Countrywide Bankruptcy Rumors Float Again

Countrywide managed to produce a bunch of bad news in a day – again. Its stock plunged more than 20%, its biggest decline since October 1987, on bankruptcy rumors and speculation. In a fresh hit to Countrywide’s reputation, it was revealed that the lender has fabricated documents related to a bankruptcy case. The papers were presented to the court as evidence of Countrywide’s actions, but they had apparently never been sent to the borrower. Although it tried to explain that this was not fabrication per se, Countrywide has finally ruined its reputation. Rumors about credit rating agencies considering downgrading Countrywide and a possible bankruptcy were dismissed by the lender. At this point, if you think you’re having a déjà vu, relax: this has indeed happened before. In fact, rumors about Countrywide considering filing for bankruptcy protection sent the company’s stock falling several times in 2007, most recently a couple of months ago. The lender will report its 2007 fourth quarter and year-end earnings, and host a live webcast on January 29. Currently, Countrywide shares trade at a little below $6.

Better Mortgage Disclosure At WaMu

Some good news for mortgage borrowers: better disclosure and fair lending are back. Oh well, we heard about new lending guidelines earlier this year, and many lenders have tightened their standards, but here comes the latest about Washington Mutual. Its brokers will have to adhere to a new set of standards, largely focusing on better disclosure and working in the clients’ interest.

The brokers will be asked to supply evidence that they provide disclosures and ensure that borrowers fully understand the terms of the loan and the compensation they will pay the broker. This pretty much reflects consumer complaints about unexpected and unnecessary fees as well as being driven into complex loans they did not understand. We’ve also heard about mortgage papers including terms that hadn’t been discussed previously and were unfavorable to borrowers. If WaMu has found a way to control mortgage disclosure, borrowers will probably have one thing less to worry about.

WaMu Chairman and CEO Kerry Killinger said, “We believe our mortgage broker standard and direct call program should become the new industry benchmark for brokers and lenders across the nation”. They seem to believe that a lot may change for the better when these new standards go into effect on October 9th. At the very least, this announcement will probably do a lot for their public image.

Cash-back deals: A new type of mortgage fraud

A scam called “cash-back deal” is becoming commonplace in the Arizona Real Estate Market; some citizens don’t even suspect it’s illegal.

This is how it works: a buyer purchases a home at a price higher than its market value, but the seller only gets the amount he’s asked for, i.e. the home’s market price. Typically an outdated appraisal, stating the higher price, is involved, and the seller is asked to return the extra money, to be used for renovations or under some other excuse. Then a mortgage for the amount paid (higher that the market value) is taken and the extra cash is divided among the buyer, the agent, appraiser or anyone else who’s participated in the scam, which may sometimes include the seller himself. The one who loses his money is the lender, because when the house is foreclosed, its selling price doesn’t cover the loan amount.

It also leads to inflated home values in the region, which means that anyone wishing to sell their home may have to accept a price lower than the actual value, and homeowners may suddenly owe more on their mortgage than they would get by selling the property. Loss from mortgage fraud has increased during the last few years, reaching approximately $1 billion in 2006. Lenders and buyers are advised to look for warning signs, such as agents offering to buy a house for a higher price or requests that the property is removed from any listings, so that the original price can’t be found.

The scam is so popular, many think it’s normal business practice, but officials are trying to explain that the procedure is illegal under Federal Law, because the home’s value is misrepresented to the lender. Participants are punishable by fine or imprisonment, and any agents or appraisers involved can lose their licenses. Measures are taken to raise awareness and protect potential victims.