McCain’s Economic Plan: Blame Minorities

Fox News’ Neil Cavuto made news of his own this week by suggesting that the credit crisis was caused by loans made to minorities. 

On Fox’s “Your World” on September 18, Cavuto asked Rep. Xavier Becerra (D-CA), “[W]hen you and many of your colleagues were pushing for more minority lending and more expanded lending to folks who heretofore couldn’t get mortgages, when you were pushing homeownership … Are you totally without culpability here? Are you totally blameless? Are you totally irresponsible of anything that happened?” Cavuto also said, “I’m just saying, I don’t remember a clarion call that said, ‘Fannie and Freddie are a disaster. Loaning to minorities and risky folks is a disaster.’” 
 
This wasn’t the first time that Cavuto blamed loans to minorities for the credit crisis.  In an exchange with House Majority Leader Steny Hoyer (D-MD) on September 16, Cavuto said “[Y]ou wanted to encourage minority lending — obviously, a lot of Republicans did as well. There was a lot of — expand lending to those to get a home,” Cavuto then rhetorically asked, “Do you think, intrinsically, it was a mistake, on both parties’ part, to push — to push for homeownership for everybody?”  Unlike Becerra, Hoyer either didn’t understand what Cavuto was saying or simply rolled over. “I think clearly what happened,” Hoyer replied, “ is Fannie and Freddie got caught up in trying to do what the Congress wanted done.”

This is not just a generic attack on minorities.

What is going on here is an attempt by Republicans to deflect public outrage from the credit industry, the investment banks and their Republican deregulators and to place the blame for the crisis credit on the government and the Democrats. 

That’s why John McCain and his Republican apologists have focused their ire on the quasi-governmental institutions Fannie Mae and Freddie Mac rather than on the wholly private companies and individuals behind the credit meltdown.

Every time McCain or one of the Republican talking-pointers blasts Fannie Mae and Freddie Mac, the message is: “These are government institutions, run by Democrats. They caused the credit crisis by pushing the Democratic Party agenda, including homeownership for minorities who could not afford to buy homes and should have been content to be renters. Blame them, not us.”

But are they right?  How big a problem are loans to minorities?  And should any future regulation of the credit and mortgage industry eliminate the mortgages that allowed so many minorities to become homeowners?

The answer is No.

The facts show that there has been tremendous racial disparity in lending is growing, and that the subprime mortgage crisis has disproportionately affected minority borrowers. Banks such as JP Morgan Chase, Citigroup, Bank of America, and Countrywide issued high-cost subprime loans to minorities more than twice as often as to whites and, at some institutions, the number of high-cost subprime loans issued increased even amid a growing credit liquidity crisis.

Citigroup in 2007 made higher-cost subprime loans 2.33 times more frequently to blacks than to whites. During the same period, JP Morgan Chase made higher-cost subprime loans 2.44 times more frequently to blacks and 1.6 times more frequently to Hispanics than to whites. Bank of America extended to blacks higher-cost loans 1.88 times more frequently, and Country Financial extended to blacks higher-cost loans 1.95 times more frequently than to whites. A study released in 2006 found that blacks and Hispanics were often two or three times more likely to receive high-cost subprime mortgages than were white borrowers.

So, yes, minorities were very much more likely to receive high-cost subprime loans than whites. Yet as Robert J. Shiller of Yale University and Austan D. Goolsbee of the University of Chicago have pointed out, although minorities have been hit hard by the subprime bust, the overall affect of the subprime mortgage boom for minorities was mostly positive.

Both Shiller and Goolsbee think that minorities benefited tremendously by financial innovations created by the mortgage and banking industries, and they have cautioned against reacting to the subprime crisis by restricting innovative mortgage practices that allowed minorities greater access to the American Dream of home ownership than ever before.

In testimony before Congress in September 2007, Robert J. Shiller, professor of economics at Yale, author of the bestseller Irrational Exuberance and co-developer of the Case-Shiller National Home Price Index, put the issue in context.  As the news of the study findings hits the media, Shiller’s nuanced Congressional testimony is worth recalling:

“The promotion of homeownership in this country among the poor and disadvantaged, as well as our veterans, has been a worthy cause. The Federal Housing Administration, the Veterans Administration, and Rural Housing Services have helped many people buy homes who otherwise could not afford them. Minorities have particularly benefited.”

“Home ownership promotes a sense of belonging and participation in our country. I strongly believe that these past efforts, which have raised homeownership, have contributed to the feeling of harmony and good will that we treasure in America.”

“But most of the gains in homeownership that we have seen in the last decade are not attributable primarily due to these government institutions. On the plus side, they have been due to financial innovations driven by the private sector. These innovations delivered benefits, including lower mortgage interest rates for U.S. homebuyers, and new institutions to distribute the related credit and collateral risks around the globe.”

