Credit Scoring at Center of Mortgage Lawsuit

A company that did business with a controversial mortgage issuer may soon see resolution of a lawsuit that alleged the company misrepresented the quality of its loans in an effort to get them insured.

The insurance company MBIA may be approaching settlement in a suit with the notorious mortgage lender Countrywide over the quality of many of the loans it backed, which the former claims cost it some $3 billion, according to a report from the Guardian. Countrywide is famous for its role in granting consumers mortgages it knew they couldn’t afford – in some cases altering negative data on applications to make them more palatable for approval – but is now owned by Bank of America following a 2008 acquisition.

In particular, MBIA alleges that the controversial lender may have misrepresented, or misreported, consumers’ many consumers’ credit scores as being 701, rather than 698, the report said. Though a three-point difference may seem relatively innocuous, it’s important because those with ratings of 701 were considered “gold” borrowers, compared with “preferred” for those at 698. Upon reaching the higher level, borrowers received more favorable interest rates because Countrywide set its threshold at 700.

“Steven Butler, [MBIA’s top witness] concluded that 56 percent of the loans his team analyzed contained at least one indisputable breach,” Harry Fong, an executive director with MKM Partners, told the media outlet. “MBIA’s lawyers also played a video clip where one senior Countrywide employee, who reviewed the same loan files, did not agree on a single breach out of the total 49,000 breaches Mr. Butler found in the sample of 8,000 loans.”

The legal arguments in the case – which will be used to determine whether there is cause for a trial – ended earlier this week, and now both sides await a judge’s ruling, the report said. However, many experts believe that there is a strong possibility of a settlement between the two sides.

Countrywide was infamous for its leniency in extending home loans to subprime consumers, and many experts say that it played a major role in the housing market’s meltdown because it knew the people to whom it issued these mortgages could not afford them and were therefore very likely to default on their payments within a period of a few years or less.

Image: zeevveez, via Flickr