Countrywide settlement echoes similar deals but offers borrowers more

A similar nationwide 2006 settlement extracted $325 million from mortgage lender Ameriquest, but again, mortgage terms remained unchanged for borrowers who said they had been misled.

Why are consumers here and elsewhere getting a better deal in 2008 than they got in 2006 or 2002?

Assistant Washington Attorney General David Huey, who played a key role in negotiating the Household and Ameriquest deals as well as the Countrywide settlement, said state attorneys faced a much different situation in the Countrywide case.

In both earlier cases, Huey said, state regulators were negotiating with company executives who denied wrongdoing and would likely have fought the matter in court for years if the states had attempted to throw out billions of dollars' worth of mortgage contracts. The states believed they had strong evidence of deceptive practices at both firms, but they also knew they could not be sure of the outcome if the case went to a jury.

But since the abuses alleged at Countrywide, the company was taken over by Bank of America, which installed new management and set aside a multibillion-dollar reserve to handle expected legal claims.

In the earlier cases, Huey said, state regulators were wary of imposing a settlement that would destroy the affected companies and disrupt the mortgage industry. This time, that industry already is deep into damage control mode.

Huey revealed that some big names in the mortgage industry were pleading with regulators in 2006 to go easy on Ameriquest. Among the pleaders were representatives of mortgage giants Fannie Mae and Freddie Mac, and representatives of the ratings firms that had certified mortgage-backed security investments as safe and solid.

As Huey recalls it, the industry representatives were telling regulators that they could do severe damage to the entire industry if they tried to force Ameriquest to pay more than $100 million.

"You will bring down the market," Huey recalled them saying. "You will bring down the company and bring down the market."

Ameriquest wound up agreeing to pay $325 million. The company did wind up going bust later, but so did many other mortgage lenders as the rapid rise in home prices screeched to a halt and then reversed. That, in turn, undermined the value of mortgage-backed investments, threatened the banks and brokerage houses that were holding them, and set off the economic chain reaction that is still playing out around the world.

Wenatchee attorney Robert Parlette, who represented a group of disgruntled Household International customers in Whatcom County in 2002, wonders if that financial horror show could have been avoided.

In 2002, Parlette sued Household International in U.S. District Court, hoping to get a federal judge to suspend foreclosures and cancel or modify the terms of mortgages for his own clients and everyone else who had been subject to deceptive practices.

But attorneys in the office of then-Attorney General Chris Gregoire refused to join Parlette in seeking those remedies. Parlette believes that if the state had joined him, the federal court might have been more receptive. Instead, the federal court wound up rejecting Parlette's legal arguments.

Parlette then shifted the legal battle to Whatcom County Superior Court, and eventually did get reduced interest rates and other relief for 240 local homeowners in a special settlement with Household.

"That's what we got for the select few up there in Bellingham," Parlette said Tuesday.

He was pleased to learn that a much bigger nationwide group of Countrywide borrowers can expect to get similar relief under the new settlement.

"This would have been so nice, if they had done that back in 2002," he said. "It might have wakened the industry up, not to engage in these subprime loans without having your eyes wide open."

It might also have wakened the industry up if the states had pushed Household out of business, Parlette added.

"Back in 2002 ... I was pleading with (the attorney general's office), 'Let these guys go broke, let them go down,'" Parlette said.

That might have damaged mortgage markets then, but it might also have prevented the later excesses that led to today's financial crisis, he said.

"Here we are at, perhaps, a global depression, caused by outright greed," Parlette said.

Assistant Attorney General Huey rejected the suggestion that the states could have headed off the entire subprime mortgage crisis. It was up to federal regulators, not states, to make sure that banks and investment houses were operating in a sound manner, he said.

As he sees it, the state's role is to police the marketplace but not to regulate it.

"We definitely see ourselves as defenders of the marketplace," Huey said. "We're not out to stop bad guys or save widows and orphans. Our job is to see that the marketplace functions effectively and without deception. ... We're not seeking to become the all-purpose regulator of commerce."

In 2002, then-Attorney General Gregoire said the Household International case would send a message to the industry. McKenna made a similar statement in 2006 as he announced the Ameriquest deal, although he admitted that Ameriquest apparently had failed to get the message his predecessor had sent.

Huey said the struggle to curb deceptive practices continues.

"We don't quit," he said. "We're still sending messages."