CountrywideWhen whistleblower Kyle Lagow raised concerns about Countrywide Financial's practice of giving bloated appraisals on government-insured loans, he lost his job. Lagow filed a lawsuit resulting in a $1 billion settlement against Bank of America (BAC), which took over Countrywide in 2008.

Lagow wasn't alone in calling out his bosses for bad behavior. There were four other whistleblowers, including Gregory Mackler, who criticized Bank of America's management of the government's Home Affordable Modification Program, which was created to help homeowners struggling to make their mortgage payments.

Together, these five whistleblowers' lawsuits became part of a $25 billion national mortgage settlement this year.

Settlement or no, we're all still paying for Countrywide's bad behavior in two ways:

  • Because of bloated appraisals, many of us are stuck with bigger mortgages at higher rates than we would have otherwise had to pay.
  • As taxpayers, we've been put on the hook for the banks' financial losses -- losses that resulted from their misrepresentation of the financial risk involved in backing government-insured mortgages.


Sticking Buyers With Overinflated Prices

All major banks require a home appraisal before approving mortgage loans in order to ensure that, should the homeowners default, the lender can recoup the investment by reclaiming the assets and reselling the homes.

Appraisals are supposed to provide an accurate representation of a home's value. So it's natural for buyers to use the appraisal as guidance in the home purchase decision. But that also means that home shoppers can be misled by inflated appraisals and end up buying a too-expensive house.

That's exactly what we saw during the worst of the housing bubble from 2002 to 2007.

With the help of slipshod appraisals, home prices doubled or even tripled in just a few years. Eager consumers rushed in to buy before they were priced out of the market, and greedy buyers moved in, hoping that they could flip the house in a year or two with the help of steadily rising appraisals.

As we know now, the higher they rise, the harder they fall. But it didn't have to happen like that.

Accurate appraisals can help stabilize the housing market by limiting the ability of potential buyers to purchase overpriced homes, since banks will not offer mortgages for amounts higher than the appraised value. Because buyers rely on mortgages to cover most of their home's price, smaller loans limit their ability to shell out the money to cover inflated home prices.


Sticking Taxpayers With the Tab for Risks and Losses

Home buyers aren't the only ones who got jammed up because of Countrywide's inflated appraisals.

When the bank insured its mortgages through government-owned organizations like the Federal Housing Administration or the Rural Housing Service, its inflated appraisals falsely suggested that Countrywide could recoup its losses on defaulted loans by seizing the homes and reselling them. In other words, it falsely represented the risks taken on by the government insurers, which ultimately had to cover bank losses on defaulted loans.

And the costs for covering these losses are passed on to taxpayers like you and me.

Aside from the more clear-cut costs outlined above, we all paid -- and continue to pay -- for the role banks played in causing the housing bubble and subsequent economic collapse.

Motley Fool contributor M. Joy Hayes, Ph.D. is the Principal at ethics consulting firm Courageous Ethics. She owns shares of Bank of America. Follow @JoyofEthics on Twitter. The Motley Fool owns shares of Bank of America.



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m_salah48

My parents have recently taken out a reverse mortgage-At first I thought it was a horrible idea since we have had the home in our family now for many generations but after speaking to my lender they explained that my parents home be mine as long as I can pay off anything that the borrow.

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November 26 2013 at 6:17 AM Report abuse rate up rate down Reply
JMan

@ha6ai - You didn't read the words above in this article. Nobody was forcing Countrywide to make loans to people who couldn't afford them. It wasn't ACORN and it wasn't Fannie Mae. Fannie Mae is guilty of some of the same misdeeds as the others, but nobody was forcing Countrywide and Ameriquest to issue bad loans. I know you want it to be that way, but this was caused by many bad actors across the political and economic spectrum. If you wan't to go all Barney Frank and ACORN and Obama on everybody, then have a look at this. http://www.youtube.com/watch?v=kNqQx7sjoS8 and this:
http://georgewbush-whitehouse.archives.gov/news/releases/2002/06/20020617.html

