, in its court filing, has said it has engaged in an “aggressive, systematic, and unprecedented” collection and production of documents. Bank of America has been “exceedingly open” with Masto’s lawyers, according to the filing.

In December, Harris and Masto, who has also criticized the proposed nationwide settlement as inadequate, announced they would jointly investigate wrongdoing in mortgage loan origination, servicing and securitization, and will share litigation strategies, information and evidence.

Cecala, of Inside Mortgage Finance, said the peril of mounting such an investigation “probably is a good argument for California to get on board” with the multistate agreement.

“Does the state have the wherewithal to launch a major investigation of all foreclosures of all lenders in the state, or even the five that are a party to the attorneys general settlement currently pending?” he said. “We’re talking about millions of loans.”

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