Allstate Sues Countrywide Over $700 Million In Mortgage-Backed Securities

Insurance company Allstate Corp. (ALL) sued mortgage-originator Countrywide Financial Corp., now a part of Bank of America Corp. (BAC), over $700 million in residential mortgage-backed securities that the insurer had invested in.

The suit also names Countrywide executives as defendants, including Chairman and Chief Executive Angelo Mozilo, who agreed in October to pay $67.5 million in penalties to settle civil fraud and insider-trading charges from the housing crisis.

Allstate's suit, filed Monday in Manhattan federal court, contains similar allegations other investors have raised with mortgage creators, namely that lax underwriting standards are to blame for the collapse of the investment vehicles.

"Countrywide began systematically to ignore the underwriting standards it touted," the suit reads. "Countrywide was singularly focused on increasing its market share, offloading the risk onto Allstate and other institutional investors that purchased securities backed by pools of Countrywide's mortgages."

The insurance giant says between 2005 and 2007 it purchased $700 million in securities from Countrywide, investments it thought were "highly rated, safe securities." The suit alleges that, in fact, Countrywide knew the loans were "a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default."

Countrywide's mortgages turned into some of the worst mortgages issued during the whole crisis, and ever since Bank of America bought the lender in 2008, the bank has had to handle growing loan losses.

The suit by Allstate is just the latest by a big name investor to claim the mortgage companies and nation's banks misled investors into buying what were in actuality highly risky financial creations.

Lawsuits this year have been filed by big names including Charles Schwab Corp. (SCHW), MBIA Inc. (MBI), Ambac Financial Group Inc. (ABKFQ) and various Federal Home Loan Banks.

In October, investors including the Federal Reserve Bank of New York, Freddie Mac (FMCC), Pacific Investment Management Co. and BlackRock Inc. (BLK) all wrote a letter to Bank of America alleging Countrywide had poor underwriting standards and demanding the bank cover the losses. The bank is in discussions with the investors over the letters, but the bank has maintained it would fight investors who simply want to recoup losses.

A Bank of America spokesman declined to immediately comment on the Allstate suit.

Investors and analysts for banks have been worried recently about the potential legal damages and costs arising from mortgage-backed securities that went bad. In November, Bank of America said it still faced up to $31 billion in lawsuits over the securities.

Bank of America shares were recently up 0.9% at $13.39 in recent trading.

-By David Benoit, Dow Jones Newswires; 212-416-2458; david.benoit@dowjones.com

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