A lawsuit accusing Countrywide (CFC) of fraud is moving forward. The mortgage lender’s officers and directors must answer shareholder claims that they failed to adequately monitor the company’s lending practices, The New York Times reports. The Times reports the decision was made Tuesday by federal Judge Mariana R. Pfaelzer in Los Angeles, who rejected a motion to dismiss the suit. The lead plaintiff, the Arkansas Teacher Retirement System, said “it is our duty to seek recourse when a company’s directors engage in practices that are not in the best interests of shareholders.”

The legal problems at Countrywide could be a source of anxiety for investors who are wondering whether Bank of America (BAC) will go through with its agreement to buy the lender for around $4 billion in stock. Bank of America said again this week that it plans to complete the deal in the third quarter and is looking forward to becoming the nation’s biggest mortgage lender after the closing.

But the suit, which also alleges insider trading, brings renewed scrutiny of the millions of dollars in stock-sale profits reaped by Countrywide executives as the company was making thousands of ill-advised loans. CEO Angelo Mozilo’s $474 million in stock sales between 2004 and 2007 will get particular attention because the exec repeatedly changed the terms of his 10b5-1 prearranged stock-sale program to allow more shares to be sold. “Mozilo’s actions,” the judge wrote, “appear to defeat the very purpose of 10b5-1 plans.”

Freddie Mac (FRE) posted a first-quarter loss and set plans to raise $5.5 billion in new capital. The government-sponsored mortgage investor lost $151 million, or 66 cents a share, for the quarter ended March 31, compared with the year-ago loss of $133 million, or 35 cents a share. Credit-related expenses jumped to $1.45 billion in the latest quarter, from $912 million in the fourth quarter and $262 million a year ago. Still, the latest-quarter loss was narrower than the 84-cent deficit forecast by analysts surveyed by Thomson Financial.

“Freddie Mac on the whole had a better first quarter than what we experienced in the third and fourth quarters of last year, which were significantly impacted by credit and interest rate related marks,” said CEO Richard Syron. “We showed strong momentum in market share, business volumes, margins and total revenue.”

Freddie boosted its full-year forecast of total credit losses as a proportion of its mortgage portfolio to 16 basis points from 12 basis points, saying “the U.S. housing market remains under pressure.” But the company said it doesn’t expect to cut its dividend again and will bolster its capital position by selling $2.75 billion in common stock and $2.75 billion in preferred stock. Freddie also said its regulator, the Office of Federal Housing Enterprise Oversight, laid out plans that will free up further capital by reducing the capital surcharge it levies against Freddie. Shares rose 6% in early action Wednesday.

Bank of America (BAC) is the latest big company to note the pain being felt by consumers hit by rising food and fuel prices. BofA exec Liam McGee told investors at a conference in New York that the bank has seen a “recent sharp increase” in spending on necessities by its credit-card customers, Bloomberg reports. The comment comes a week after giant retailer Wal-Mart (WMT) said the slowdown in the economy was observable through what it called “the paycheck cycle,” in which sales drop late in the month as workers run low on cash, and a day after JPMorgan Chase (JPM) chief Jamie Dimon said he believes a recession could be deeper than the 1990 and 2001 pullbacks.

BofA is also being hit by the housing bust, McGee said. He said the bank now expects to post losses above 2.5% of its home equity loan portfolio, up from a projection last month of a loss between 2% and 2.5%, Bloomberg reports. While McGee says the bank is “obviously not happy with rising credit losses,” The Wall Street Journal reports, it’s hoping to weather the storm by trying to attract more affluent consumers.

Toll Brothers (TOL) said revenue fell 30% from a year ago in its fiscal second quarter ended last month, as sales volumes and prices continue their two-year-long slide. The Horsham, Pa.-based homebuilder posted a 44% decline in net signed house-sale contracts, while the average price per unit dropped 25% to $534,000. The company said cancellations fell from year-ago levels, to 308 from 384, but Toll paid a steep price for losing those deals: the average price of a canceled contract - $760,000 - was 42% above the company’s net average contract price for the second quarter.

“We believe there is significant pent-up demand which is growing. When we have held promotions, buyers have come out to play and put down deposits,” said CEO Bob Toll. “Often, however, a lack of confidence in the direction of home prices overcomes their enthusiasm and they don’t take the next step of going to contract.”

