Americans Are Still Paying the Tab for Countrywide's Misdeeds
byJun 15th 2012 11:57AM
When 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.
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.
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.
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.