July 16 2012 at 11:57 PM Report abuse rate up rate down Reply
JMan

@ha6ai - You didn't read the words above in this article. Nobody was forcing Countrywide to make loans to people who couldn't afford them. It wasn't ACORN and it wasn't Fannie Mae. Fannie Mae is guilty of some of the same misdeeds as the others, but nobody was forcing Countrywide and Ameriquest to issue bad loans. I know you want it to be that way, but this was caused by many bad actors across the political and economic spectrum. If you wan't to go all Barney Frank and ACORN and Obama on everybody, then have a look at this. http://www.youtube.com/watch?v=kNqQx7sjoS8 and this: http://georgewbush-whitehouse.archives.gov/news/releases/2002/06/20020617.html

July 16 2012 at 11:47 PM Report abuse rate up rate down Reply
wmmoore1234

they took eight thousand doller from me they said if i paid off the loan early there would not be a charge they are ckooks

July 05 2012 at 11:35 AM Report abuse rate up rate down Reply
shar6jo

The president did not miss out on the free money either and profited from his race based lawsuits he filed in Chicago against citibank.

June 19 2012 at 1:50 PM Report abuse +2 rate up rate down Reply
Storm Bradford

Mortgage fraud Examiners (www.mortgagefraudexaminers.com) finds appraisal fraud in eight out of every ten mortgage transactions examined. That's why the problem was and is systemic.

June 19 2012 at 10:00 AM Report abuse rate up rate down Reply
cabo79

Your Professional Politicians knew what was going on but were paid well to look the other way. What is a government for anyway?

June 18 2012 at 7:14 AM Report abuse rate up rate down Reply
anthonygolfbones

It seems that Jim Johnson a former executive at Lehman brothers and who was later forced from his position at Fannie Mae. Investigators found that Fannie Mae had hidden a large amount of Johnsons compensation from the public, 21 million dollars. He is currently under investigation for illegal loans from Countrywide while serving as CEO of Fannie Mae. Johnsons golden parachute was 28 million dollars. Now this is the good part, he is currently a Senior Obama finance advisor working for Obama's vice presidential search committee. Franklin Raines another person who was forced to leave Fannie Mae with a 240 million dollars in benefits , he also also works as a chief Economic advisor for the Obama Campaign. Another person forced from Fannie Mae Tim Howard had a 20 milion dollar Golden Parachute is also a chief economic advisor to Obama. How long does the American public have to put up with this kind of highway robbery, here are three men who in my opinion should be behind bars instead or getting 290 million dollars in Golden Parachutes , and now they work for the President. I thought you had to pass a background check to work for the goverment.

June 17 2012 at 8:02 PM Report abuse rate up rate down Reply
Charle

The Banks that caused this mess were bailed out by our government . And now are even bigger and making record profits. The corporate credit union system got stuck with the toxic CMO investments sold to them by the banks . They got wiped out not bailed out by the government. Regular credit unions are being annually charged for at least 7 years for those losses. Plus they were forced to recapitalize a reconstructed corporate system to reconstruct their transaction clearing services needed to operate their credit unions.

June 17 2012 at 12:28 PM Report abuse rate up rate down Reply
ha6ai

Americans wlll be paying for generations for Obama's misdeeds.

June 17 2012 at 1:45 AM Report abuse rate up rate down Reply
2 replies to ha6ai's comment
kafienkarl

A big chunk of the deficit is the doing of repulicans specifically neoCONs growing government three fold during the Bush yrs. MEDiCARE D was passed during the 109 congress and Bush google how much that will costs in the trillions. Trying to ignore and rewrite history won't work for us that read several sources.

June 17 2012 at 12:23 PM Report abuse rate up rate down Reply
cabo79

We all agree, it is ALL Obamas fault, OK? Now you can go somewhere else.

June 18 2012 at 7:17 AM Report abuse rate up rate down Reply