The same point was made by University of Chicago economics professor and Barack Obama economic advisor Austan D. Goolsbee in his essay in the New York Times entitled “‘Irresponsible Mortgages’ Have Opened Doors to Many of the Excluded.”

Goolsbee cautioned against the “very old vein of suspicion against innovations in the mortgage market.”  He cited a study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, “Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market,” showing that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans.” “These innovations,” Goolsbee observed, “mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital.”

Goolsbee wrote that these economists “followed thousands of people over their lives and examined the evidence for whether mortgage markets have become more efficient over time. Lost in the current discussion about borrowers’ income levels in the subprime market is the fact that someone with a low income now but who stands to earn much more in the future would, in a perfect market, be able to borrow from a bank to buy a house. That is how economists view the efficiency of a capital market: people’s decisions unrestricted by the amount of money they have right now.”

In regard to racism in mortgage lending, Goolsbee noted that “Since 1995, for example, the number of African-American households has risen by about 20 percent, but the number of African-American homeowners has risen almost twice that rate, by about 35 percent. For Hispanics, the number of households is up about 45 percent and the number of homeowning households is up by almost 70 percent.”

He concluded that “When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.”

In the search for villains in the credit crisis, Congress should be careful not to  eliminate the mortgages that have opened doors for many who have historically been excluded from homeownership and the American Dream.

It is also important to recognize that it was the Bush adminstration that pushed for greater access to homeownership for minorities, and specifically tasked Freddie Mac and Fannie Mae with expanding home loans to minorities.

As CNN reported on June 17, 2002:

“President Bush touted his goal Monday of boosting minority home ownership by 5.5 million before the end of the decade through grants to low-income families and credits to developers. ‘Too many American families, too many minorities, do not own a home. There is a home ownership gap in America. The difference between African-American and Hispanic home ownership is too big,” Bush told a crowd at St. Paul AME Church in Atlanta. Citing data he used Saturday in his weekly radio address, Bush said that while nearly three-quarters of white Americans own their homes, less than half of African-Americans and Hispanic-Americans are homeowners. He urged Congress to expand the American Dream Down-Payment Fund, which would provide $200 million in grants over five years to low-income families who are first-time home buyers. The money would be used for down payments, one of the major obstacles to home ownership, Bush said. … Fannie Mae, Freddie Mac and the federal Home Loan Banks — the government-sponsored corporations that handle home mortgages — will increase their commitment to minority markets by more than $440 billion, Bush said. Under one of the initiatives launched by Freddie Mac, consumers with poor credit will be able to obtain mortgages with interest rates that automatically decline after a period of consistent payments, he added.”

In the political battle over blame for the credit crisis, Democrats need to be careful both to counter claims that the crisis was caused by loans to minorities and also not to allow conservatives and Republicans to use the crisis as a pretext to scuttle these programs.

State of Washington Fines Countrywide for $1 Million for Discriminatory Lending — Will Seek to Revoke Countrywide’s License to Do Business in State

Washington Governor Christine Gregoire today announced plans by her state to fine Countrywide Home Loans $1 million for discriminatory lending.

In addition, the company will be required to pay more than $5 million in back assessments the company failed to pay.

Gregoire also announced the state is seeking to revoke Countrywide’s license to do business in Washington for its alleged illegal activity.

Joining Gregoire at today’s announcement was Deb Bortner, director of consumer services at the Washington state Department of Financial Institutions (DFI), and James Kelly, president of the Urban League of Metropolitan Seattle.

“The allegation that Countrywide preyed on minority borrowers is extremely troubling to me,” Gregoire said. “And I hope to learn eventually just how much this may have contributed to foreclosures in our state. The allegation offers evidence that Countrywide engaged in a pattern to target minority groups and engage in predatory practices.”

“That’s why we intend to bring the full weight of the state on Countrywide to rewrite home loans for minority borrowers who may have been misled into signing predatory mortgages,” the governor noted. “My job is to protect hard-working Washingtonians, and protect them we will.”

DFI is required to examine every home-lender licensed in the state of Washington. The agency conducted its fair lending examination of Countrywide last year. At that time, DFI looked at roughly 600 individual loan files and uncovered evidence that Countrywide engaged in discriminatory lending that targeted Washington’s minority communities. The agency also found significant underreporting of loans during its investigation.

“The Urban League is seeing far too many families caught up in the mortgage crisis who are being steered into bad loans,” stated James Kelly. “Today’s announcement from the governor is consistent with her message of protecting Washingtonians from national mortgage instability.”

DFI sent Countrywide a statement of charges on June 23, notifying the company of the fine and the back assessments the state plans to pursue.  Washington says that the investigation continues.

