Poor Angelo's Almanack

As a follow up to my first post on the US mortgage juggernaut, I will note here that Countrywide Financial has just been sued by the state of Illinois. (Don't miss the juxtaposed photos of the smiling, kind, "good guy", Illinois Attorney General Lisa Madigan, versus the scowling bad guy, Countrywide CEO Angelo Mozilo. I smell movie rights - they should both play themselves.)

If Illinois gets anywhere with this, then I guess there are only 49 states to follow suit (as it were). Countrywide, indeed. This could lead to a lot of people getting bailed out of their mortgages. Which means that if you pay tax, you are probably about to contribute. From the NYT:

Former employees told Illinois investigators that Countrywide’s pay structure encouraged them to make as many loans as they could; some loans took as little as 30 minutes to underwrite, the complaint said.

The lawsuit cited Countrywide documents indicating that almost 60 percent of its borrowers in subprime adjustable rate mortgages (requiring minimal payments in the early years, known as hybrid A.R.M.’s), would not have qualified at the full payment rate. Countrywide also acknowledged that almost 25 percent of the borrowers would not have qualified for any other mortgage product that it sold.

"ARM's" are nasty. You pay a very low interest rate for the first year or two - almost nothing - then the rate jumps up to a very high level after that. Buyers only choose ARM's if they are unaware of what they are getting, or if they assume that they will be able to resell the house before the rate resets. And for a while, a lot of people did. They also borrowed against the increased house value, effectively turning the property into a credit card.

Looks like a perfect Exhibit A for David Brooks' jeremiad on America's lapsed financial values.