Toll said he believes the company’s premium pricing and strong balance sheet, together with thinning competition in the house-building business, will serve Toll well when the market turns, and in the meantime the company is looking opportunistically for acquisitions. But like the house buyers who don’t know when prices are going to bottom, Toll remains on the sidelines for the moment. “With over $2.5 billion of available capital we hope to be able to take advantage of opportunities that we expect will arise from today’s distress,” Toll said. “We are looking for deals in most markets but have yet to see any opportunities that fit our parameters of high-end communities at bargain prices. More offerings have come to market recently but nothing has excited us yet.”

Meanwhile, despite the poor numbers from Toll and its rivals, investors seem to have faith the sector will turn around sooner rather than later. Toll shares are up 15% this year.

IndyMac (IMB) is showing that turning the corner isn’t all it’s cracked up to be. The Pasadena, Calif.-based lender posted a first-quarter loss Monday, as the bank took another big hit to its bottom line to add to its reserves for future loan losses. IndyMac lost $184 million, or $2.27 a share, compared with the year-ago $52 million, or 70 cents a share. Credit provisions and costs were $249 million in the latest quarter, which IndyMac chief Mike Perry noted represents a 71% drop from the fourth-quarter level. Perry said that decline shows IndyMac “took the appropriate steps in the second half of last year to get the bulk of our credit costs behind us.”

But IndyMac also said it can’t tell when U.S. house prices will slow their decline, and said it won’t be able to predict a return to profitablity until they do. Until then, its first priority is to build capital - which is why IndyMac is deferring interest payments on holding company trust preferred securities, and suspending dividend payouts on bank non-cumulative, perpetual preferred stock.

“With these actions and with declining quarterly losses,” Perry wrote, “we forecast that our capital ratios will improve throughout the remainder of the year and that we should remain well-capitalized throughout this crisis, although we can make no guarantees that that will be the case.”

The remarks come just over a week after Perry set off a sharp rally in IndyMac’s beaten-down shares by saying the company had “turned a corner.” Perry reiterated those comments Monday, but he also indicated the company faces a long road to recovery. IndyMac shares dropped 7%, giving back the last of the gains they made back on May Day.

Here’s something you don’t see every day: A company hit by housing-related losses announces a massive quarterly loss and a plan to raise billions of dollars of new capital - while increasing its dividend.

That was the news out late Thursday at AIG (AIG), the insurance company locked in a fight to the death with longtime former CEO Hank Greenberg. AIG said it lost $7.8 billion, or $3.09 a share, for the quarter ended March 31, as “weak U.S. housing market, the disruption in the credit markets, [and] equity market volatility had a substantial adverse effect on its results.”

To make up for the massive loss, AIG said it would raise $12.5 billion in new capital, first through a $7.5 billion sale of common stock and equity-linked units, and then through a later $5 billion issuance of “high equity content fixed income securities.”

“These offerings are designed to further strengthen AIG’s significant financial resources,” the company said, “and will enhance its ability to grow while maintaining the strength to withstand potential short-term market volatility.”

That all sounds pretty standard. But if AIG wants to strengthen its resources, why is it boosting its quarterly dividend by 10%, to 22 cents a share? Many other companies hitting shareholders up for new capital, such as Citi (C) and Fannie Mae (FNM), have slashed their payouts in a bid to preserve cash. Perhaps AIG is trying to show investors that it believes the upheaval in the markets is temporary and that the company is still operating from a position of strength. But Thursday’s quarterly loss report - including a $3.6 billion operating loss, excluding investment gains and losses - makes that argument seem a bit far-fetched. Shares fell 8% in postclose trading.

Fannie Mae (FNM) is tightening its belt. The big mortgage lender said Tuesday it would cut its quarterly dividend and raise $6 billion in new capital to replenish its accounts after its latest quarterly loss. Fannie lost $2.2 billion, or $2.57 a share, for the quarter ended March 31, reversing the year-ago profit of $961 million, or 85 cents a share. The latest quarter was hit by a sharp rise in credit costs,  Fannie said in a filing with the Securities and Exchange Commission. Its shares dropped 13% in early trading Tuesday.

“During the first quarter we saw heightened volatility in the secondary mortgage market, credit spreads that widened out to 22-year highs, and home prices that fell faster than expected,” said CEO Daniel H. Mudd. “Our first quarter results, although an improvement over the last quarter, reflect these challenging market conditions.” The latest quarter included $4.4 billion in fair value losses, reflecting markdowns on the value of Fannie’s derivatives holdings and trading positions.