We have written on the disproportionate impact that the mortgage meltdown and housing crisis has had on minorities.

Washington’s action against Countrywide comes on the heels of lawsuits for fraud, deception, and unfair trade practices filed against Countrywide by the states of Illinois, California, and Florida.

 

Florida Joins States Suing Countrywide

Florida has joined Illinois and California as states suing subprime lender Countrywide Financial for deceptive and unfair trade practices.

The Florida lawsuit claims that Countrywide put borrowers into mortgages they couldn’t afford or loans with rates and penalties that were misleading.

As in the Illinois and California actions, Countrywide CEO Executive Angelo Mozilo was also named as a defendant.

Here you can read the complaint filed Broward County Circuit Court in Attorney General, Department of Legal Affairs, State of Florida v. Countywide Financial Corp., Countrywide Home Loans Inc., and Angelo Mozilo.

Here you can read our earlier reports on the Illinois and California lawsuits against Countrywide.

In filing the lawsuit, Florida Attorney General William “Bill” McCollum said that “It is unthinkable that a company would try to take advantage of someone’s dream of homeownership. Florida homeowners who are trying to protect their homes from foreclosures shouldn’t have to worry about their mortgage brokers or lenders unfairly profiting at their expense.”

“Similar to other mortgage lenders, Countrywide attempted to generate large numbers of mortgage loans for resale on the secondary mortgage market. In doing so, the company purportedly originated loans with little concern about whether the borrower could afford and maintain payments on these loans. In the process, the company allegedly eased or ignored its own underwriting standards and encouraged borrowers to enter into “teaser” rates while concealing or misrepresenting that much larger payments would become due.”

According to Marc Taps of Legal Services of North Florida, “Our legal services programs throughout the state have seen a large number of clients who are now in default on mortgages written by Countrywide. It appears to us Countrywide did no due diligence and accepted applications which were patently fraudulent and reflected no ability on the part of the borrowers to make the required payments. We cannot help but conclude that the most financially unsophisticated segment of the population was targeted by the brokers who knew Countrywide would write these mortgages.”

The lawsuit also claims that Countrywide hid any potentially negative effects of “teaser” loans, including rising rates, prepayment penalties and negative amortization, which borrowers would inevitably face if they were making minimum payments or trying to refinance.

Traditionally, lenders require borrowers to document income and assets, but investigators with the Attorney General’s Office believe Countrywide offered reduced or no documentation loan programs to increase its loan sales. Countrywide also allegedly paid greater compensation to brokers for loans with higher interest rates and prepayment penalties because it could sell those loans for higher prices on the secondary market.

The Florida Attorney General’s Office also asserts that “[Countrywide’s] deceptive marketing practices were supposedly designed to sell costly loans while hiding or misrepresenting the terms and dangers. Countrywide’s deceptive sales practices resulted in a large number of loans ending in default and foreclosure, with the company reporting earlier this year that more than 25 percent of its subprime loans were delinquent. The Attorney General’s Office received more than 150 complaints about Countrywide, prompting a subpoena in February and ultimately leading to today’s lawsuit.”

In a sign that the growing state legal assault on Countrywide is a bipartisan project, McCollum is the first Republican state attorney general to sue Countrywide.

As we’ve observed before, Countrywide’s expanding legal troubles do not bode well for Bank of America, which plans to acquire Countrywide.

Adding to the pressure on Bank of America to abandon the Countrywide deal, McCollum vowed that he would go after Bank of America’s assets to pay for the damages owed by Countrwide if the sale goes through.

Florida asks consumers who believe they have been victimized by Countrywide to call the Attorney General’s fraud hotline at 1-866-966-7226 or  file a complaint online at: http://myfloridalegal.com.

 UPDATE:

The state of Washington is expected to file a lawsuit against Countrywide soon, accusing Countrywide of discriminating against minority borrowers. The state wants to fine the mortgage lender and revoke its license to conduct business in the state.

California Sues Countrywide for Mortgage Deception

California has joined Illinois today as states suing beleaguered subprime mortgage giant Countrywide Financial Corp. for deceptive loan practices.

In a lawsuit filed this morning in Los Angeles Superior Court, California Attorney General Jerry Brown sued Countrywide Financial, its chief executive Angelo Mozilo, and president David Sambol, for engaging in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market.

The lawsuit alleges that Countrywide Financial used deceptive tactics to push homeowners into complicated, risky, and expensive loans so that the company could sell as many loans as possible to third-party investors. 

The complaint also alleges that the company marketed complex and difficult to understand loans with very low initial or “teaser” interest rates or payments. Countrywide employees, including loan officers, underwriters, and branch managers–who were under intense pressure to process a constantly increasing number of loans–misrepresented or obfuscated the fact that borrowers who obtained certain types of loans would experience dramatic increases in monthly payments.

