The former Countrywide Financial Corp. disclosed in its final filing with regulators that the company has been hit with 33 lawsuits from private parties as well as legal attacks from four state governments and two federal agencies. These are in addition to an unknown number of “predatory lending” suits.
As a result, it could take up to four years for the lending company’s purchaser, Bank of America Corp., to fully absorb the impact of the litigation, and the costs could rise into the billions. Bank of America’s shares dropped after the filing was disclosed, and at least one research firm downgraded the stock.
However, BofA executives said they believe the impact will be manageable. And several observers said much of the legal costs could be covered by insurance that Countrywide had carried.
Still, more lawsuits, such as from foreign companies that purchased mortgage securities on Wall Street, could be on the horizon.
The avalanche of litigation was listed in Countrywide’s quarterly report with the Securities and Exchange Commission, which it filed Aug. 11. It includes 18 class-action suits from its own employees alleging violations of the Employee Retirement Income Security Act; eight additional class actions alleging various types of securities fraud; seven non-class action suits alleging securities violations, and four lawsuits filed by state attorneys general alleging predatory lending practices.
The company also faces formal investigations by the Securities & Exchange Commission and the Federal Trade Commission.
Those are the lawsuits deemed not directly related to Countrywide’s core business of making home loans. The company did not disclose the number of “predatory lending” complaints and suits filed by individual homebuyers. Those suits, which accuse the company of deceptive practices, are now in various stages of the legal pipeline.
Calabasas-based Countrywide was acquired by Bank of America in July for $2.5 billion in stock. Bank of America had earlier pumped $2 billion into the mortgage company. When the bank’s Chief Executive Ken Lewis came to Los Angeles in early July, he said that Countrywide would prove a profitable acquisition because Bank of America paid such a low price for it.
Investors reacted immediately to Countrywide’s last legal disclosure. In the two days after the filing, Bank of America’s stock lost 14 percent of its value, and it hasn’t recovered much since. Research firm Matrix USA LLC in New York immediately downgraded Bank of America from “buy” to “hold.”
Steve Berman, an attorney with three lawsuits pending against Countrywide, said he couldn’t calculate the financial impact of all the class-action litigation on Bank of America shareholders.
“We don’t have a dollar figure and it would be impossible to value one right now, but it’s in the billions,” said Berman, a partner in the firm Hagens Berman Sobol Shapiro LLP. “As more people come forward, the numbers grow so it’s impossible to get your hands around it.”
Shirley Norton, a spokeswoman for Bank of America, said executives aren’t especially concerned.
“Since taking ownership of Countrywide in July, Bank of America has been involved in a detailed review of Countrywide’s operations, including litigation,” Norton said. “We think the actual exposure is manageable and we intend to defend vigorously to minimize the litigation expense.”
Berman estimates it will take two to four years for all these cases to work through the legal system. He also sees the potential for even more bad news for BofA.
Most Countrywide mortgages were packaged and sold on Wall Street to Asian and European investors. “At some point those investors are going to sue,” Berman said. “They haven’t yet because it’s so complicated they don’t know the value of what they have.”
But Walter J. Mix III, managing director at bank consultancy LECG in Los Angeles, said BofA’s contention that Countrywide was a good deal could be correct. In the filing, Countrywide reported loans with full face value of $92.4 billion, which means it had a big and ongoing business.
And even if Countrywide loses big-money suits, insurance could mitigate the effect. In the SEC filing the company stated that it believed the lawsuits “will not materially affect its consolidated financial position,” adding that “this assessment is based in part on the existence of insurance coverage.”
Berman said that the 18 ERISA suits are being combined into one case, a master class action case. The securities suits could also be combined, as could the predatory lending cases.
Countrywide is trying to merge all the complaints from the state attorneys general. However, that seems unlikely.
Legal analysis
Abraham Arredondo, a spokesman for the California Attorney General’s Office, said his office has refused to join other state cases. The California suit accuses Countrywide of violating consumer protection laws, which differ by state, so those actions will settle separately.
While the mortgage industry in general and Countrywide in particular have received plenty of negative publicity in the last year, that doesn’t necessarily help in the courtroom. In reaching conclusions, Mix said the “courts would consider a variety of factors, including the economics both during the time when the loans were made and the current economics. But the resolution really lies in analysis of the laws and regulations.”
That’s the logic Bank of America and its investors hope will prevail. “We did a realistic take on Countrywide’s litigation exposure, and although there is lots of publicity around claims, claims don’t necessarily translate into exposure,” said Norton. “Practices that established Bank of America’s positive reputation and record in home lending are an illustration of how we will operate the combined company. We are confident that our newly combined company will be recognized as a leader in responsible lending practices.”
Significant Exposure?
When Bank of America bought Countrywide, it inherited an avalanche of lawsuits.
Action Number
Employee (ERISA) Class-Action Suits 18
Debt & Equity Trading Class Action Suits 4
Mortgage Securities Class Action Suits 2
Common Stock Class Action Suits 2
Fannie Mae & Freddie Mac Trading Suits 2
Derivative Trading Suits 2
Other Securities Suits 3
State Attorney General Suits 4
SEC Investigation 1
FTC Investigation 1
Source: Countrywide SEC filing, Aug. 11, 2008