The announcement comes just a day after Fed chief Ben Bernanke called on Fannie and sibling Freddie Mac (FRE) to play a bigger role in easing the pain of the U.S. housing bust. Fannie said in its filing Tuesday morning it will “announce a series of new initiatives called ‘Keys to Recovery’ on its Tuesday earnings conference call. The plan, which includes the refinancing of underwater loans, “is geared toward providing liquidity, stability and affordability to the housing and mortgage markets for the long term, keeping struggling borrowers in their homes, assisting prospective homebuyers with home purchases, and stabilizing communities affected by the mortgage market downturn,” the company said.

In part, the decision to raise new capital reflects both the declining health of the mortgage market and Fannie’s expanding role in treating those ills. Fannie said the capital-raising plan - which includes $2 billion in common stock and $2 billion in each of two classes of preferred stock - and the dime-a-share dividend cut, to 25 cents a share, will enable it “to operate and grow from a position of strength.” Judging by Tuesday’s market reaction, though, investors aren’t so sure.

Fed chief Ben Bernanke sees a big role for Fannie Mae (FNM) and Freddie Mac (FRE) in resolving the U.S. housing crisis. Speaking at a Columbia Business School dinner Monday night, Bernanke said the government-sponsored mortgage investors should “move quickly to raise significant new capital” to aid the housing market, Bloomberg reports. Bernanke also spoke in support of proposals that would have lenders forgiving parts of struggling homeowners’ loans and make Federal Housing Administration refinancings more widely available.

Calls for new capital at the big mortgage companies are nothing new. The director of Fannie and Freddie’s main regulator, James Lockhart of the Office of Federal Housing Enterprise Oversight, said in March that the companies may raise as much as $20 billion in new capital as part of a deal freeing them to expand their purchases of mortgage securities. The firms raised some $15 billion at the end of 2007 via preferred stock sales to replenish their coffers after two quarters of hefty losses tied to souring mortgages. Fannie Mae’s first-quarter earnings, due out Tuesday morning and expected to show a third straight quarterly loss, may offer a clue as to how much money the firms will need to raise.

Bad news for Wall Street means more business for BlackRock (BLK). The New York-based asset manager is in talks that could lead to its managing a fund made up of subprime mortgage-related assets being cast off by Swiss bank UBS (UBS), Bloomberg reports, citing two people with knowledge of the discussions. UBS said last month it would put its U.S. residential mortgage assets into a separate workout unit to provide “the greatest opportunity for shareholders to realize value over time.”

The news comes as UBS is preparing its first-quarter earnings report, which is due out Tuesday morning. Along with a writedown-heavy first-quarter loss of more than $11 billion, UBS is expected to lay out plans for thousands of job cuts as the bank reverses years of headfirst expansion.

A UBS assignment would only extend BlackRock’s already substantial impaired-assets business. The firm is managing a portfolio of BearStearns (BSC) assets that were cast aside by JPMorgan (JPM) back in March when the Fed oversaw a rescue of the cash-strapped brokerage firm. CEO Larry Fink said on BlackRock’s first-quarter conference call last month that the firm expects to see investors moving into distressed mortgage-related assets in coming months as fund managers and other yield-minded buyers move back into private-label securities from the safety of Treasuries. When they do, it appears BlackRock will have a number of options for them to look at.

Countrywide (CFC) sank 11% in morning trading Monday after an analyst said Bank of America (BAC) should walk away from its $4 billion deal to buy Countrywide, due to rising credit costs and souring loans at the troubled mortgage lender. Analyst Paul Miller at Friedman Billings Ramsey downgraded Countrywide to underperform from market perform and cut his price target to $2 from $7, saying Bank of America could face writedowns of $30 billion or more when it closes the Countrywide deal. He says BofA’s statement Thursday that it won’t guarantee Countrywide debt “is most likely the first step in renegotiating the entire deal.”

Miller estimates that Bank of America has a $22 billion cushion to absorb writedowns of Countrywide’s loan book. While that sounds like a big number, the analyst lays out a worst-case scenario that could see Bank of America taking $17 billion in writedowns on Countrywide’s home equity and second mortgage portfolio alone. The analyst says writedowns could reach $11 billion on Countrywide’s portfolio of option adjustable-rate mortgages (ARMs) and $5 billion on hybrid ARMs and other loans. Writedowns of that size could easily swamp the cushion Bank of America set aside when it agreed back in January to buy Countrywide for $7 or so in BofA stock.

“The issue of fair value marks was a significant part of the reason that National City (NCC) failed to find an acquirer,” Miller writes, referring to the Cleveland-based bank, which has taken large mortgage-related losses. “If fair value marks sufficiently exceed BAC’s projections at the time of its due diligence, we believe the deal price for the purchase of CFC could be renegotiated lower, or BAC could (and should) decide to walk away.”