Here you can read the complaint filed in California v. Countrywide Financial Corp, Full Spectrum Lending, Angelo Mozilo, and David Sabol.

According to the Calfornia Attorney General’s Office, “In the past, lenders like Countrywide sold home loans to customers and held the loans in their own portfolio, an incentive to maintain strong underwriting standards. Countrywide, however, sold its loans to third-parties in the form of securities or whole loans, often earning more profit for riskier loans. The business model generated windfall profits for Countrywide.”

“The company pushed these loans by emphasizing a low “teaser” or initial rate, often as low as 1 percent for pay option ARMs. Countrywide obscured the negative effects–including rising rates, prepayment penalties and negative amortization–which would inevitably result from making minimum payments or trying to refinance. The company misrepresented or hid the fact that borrowers who obtained its home loans–including exploding adjustable rates and negatively amortizing loans–would experience dramatic increases in monthly payments.”

“In an effort to rope in as many customers as possible, Countrywide greatly relaxed and liberally granted exceptions to its mortgage lending standards. Traditionally, lenders required borrowers to document income and assets but Countrywide offered reduced or no documentation loan programs to increase its loan sales. Angelo Mozilo and David Sambol actively pushed for easing underwriting standards and granting exceptions to documentation requirements.”

“In Countrywide’s 2006 annual report, the company touted the massive growth of its loan production from $62 billion in 2000 to $463 billion in 2006–three times the increase of the U.S. residential loan production market, which tripled from $1.0 trillion in 2000 to $2.9 trillion in 2006. 26 percent of Countywide loans were for California properties. The company sold an ever-increasing number of loans in an effort to gain a 30 percent market share of loan originations and then sell its loans on the secondary market, as mortgage-backed securities or pools of whole loans. Countrywide’s securities trading volume increased from $647 billion in 2000 to $3.8 trillion in 2006.”

“Countrywide routinely sold loans based upon a borrower’s stated income and without verifying the information. Loan officers memorized scripts that marketed low payments by focusing on the potential customer’s dissatisfaction, saying, for example, ‘Which would you rather have, a long-term fixed payment, or a short-term one that may allow you to realize several hundred dollars a month in savings?’ The loan officer did not state that the payment on this new loan would exceed the payment on the current loan.

“Countrywide paid greater compensation to brokers for loans with a higher interest rates, as well as prepayment penalties, because it could sell those loans for higher prices on the secondary market. Countrywide also paid rebates to brokers who originated loans with prepayment penalties, adjustable rates and high margins.”

“Countrywide operated an extensive telemarketing operation in which it touted its expertise and claimed to find the best financial options for customers. Customer Service representatives at Countrywide call centers were required to complete calls within three minutes, often processing sixty-five to eight-five calls per day. Employees who did not meet quotas were terminated. The company’s deceptive marketing practices, designed to sell costly loans while hiding or misrepresenting the terms and dangers, included:

• Encouraging borrowers to refinance or obtain financing with complicated mortgage instruments like hybrid adjustable rate mortgages or payment option adjustable mortgages;
• Marketing complex loan products by emphasizing a very low “teaser” rate while misrepresenting the steep monthly payments, increased interest rates and risk of negative amortization;
• Dramatically easing underwriting standards to qualify more people for loans;
• Using low or no-documentation loans which allowed no verification of stated income;
• Hiding total monthly payment obligations by selling homeowners a second mortgage in the form of a home equity line of credit;
• Making borrowers sign a large stack of documents without provider time to read the paperwork; and
• Misrepresenting or hiding the fact that loans had prepayment penalties.”

“As the secondary market’s appetite for loans increased, Countrywide further relaxed its standards to finance borrowers with ever-decreasing credit scores. Countrywide employees routinely overrode the company’s computerized underwriting system, known as CLUES, which issued loan analysis reports recommending or discouraging loans based on factors such as a consumer’s credit rating. As the pressure to produce loans increased, Countrywide set up an entire department in Plano, Texas, at the direction of Mozilo and Sambol, where employees could submit requests for underwriting exceptions. In 2006, 15,000 to 20,000 loans a month were processed through this exception process.>

“Countrywide’s deceptive sales practices resulted in a large number of loans ending in default and foreclosure. According to Countrywide’s February 2008 records, a staggering 27 percent of its subprime mortgages were delinquent. Overall, approximately 20,000 Californians lost their homes to foreclosure in May 2008 and 72,000 California homes were in default, roughly 1 out of 183 homes.”

“Despite receiving numerous complaints from borrowers claiming that they did not understand their loan terms, Countrywide ignored loan officer’s deceptive practices and loose underwriting standards. Countrywide also pushed its borrowers to serially refinance, repeatedly urging borrowers to obtain home loans to pay off their current debt.”

