The lawsuit requests that a judge grant relief to borrowers by requiring Countrywide “to rescind or reform all the questionable loans it sold” since 2004. The Times notes the investigation has been ongoing since the fall and found some interesting information:

In reviewing one Illinois mortgage broker’s sales of Countrywide loans, the complaint said the “vast majority of the loans had inflated income, almost all without the borrower’s knowledge…”

“People were put into loans they did not understand, could not afford and could not get out of,” (the AG) said. “This mounting disaster has had an impact on individual homeowners statewide and is having an impact on the global economy. It is all from the greed of people like Angelo Mozilo.”

The Times reports that the lawsuit says nearly 60 percent of the lender’s subprime borrowers who were put in hybrid adjustable-rate mortgages, which required minimal payments in early years (interest-only, for instance), couldn’t have afforded a regular mortgage where they had to pay the principal.

The lawsuit just adds to Countrywide’s mounting woes. It’s also being investigated by the FBI, the Securities and Exchange Commission and the Federal Trade Commission, for crimes including securities fraud, and it faces a number of shareholder lawsuits, along with one by the United States Trustee for abusing the bankruptcy system. The Times notes, while the Journal doesn’t, that the Illinois suit adds to the risks Bank of America is taking on in its buyout of Countrywide.

Bloomberg has an interesting report that Bank of America’s purchase of Countrywide may be covered almost entirely by tax writeoffs from the lender’s losses, or as it says, “financed by 138 million tax-paying Americans.”

Crime blotter

In other real-estate crime news, the Journal on A1 and the Times on C3 say Raffaello Follieri, a strange character who touted ties to the Vatican to drum up real-estate business, was charged in federal court for fraud, conspiracy, and money laundering. The twenty-nine-year-old had ties to Ron Burkle and Bill Clinton and once entertained John McCain on a yacht off the coast of Montenegro. Follieri once claimed he was chief financial officer of the Vatican and could buy church property on the cheap.

In another story, the Journal on A3 says the FBI and state regulators are investigating a Philadelphia real-estate loan broker with ties to former vice-presidential candidate Jack Kemp for allegedly committing millions of dollars in fraud.

Stupid banking tricks

The Journal has a good C1 story saying small banks are about to get hit by interest reserves they accounted for from real-estate developers who are going bust. Regulators have already issued cease-and-desist orders to several banks for how they use those reserves and they are wary that the practice is easy to use to cover up failing loans.

Small banks, which are more exposed relative to bigger banks, have $280 billion of outstanding construction loans overall, mostly to condominium developers and home builders. When the loans were made, the banks calculated the interest that would be paid and put that money aside in “interest reserves.” In essence, the banks pay themselves until the loan becomes due or the property generates cash flow.

Regulators fear this practice can be abused to keep recording loans as performing even though the underlying real-estate projects are failing.

But as projects are delayed or can’t be sold, those interest reserves are running out, which the Journal says may augur a “sudden jump” in defaults. The paper analyzed data from 8,000 banks for the report.

The Chicago Tribune says the Chicago office-building market is the worst since 1990. No buildings have sold in the second quarter and companies are taking properties off the market.

And now…

The Los Angeles Times reports Chrysler will offer wireless Internet in its new cars starting this year, a first for an automaker.

Perhaps not surprisingly, safety advocates were less than overwhelmed by Chrysler’s innovation.

“Surfing the Web is something people really don’t have any business doing while they drive,” said Jonathan Adkins, spokesman for the Governors Highway Safety Assn. “It’s definitely a distraction.”

Buffettisms

The Quote of the Day comes from Warren Buffett, as reported by Bloomberg, responding to a question about why companies should sell to Berkshire Hathaway rather than private equity:

”You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever,” he says at the February meeting. “Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it.”
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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.