Tuesday, Oct. 7, 2008 | City Attorney Mike Aguirre said Monday that the settlement struck between 11 states and Countrywide Financial Corp. catapults his office forward in an effort to stop foreclosures for San Diego borrowers who were victims of predatory lending practices.

Aguirre said he will announce by Friday a list of other subprime lenders he will be targeting with similar legal action, in line with his efforts to create a “foreclosure sanctuary” in San Diego. He said the sanctuary isn’t yet achieved, but that the settlement sets a precedent for future relief for homeowners facing foreclosure because of loans they should never have been given in the first place.

“It’s enough to get us started,” he said. “It will be very difficult for other subprime lenders to not follow suit.”

Those lenders have not yet been contacted, he said. “There has been no formal discussion, other than we’ve announced that we’re on our way,” he said. Aguirre said he will send letters to city attorneys in 50 cities this week to ask them to join his action.

Aguirre traveled to Harvard University last month to argue for local hearings for the cases brought against Countrywide from a number of sources. The bank sought to consolidate all of the cases into one national case.

Aguirre inserted himself into the issue with his own lawsuit in July, publicizing his dream that San Diego would become a foreclosure sanctuary. But it’s not clear what role his legal action bore on the settlement announced Monday. Ultimately, the negotiators on the settlement came from the offices of Brown and other attorneys general, not from Aguirre’s office. Aguirre has yet to expressly settle or amend his lawsuit.

Attorneys and officials studying the foreclosure crisis said Monday the wide-reaching settlement with mortgage giant Countrywide could serve as a precedent for future action against similar lending practices by other mortgage companies.

Paul Leonard, director of the Center for Responsible Lending, said the settlement sets up a model for lenders trying to figure out systemic ways to deal with their own portfolios of troublesome mortgages.

“Much of the servicing process today is the burdensome, time-intensive case-by-case kind, without the clear set of rules about who gets what kind of modification,” Leonard said. “One of the things that you would hope would be that to avoid a potential lawsuit that some of the companies, that they would follow the model that has essentially been blessed by the settlement.”

Brown filed suit against Countrywide, now owned by Bank of America, in June. He and Lisa Madigan, Illinois attorney general, were the first attorneys general to do so, alleging that the company had given its employees incentives for placing consumers into risky, unaffordable loans.

In July, Aguirre jumped in on behalf of the city of San Diego. Brown and Aguirre have publicly sparred over their approaches and their similar lawsuits to combat the complex situation faced in the state by homeowners stuck in mortgages with skyrocketing payments.

Aguirre said he emphasized the need for a pause — a “moratorium” — in foreclosure proceedings, not just damages for people who had already lost their homes. He has claimed that piece was initially missing from Brown’s lawsuit. Aguirre said his lawsuit introduced a mechanism, a precedent from Massachusetts litigation, that negotiators used in this settlement.

But Ben Diehl, deputy attorney general, said the two suits were very similar in their intent, and the settlement addressed the concerns of both. He said Brown always considered that relief for homeowners stuck in their loans paramount in his lawsuit. Diehl said the Attorney General’s Office could use the settlement brokered with Countrywide to launch its own subsequent lawsuits, though he said he couldn’t confirm if the office has ongoing investigations into any other companies.

The settlement could be worth more than $8.4 billion by the time Countrywide adjusts the loan balances and interest rates of close to 400,000 mortgages made between 2004 and 2007. The settlement, with a share of about $3.5 billion worth of loan modifications expected in California.

While the settlement achieves many of the same ends also sought in Aguirre’s own suit filed in July, the city of San Diego’s suit was not expressly settled as part of Monday’s settlement. Aguirre said he will consider his suit settled as long as a couple of provisions are met, including a promise that the lender won’t “push through” a slew of foreclosures between now and Dec. 1, the day the settlement officially takes effect.

Jumana Bauwens, Countrywide spokeswoman, said that provision has already been met, but offered no specific information about the progress of the city of San Diego’s suit.

“Obviously, this (settlement) helps the residents of San Diego as well as residents for the rest of the state,” she said.

Despite the lack of settlement on the city’s case, Aguirre touted the attorneys general’s settlement at a press conference Monday, announcing “a bit of good news for the San Diegans who were victimized” as a result of predatory lending. Aguirre has advocated for a foreclosure moratorium for the city of San Diego, hoping to halt foreclosure proceedings in cases of predatory lending, and give those borrowers a chance to work out affordable terms with their banks.

Under the settlement, certain borrowers in subprime or adjustable-rate mortgages with a variety of payment options (option-ARMs) can avoid foreclosure by modifying the terms of their loans. The modification program applies to borrowers whose first payment was between Jan. 1, 2004 and Dec. 31, 2007, dates determined because of the popularity of such loans in that time and because of the time limit by which legal action must be filed to be considered.

To qualify, a borrower must be in default (have missed mortgage payments), and live in the property. The loan balance must be at least 75 percent of the current value of the home, and the borrower must be able to afford the new, modified payments.

Specifically, the modifications apply differently depending on the loan, according to Brown. For example, take a borrower whose loan allows for a choice each month for how much to pay.

The lowest possible payment doesn’t even cover the interest accrued in the month, and so the principal amount of the loan actually grows each month. Such loans typically had an introductory phase where the payment was kept very low, and then they hit a reset point when the payments grew, sometimes doubling or tripling.

The borrower unable to make the skyrocketing payments might be able to have the principal lowered to 95 percent of the house’s current value under the settlement. And the borrower might qualify for a reduction in the interest rate, or the payment might be converted to an interest-only option.

Also, borrowers of subprime adjustable-rate loans might have their interest rate reduced to their introductory rate. If the loan is still unaffordable, the interest rate could be lowered to as low as 3.5 percent. Other borrowers in subprime fixed loans, risky loans for good-credit borrowers (Alt-A), or prime loans, might be eligible for other modifications, though the specifics of those remain unclear.

As part of the definition of predatory lending, the lawsuits against Countrywide alleged that the bank sold risky, variable loans to consumers whom the bank knew would be unlikely able to afford the increased payments. It is unclear how each loan will be evaluated in terms of how predatory its beginnings were.

Jan Goldsmith, Aguirre’s challenger in the race for city attorney, reiterated his stance that Aguirre should have turned his case over to Brown to begin with for a unified California case. He said the fact that Brown’s settlement essentially addresses Aguirre’s suit proves the two overlapped.

“It was not necessary for the city of San Diego taxpayers to pay for a separate lawsuit, with four attorneys, and send the city attorney across the country on a nice trip,” Goldsmith said.

Both Brown and Aguirre said their agencies will continue their lawsuit against Countrywide officers, including Angelo Mozilo, the company’s former CEO.

Please contact Kelly Bennett directly at kelly.bennett@voiceofsandiego.org with your thoughts, ideas, personal stories or tips. Or set the tone of the debate with a letter to the editor.

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