The California Attorney General’s Office asks that consumers who believe they have been victimized by Countrywide Consumers should file a complaint by contact the Attorney General’s Public Inquiry Unit in writing at Attorney General’s Office California Department of Justice Attn: Public Inquiry Unit P.O. Box 944255, Sacramento, California or through an online complaint form available at http://ag.ca.gov/contact/complaint_form.php?cmplt=CL

 

Illinois Sues Countrywide and Mozilo For Fraud and Deception

In the first state action against Countrywide Financial, the Attorney General of Illinois is suing Countrywide and its chief executive, Angelo Mozilo, claiming that the company and its executives engaged in unfair and deceptive practices that defrauded borrowers by selling them costly and defective loans that quickly went into foreclosure.

Here you can read the complaint in Illinois v. Countrywide Financial Corp., Countywide Home Loans Inc., Full Spectrum Lending, Countrywide Home Loans Servicing LP, and Angelo R. Mozilo. 

The lawsuit, which will be filed on Wednesday in Cook County, accuses Countrywide and Mozilo of improper underwriting standards, structuring loans with risky features, and misleading consumers with hidden fees and fake marketing claims, including its still heavily advertised “no closing costs loan.” 

The complaint also alleges that Countrywide created incentives for its employees and brokers to sell questionable loans by paying them more on such sales.

The lawsuit asks for an unspecified amount of monetary damages and requests that the court require Countrywide to rescind or reform all the questionable loans it sold from 2004 through the present. 

In addition, the lawsuit asks the Court to require that Mozilo personally contribute to paying the damages.

Illinois Attorney General Lisa Madigan also asks the court for 90 days to review any loans currently in foreclosure or moving toward foreclosure.

The complaint states that Countrywide was the largest lender in Illionis from 2004 through 2006, selling about 94,000 loans to consumers in the state. The company operated about 100 retail branch offices in Illinois and its loans were also offered by Illinois mortgage brokers. Countrywide also purchased loans through a network of 2,100 correspondent lenders in the state.

The complaint also describes dubious practices in Countrywide’s huge servicing arm, which oversees $1.5 trillion in loans. 

For example, the complaint alleges that an Illinois consumer whose Countrywide mortgage was in foreclosure came home to find that the company had changed her locks and boarded up her home, although no judgment had been entered and no foreclosure sale conducted, and that It took a week for the homeowner to regain access to her home.

Attorney General Madigan claims that “People were put into loans they did not understand, could not afford and could not get out of. 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 lawsuit is being filed on the same day that Countrywide’s shareholders will meet to decide whether to agree to a sale of the company to Bank of America.

We’ve written before about why we think that Bank of America will ultimately pull out of the deal. 

Adding to the arguments that we earlier made against Bank of America’s purchase of Countrywide, the New York Times notes that “The lawsuit adds to the considerable legal risks facing Bank of America as it prepares to absorb Countrywide in a takeover announced in January. Countrywide and its executives have been named as defendants in shareholder lawsuits, and the company’s practices are the subject of investigations by the Securities and Exchange Commission, the F.B.I. and the Federal Trade Commission, which oversees loan servicing companies.”

In addition to the Illinois lawsuit, at least three lawsuits against Countrywide have been filed by offices of the U. S. Trustee, part of the Department of Justice that monitors the bankruptcy system,  contending that Countrywide’s loan servicing practices were an abuse of the bankruptcy system.

Countrywide CEO Angelo Mozilo also has troubles of his own. 

Mozilo is the subject of a Securities and Exchanges Commission investigation into his sales of Countrywide stock before the price imploded; from 2005 to 2007 Angelo R. Mozilo sold much of his Countrywide stock realizing $291.5 million in profits.

And, as we’ve reported, Mozilo is at the center of the new controversy regarding recent revelations that politically connected “Friends of Angelo,” including  U.S. Senators Christopher Dodd (D- Conn.) and Kent Conrad (D-N. Dak.), as well as members of both the current Bush and previous Clinton administrations, got special “V.I.P.” loans with extremely favorable terms from Countrywide.

In the last three quarters, Countrywide reported $2.5 billion in losses, and in the first quarter of 2008, total nonperforming assets reached $6 billion, almost five times that of the same period last year.

UPDATE:

California has also sued Countrywide for deceptive practices. 

You can read the story here.

You can also read the complaint in California v. Countrywide Financial Corp, Full Spectrum Lending, Angelo Mozilo, and David Sabol.

 

The “Friends of Angelo” — Countrywide’s Sweetheart Loans to Washington Big-Shots

The scandal involving special “sweetheart” loans to politicians and Washington insiders by Countrywide Financial is both heating up and widening.

