Allstate Sues Countrywide Over $700 Million Investment

Allstate Corp. sued Bank of America Corp. and its Countrywide mortgage unit over $700 million in residential mortgage-backed securities the insurer purchased, claiming Countrywide misrepresented the investments.

“The defendants knew the loans offloaded onto Allstate were a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default,” Allstate said in a complaint filed in federal court in Manhattan yesterday.

Allstate, based in Northbrook, Illinois, said in the complaint that the mortgage-backed securities, purchased from March 2005 to June 2007, suffered “drastic and rapid loss in value” when large numbers of homeowners began to default on their mortgages.

The suit, which seeks unspecified damages, alleges fraud, negligent misrepresentation and violation of U.S. securities laws. In addition to Bank of America and Countrywide, Allstate names as defendants former Countrywide officials including former chairman and chief executive officer, Angelo Mozilo.

“We are still reviewing the complaint, but this unfortunately appears to be a situation where a sophisticated investor is looking for someone to blame for a downturn in the economy and losses on an investment it made,” Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America, said in a statement.

Outstanding Claims

Bank of America and Countrywide have been sued by the purchasers of more than $375 billion of securities, Bank of America said in a Nov. 5 regulatory filing. The bank acquired Countrywide Financial Corp. for $4.2 billion in July 2008.

Allstate, the biggest publicly-traded U.S. home and auto insurer, returned to profit last year after investment declines pushed the company into a $1.7 billion loss in 2008. The insurer, led by Chief Executive Officer Thomas Wilson, had about $102 billion of investments at the end of the third quarter.

Liberty Mutual Insurance Co., a Boston-based competitor of Allstate’s, is also seeking damages in lawsuits over mortgage-related investments that soured during the financial crisis. In July, Liberty Mutual sued Goldman Sachs Group Inc. in federal court, accusing the brokerage of misleading investors in 2007 when it sold preferred stock in Fannie Mae, the government-sponsored source of home-loan financing.

‘Mixing and Matching’

In its complaint, Allstate claimed that Countrywide began ignoring its own underwriting standards in 2003 in an effort to increase its share of the home mortgage market. The company adopted an internal strategy to match any mortgage product feature offered by a competitor, Allstate said.

“By mixing and matching the worst features of mortgage products from different competitors, Countrywide’s composite product offering became very aggressive within the industry,” Allstate said.

Countrywide misled investors about its underwriting guidelines, the rate at which mortgaged properties were owner-occupied, the value of the mortgaged homes and the widespread use of exceptions to the underwriting process to circumvent guidelines, Allstate said in the complaint.

The case is Allstate Insurance Co. v. Countrywide Financial Corp., 10-cv-9591, U.S. District Court, Southern District of New York (Manhattan).

(Updates with Bank of America comment in fifth paragraph.)
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