Short Sale, Foreclosure and Strategic Default

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Thursday, June 26, 2008

California sues Countrwide - Does this open door on taxation and credit issues?

If you are having problems with your lender this law suit may give you and your attorney some leverage in dealing with credit and tax issues.

If you have a property in California and you are concerned about tax or credit issues speak with an attorney who can leverage this news for you.

I suspect I will be counseling my clients on how to use this lawsuit to their advantage. Every set of facts is unique, but now you have a lawsuit on your side when you go to dispute your debt.


Calif., Ill. file lawsuits against Countrywide -- baltimoresun.com
But Brown charges that its success resulted from "deceptive advertising" and intense pressure and financial incentives for managers and sales staff to sell risky loans without regard to the borrower's ability to repay them. He alleged that Countrywide also pushed prepayment financial penalties that boosted profits and kept people from refinancing out of the loans.

The lawsuit singles out a variety of "teaser rate" loans that Countrywide and other lenders specialized in as housing prices rose. Those offered interest rates as low as 1 percent.

The state said many borrowers mistakenly assumed those were permanent rates because Countrywide often offered that impression. Borrowers then quickly found themselves making higher monthly payments than they expected or could afford.

Now thousands of borrowers across California are defaulting on those loans. The lawsuit notes that 20,000 Californians lost their homes in May alone and 72,000 were in default, meaning they were at least two months behind on payments, though not all were Countrywide borrowers.

The lawsuit also pointed to Countrywide's own February 2008 records that 27 percent of its subprime loans given to borrowers with spotty credit histories were delinquent.

Six pages of the lawsuit deal with an especially risky type of Countrywide loan called pay option ARMs. That "highly profitable" loan offers borrowers lower initial interest rates and several payment options. But most borrowers chose the least expensive, which makes the adjustable-rate mortgage grow instead of getting paid off. Eventually, in industry parlance, the loan "explodes," raising the monthly payment beyond what many borrowers can afford.

The lawsuit says that 19 percent of Countrywide's 2005 loans were pay option ARMs.

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