Earlier this week, James A. Johnson was forced to step down as head of Barack Obama’s vice president selection team when it was revealed that he had profited from special deals on three home loans with Countrywide that were approved by Countrywide founder Angelo Mozilo only for his “close friends.”

At that time, we wrote that “Given its central role in the subprime mortgage debacle, it is no surprise that Countrywide Financial has become politically radioactive. The most recent evidence for the politically deadly consequences of an association with Countrywide or its corporate officers is the sudden and ungraceful exit of businessman James A. Johnson, a long time Washington insider and lobbyist, from Barack Obama’s vice-presidential selection team.”

Now it appears that Mozilo had a much larger circle of “close friends” in Congress and in recent Democrat and Republican administrations than was originally supposed, and that sweatheart loan deals were given by Countrywide to a wide array of Washington politicians and big-shots.

The “Friends of Angelo” list is now known to include Senator Christopher Dodd (D-Conn.), Senator Kent Conrad (D-N. Dak.), Bush’s Secretary of Housing and Urban Development Alphonso Jackson, former Clinton Secretary of Health and Human Services Donna Shalala, and former U.N. ambassador and Clinton Assistant Secretary of State Richard C. Holbrooke.

According to Portfolio.com, which broke the story:

“Most of the officials belonged to a group of V.I.P. loan recipients known in company documents and emails as “F.O.A.’s”—Friends of Angelo, a reference to Countrywide chief executive Angelo Mozilo. While the V.I.P. program also serviced friends and contacts of other Countrywide executives, the F.O.A.’s made up the biggest subset. According to company documents and emails, the V.I.P.’s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value.”

“For V.I.P.’s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free ‘float-down’ to the lower rate, eschewing its usual charge of half a point. Some V.I.P.’s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.”

“Unless they asked, V.I.P. borrowers weren’t told exactly how many points were waived on their loans, the former employee says. However, they were typically assured that they were receiving the ‘Friends of Angelo’ discount, and that Mozilo had personally priced their loans.

“The V.I.P. loans to public officials in a position to advance Countrywide’s interests raise legal and ethical questions. Countrywide’s ethics code bars directors, officers and employees from ‘improperly influencing the decisions of government employees or contractors by offering or promising to give money, gifts, loans, rewards, favors, or anything else of value.’ Federal employees are prohibited from receiving gifts offered because of their official position, including loans on terms not generally available to the public. Senate rules prohibit members from knowingly receiving gifts worth $100 or more in a calendar year from private entities that, like Countrywide, employ a registered lobbyist.”

So far, neither Senator Dodd nor Senator Conrad have admitted any wrongdoing, and both claim that they did nothing for Mozilo or Countrywide in return for their sweetheart deals.

Dodd, who is chairman of the Senate Banking Committee, claims that he never inquired or even wondered whether his special status with Countrywide might be related to his position as a senator or as Banking Committee chairman.

“Well, I don’t know we did anything wrong here,” Dodd said at a press conference. “I negotiated a mortgage at a prevailing rate, a competitive rate. If anyone had said to me, ‘We’re giving you some special treatment here,’ I would have rejected it. So no, I don’t feel at this point that I have any obligation. I did what I was supposed to do. I did what millions of other people did.”

Conrad, who is chairman of the Senate Budget Committee and a member of the Senate Finance Committee, has said that he gave the money he saved on his special deal with Countrywide to charity.

We hope that Congress vigorously investigates this scandal, and that it fully exposes those who benefited from special deals with Countrywide while they were on the public payroll.

 

FBI Hits Mortgage Fraud with “Operation Malicious Mortgage” — 400+ Indictments and the Arrests of Two Bear Stearns Execs

The FBI announced today that the Justice Department’s crackdown on mortgage fraud has resulted in more than 400 indictments since March — including dozens over the last two days.

Those arrested run the gamut of players in the mortgage industry, including lenders, real estate developers, brokers, agents, lawyers, appraisers, and so-called straw buyers.

The Department of Justice’s name for the crackdown is “Operation Malicious Mortgage,” which it describes as “a massive multiagency takedown of mortgage fraud schemes.”

According to the FBI, the on-going “Operation Malicious Mortgage” focuses primarily on three types of mortgage fraud — lending fraud, foreclosure rescue schemes, and mortgage-related bankruptcy schemes.

“To persons who are involved in such schemes, we will find you, you will be investigated, and you will be prosecuted,” said Federal Bureau of Investigation Director Robert Mueller. “To those who would contemplate misleading, engaging in such schemes, you will spend time in jail.”

