Allstate Sues Lenders Over ‘Toxic’ Mortgage-Backed Securities

Allstate Insurance Co. filed suit against mortgage lender Countrywide Financial Corp., now owned by Bank of America, alleging Countrywide sold Allstate more than $700 million in “toxic” mortgage-backed securities that Countrywide knew were likely to default.

The suit, filed in U.S. District Court for the Southern District of New York, names a total of 19 defendants, including Countrywide co-founder and former Chief Executive Officer Angelo Mozilo, former President and Chief Operating Officer David Sambol, other former executives, as well as certain Countrywide affiliates.

“Allstate’s claims are based on an extensive analysis of the mortgage loans underlying the mortgage-backed securities, internal Countrywide documents made public by an SEC lawsuit against Countrywide’s former executives, and other complaints filed against Countrywide by the SEC, states’ attorneys general, insurers and other investors,” Allstate spokeswoman Maryellen Thielen said in an e-mail.

In its complaint, Allstate alleges Countrywide abandoned its underwriting standards, misrepresented crucial information about the underlying mortgage loans and concealed material facts from Allstate and other investors.“We are still reviewing the complaint, but this unfortunately appears to be a situation where a sophisticated investor is looking for someone to blame for a downturn in the economy and losses on an investment it made,” Bank of America spokesman Bill Halldin said in an e-mail. Bank of America acquired Countrywide in July 2008.

Beginning in 2003 and under the direction of Mozilo and Sambol, Countrywide “abandoned any semblance of underwriting standards,” the lawsuit states. The mortgage lender adopted a “matching” strategy — approving any mortgage product offered by a competitor — as it was “singularly focused” on increasing its market share, the suit states.

Allstate purchased the mortgage-backed securities from Countrywide between March 2005 and June 2007.

“Whereas Allstate was made to believe it was buying highly rated, safe securities backed by pools of loans with specifically represented risk profiles, in fact the defendants knew the loans off-loaded onto Allstate were a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default,” the lawsuit states.

“Countrywide’s senior management imposed intense pressure on underwriters to approve mortgage loans, in some instances requiring underwriters to process 60 to 70 mortgage loan applications in a single day and to justify any rejections they made,” according to the complaint. “This created an incentive not to review loans thoroughly but instead simply to rubber-stamp them ‘approved.'”

As a result of Countrywide’s “wrongdoing,” Allstate suffered “drastic and rapid” investment losses, including lost principal and interest payments, and most of the securities Allstate purchased were downgraded from the highest possible rating to junk-bond status, the suit states.

The suit accuses Bank of America, Countrywide, and other defendants of fraud, securities violations and negligent misrepresentation. It seeks rescission and unspecified damages, including recovery of costs related to purchasing the securities, loss of principal and interest payments, and attorneys’ fees and costs.

Bank of America, Countrywide and Merrill Lynch are being sued by buyers of more than $375 billion of mortgage-backed securities, Bank of America stated in a Nov. 5 filing with the U.S. Securities and Exchange Commission.

Allstate Insurance Group, based in Northbrook, Ill., currently has a Best’s Financial Strength Rating of A+ (Superior).

On the afternoon of Dec. 29, shares of Allstate (NYSE: ALL) were trading at $31.97, down 0.09% from the previous close.

(By Diana Rosenberg, senior associate editor, BestWeek)