Reckless lenders

Today's New York Times reports on a court ruling (Order and Opinion here) allowing a shareholder suit against Countrywide to proceed. The court cited specific allegations in the complaint that company directors ignored numerous red flags alerting them to widespread deviations from undewriting standards at all levels of the company. The allegations are remarkably similar to the story of New Century's demise, in which various officers tried in vain to alert management to the serious problems in underwriting and the rapid rise in early payment defaults in 2005 and 2006.

It is a bit ironic that shareholders are complaining of the underwriting lapses, which after all permitted the rapid growth in loan volume and share prices. In any event, it is clear that the foreclosure crisis was not caused solely by the end of home price appreciation. Inside the major subprime lenders, the battle between underwriting and sales was being lost by the underwriters, despite the latter's appeals to top management.