In its statement, the FBI said that “Among the 400-plus subjects of Operation Malicious Mortgage, there have been 173 convictions and 81 sentencings so far for crimes that have accounted for more than $1 billion in estimated losses. Forty-six of our 56 field offices around the country took part in the operation, which has secured more than $60 million in assets.”

While most of those indicted so far are relatively small players in the industry-wide fraud crisis, Mueller today repeated his earlier promise that federal authorities are not ignoring the major players in the mortgage industry, but are investigating some “relatively large corporations” as part of its sweeping mortgage-fraud probe, including some 19 large companies, including mortgage lenders, investment banks, hedge funds, credit-rating agencies and accounting firms.

Most of these corporate fraud investigations, said Mueller, deal with accounting fraud, insider trading, and the intentional failure to disclose the proper valuations of securitized loans and derivatives.

The FBI’s announcement of Operation Malicious Mortgage coincided with the indictment and arrest in New York on Thursday of two former Bear Stearns managers, Ralph R. Cioffi and Matthew Tannin, who are charged with nine counts of securities, mail and wire fraud resulting in $1.4 billion in losses on mortgage-related assets.

According to the New York Times,  Cioffi and Tannin “are the first senior executives from Wall Street investment banks to face criminal charges, and the investigation by federal prosecutors based in Brooklyn is likely to become a test case of the government’s ability to make successful prosecutions of arcane financial transactions.”

“This is not about mismanagement of a hedge fund investment strategy,” said Mark J. Mershon, the head of the New York office of the Federal Bureau of Investigation at a news conference Thursday afternoon. “It’s about premeditated lies to investors and lenders. Its about the defendants prostituting their client’s trust in order to salvage their personal wealth.”

 

Obama and McCain Discover that Ties to Countrywide and Banking Industry are Political Kryptonite

Given its central role in the subprime mortgage debacle, it is no surprise that Countrywide Financial has become politically radioactive.

The most recent evidence for the politically deadly consequences of an association with Countrywide or its corporate officers is the sudden and ungraceful exit of businessman James A. Johnson, a long time Washington insider and lobbyist, from Barack Obama’s vice-presidential selection team.

Johnson was chosen by Obama to lead the group, which also includes Caroline Kennedy Schlossberg and Eric Holder, that would help him select a running mate. The appointment seemed obvious, if uninspired, since Johnson is an old Democratic Party insider who played a similar role in selecting the vice presidential choices for both Walter Mondale and John Kerry.

But last week, Johnson came under withering fire for his association and possible sweetheart deals with former Countrywide chairman Angelo Mozilo. Specifically, Johnson was charged with having profited from special sweetheart deals on three home loans, with usually preferential mortgage terms, approved by Mozilo as the head of the Countrywide only for his close friends.

Bloomberg.com reports that “Angelo Mozilo, the chief executive officer of Countrywide, the biggest U.S. home lender, may have given Johnson and other friends good deals on mortgages, the Wall Street Journal reported on June 7, citing unidentified people familiar with the matter. The newspaper didn’t provide any specifics on whether favors were granted. Since then, Johnson’s position on the search committee has drawn criticism from Republicans who noted that Obama, the presumptive Democratic nominee, repeatedly denounced Countrywide for its role in the subprime-mortgage crisis.”

It was soon discovered that Johnson had other political liabilities, including criticism for his role as chairman and chief executive officer of the Federal National Mortgage Association (Fannie Mae) from 1991 to 1999, and also faced questions about his role on corporate compensation committees that awarded large payouts to corporate executives.

As New York Times columnist Gail Collins pointed out, “Johnson is the former head of Fannie Mae, which under his direction, according to regulators, engaged in accounting practices that were, at best, sloppy. At the same time, he sat on the boards of five different corporations, where he appeared to serve as cheerleader for the theory that corporate executives deserve to be paid obscene amounts of money. How does someone go up to Barack Obama, who once sponsored a bill to curb excessive executive compensation, and say — ‘You know the vice-presidential search committee? For chairman, how about Jim Johnson? Remember, the guy who tried to give the head of United Health Group $1.4 billion in stock options?'”

Although Republicans are pleased with Johnson’s departure — or at least with the embarrassment to Barack Obama caused by the Johnson episode — John McCain has his own toxic subprime-association worries.

Former Senator Phil Gramm (R-Texas), now serving as John McCain’s chief economic advisor, has been called “the father of the mortgage meltdown and financial crisis.”

Gramm spearheaded sweeping changes in federal banking law, including the Gramm-Leach-Bliley Act in 1999, which repealed previous rules separating banking, insurance and brokerage activities, and which some analysts blame for creating the legal framework for the current mortgage meltdown and credit crisis.

