Countrywide suit settled; homeowners to get aid

More than 10,000 Washington state homeowners who are at risk of foreclosure will get help with their mortgages as part of a record $8.4 billion settlement between Countrywide Financial and officials in 11 states.

The settlement is the largest program ever to modify home loans and comes just days after the federal government adopted a giant financial-rescue package without any relief for distressed homeowners.

Countrywide, the nation's largest lender and loan servicer, recently acquired by Bank of America, had been sued by the states over what they said were predatory lending practices.

To settle the suits, Countrywide will provide $8.4 billion in direct loan relief, affecting an estimated 400,000 borrowers nationwide, while waiving certain fees and setting aside additional funds to help people in foreclosure and relocating.

Washington residents who got mortgages through Countrywide and who already lost their homes to foreclosure will be eligible for money, said Washington Attorney General Rob McKenna, who will discuss the settlement this morning at a news conference.

"This is a very large and important first step in helping to stop the cycle," McKenna said. "We are going to put the brakes on that downward spiral."

McKenna said Countrywide used predatory lending practices similar to those found in investigations of other large lenders across the country. They issued loans to people who couldn't afford them by falsely inflating borrowers' incomes, used hidden fees and made deceptive marketing claims, saying, for example, a loan had "no closing costs," when borrowers were actually paying closing costs.

Countrywide has pledged before to modify large swaths of loans. Late last year, it vowed to help about 82,000 borrowers facing higher payments through 2008. But the new program will be mandatory and will be monitored by state officials.

Along with the direct relief, Countrywide will waive late fees of $79 million and prepayment penalties of $56 million and suspend foreclosures on delinquent borrowers with the riskiest loans.

A foreclosure relief fund will be created with $150 million from Countrywide to help borrowers at least four months behind on payments or whose homes have been foreclosed on. The company will also provide $70 million to help troubled borrowers relocate to rental housing.

In all, Countrywide is setting aside $8.7 billion to help borrowers.

A Bank of America spokesman, James E. Mahoney, said the program's cost had been anticipated in the company's purchase of Countrywide.

"We have worked with attorneys general across the country to resolve the issues relating to Countrywide's practices," he said. "Bank of America has put our own leadership in charge of Countrywide and have committed to a very different set of business practices going forward."

Countrywide settled with the states without admitting any wrongdoing.

Under the agreement's terms, Countrywide will reduce principal balances in some cases and cut interest rates in others.

Rates could decline to 2.5 percent, depending upon a borrower's ability to pay, and remain at that level for five years. Then the rate would adjust to prevailing interest rates charged by Fannie Mae on its fixed-rate mortgages.

The program will focus on borrowers placed in the riskiest loans, including adjustable-rate mortgages whose interest rates reset significantly several years after the loans were made.

Pay-option mortgages, under which a borrower must pay only a small fraction of the interest and principal, thereby allowing the loan balance to increase, are also included in the modifications.

Borrowers whose first payment was due between Jan. 1, 2004, and Dec. 31, 2007, can participate. The loan balance must be at least 75 percent of the current value of the home, and the borrower must be able to afford the adjusted monthly payments.

"We have created the first comprehensive, mandatory loan-modification program with the largest loan servicer in the country, and it is going to help homeowners stay in their homes," Illinois Attorney General Lisa Madigan said.

Illinois had accused Countrywide of relaxing underwriting standards, structuring loans with risky features and misleading consumers with hidden fees.

Other states in the settlement are Arizona, California, Connecticut, Florida, Iowa, Michigan, North Carolina, Ohio and Texas.

It is the largest predatory- lending settlement in history, far exceeding the $484 million deal struck in 2002 with the Household Finance Corp.

The program will be administered by state officials who will examine regular reports from Bank of America. The program will begin Dec. 1 as Bank of America contacts borrowers.

In the meantime, Bank of America said Countrywide customers can call 800-669-6607 to discuss their loans.

Seattle Times staff reporter Emily Heffter contributed to this report.