Dead man walking

Countrywide is under investigation for fraudulent loan origination in its "Fast and Easy" program: deliberately making loans to people who were obviously lying about their income. Today's WSJ:

A federal probe of Countrywide, the nation's largest mortgage lender, is turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers, people with knowledge of the investigation say.

Some of the problems are surfacing in a mortgage program called "Fast and Easy," in which borrowers were asked to provide little or no documentation of their finances, according to these people and to former Countrywide employees. Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as "prime," meaning low-risk.

Fast and Easy borrowers aren't required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn't even require loan officers to verify employment, according to an October 2006 presentation by Countrywide's consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.

This raises a couple of questions:

1) Countrywide then sold many of these mortgages to unwitting investors. Why aren't more of these investors filing multi-billion-dollar class-action suits against Countrywide for fraudulent origination?

2) With all this legal risk, why is B of A still apparently going ahead with the purchase of Countrywide?

I'll propose a possible reason for 1), which should encourage B of A to seriously reconsider 2).

Without the pending B of A transaction, Countrywide would likely be bankrupt already. If B of A were to walk away now, Countrywide would be in deep trouble. If you sue Countrywide now, you might not get much. Blood from a stone. Countrywide's mortgage buyers may realize that it's better to keep quiet until the B of A transaction, then sue the deep-pocketed B of A. Makes sense to me.