In addition, New York Times columnist Paul Krugman observed that “According to federal lobbying disclosure records, Gramm lobbied Congress, the Federal Reserve and Treasury Department about banking and mortgage issues in 2005 and 2006. During those years, the mortgage industry pressed Congress to roll back strong state rules that sought to stem the rise of predatory tactics used by lenders and brokers to place homeowners in high-cost mortgages.”

Gramm is also under fire for his connection with Swiss investment banking giant UBS, which is the subject of a federal investigation into whether it helped wealthy clients to use offshore accounts to hide as much as $20 billion in assets from the Internal Revenue Service and dodging at least $300 million in federal taxes. Gramm is vice-chair of UBS Securities, UBS’s investment arm.

The New York Times reports that “The case could turn into an embarrassment for Marcel Rohner, the chief executive of UBS and the former head of its private bank, as well as for Phil Gramm, the former Republican senator from Texas who is now the vice chairman of UBS Securities, the Swiss bank’s investment banking arm.”

So far, McCain has rejected calls to remove Gramm from his inner circle. But our guess is that, fairly soon, Gramm will join Jim Johnson in the growing Class of 2008 Ex-Presidential Candidate Advisors Club.

UPDATE:

For more on Phil Gramm, John McCain, and UBS, click here.

Why Bank of America Won’t Acquire Countrywide

The New York Times reports today that Bank of America is still firmly committed to acquiring crippled mortgage giant Countrywide Financial. 

After reading the article, we’re convinced that the deal isn’t going to happen.

According to the Times, Bank of America’s chief executive Kenneth D. Lewis “confirmed his commitment to the Countrywide buyout, which is expected to close by the end of September. When asked about the fact that home prices have plummeted and loan defaults have soared since the deal was announced, Mr. Lewis defended it as ‘compelling’, with a ‘pretty nice’ upside. ‘We don’t have our heads in the sand,’ he said.”

But the facts are that Countrywide has lost $2.5 billion in just the last three quarters. As the Times noted, in the first quarter of 2008, Countrywide’s total nonperforming assets hit $6 billion, almost five times that of the same period last year.

Countrywide has more than $95 billion in loans held for investments on its books, many of them adjustable-rate mortgages written on properties in California and Florida, where prices are still falling. Moreover, $34 billion of these loans are home equity lines of credit and second liens, which are riskier because they are more likely to generate losses when home values fall.

In addition, the Times said, “Countrywide has $15.6 billion in mortgages and related securities that it hopes to sell. Of these, $10.4 billion are so-called Level 2, and hard to value because the market for them is inactive. An additional $5.1 billion are valued on internal company models, not market prices.”

The Times quoted several analysts who think that the Countrywide deal is a bad move.

Paul J. Miller, managing director at the securities firm Friedman, Billings, Ramsey, which has published a report analysing the acquisition, called the purchase of Countrywide by Bank of America “a horrible deal.” 

Miller estimates that the deal will cost Bank of America an additional $10 billion to $15 billion above the $4 billion purchase price when a final accounting of losses is made.  Miller also said that Bank of America could face write-downs of up to $30 billion if goes ahead with buying Countrywide.

Instead, Miller think that Bank of America should  “completely walk away” from the deal.

Bloomberg News also points out the potential disaster awaiting Bank of America if it goes ahead with the Countrywide deal. 

Bloomberg observes that Bank of America stock has dropped 17 points since the deal was announced, and quotes Christopher Whalen of Institutional Risk Analytics as saying that “If Ken Lewis pulls the trigger on Countrywide, he’s going to lose his job. It’s so early in the cycle of this housing downturn, you almost know that they are going to go wrong.”

Further, as the subprime mortgage industry collapsed and took much of the national economy with it, Countrywide and its executives have been hit with a barrage of criticism, investigations, and lawsuits, and could even face criminal charges. 

Even with its decision last week to jettison Countrywide COO David Sambol (who it had onced pledged to keep on board), Bank of America is likely to come under sharp criticism for its association with the Countrywide, which has become the poster-child for the greed, mismanagement, false advertising and outright fraud that led to the subprime meltdown.

As law professor Carl Tobias is quoted as saying, “there ought to be concern on Bank of America’s part as to reputation and what these bankruptcy trustees and judges are saying.”

There are some signs that the deal is falling apart even as the Federal Reserve gave the deal its blessing. Last month, Bank of America  said in a filing that it’s not promising to guarantee the debt of Countrywide.

Our guess is that the Times article is, in fact, part of an exit strategy by Bank of America, and that it will soon find a compelling reason to back out of the deal.

 UPDATE:

We were wrong here — Bank of America purchased Countrywide on July 1. 

According to Bank of America CEO Kenneth D. Lewis, “This purchase significantly increases Bank of America’s market share in consumer real estate, and as our companies combine, we believe Bank of America will benefit from excellent systems and a broad distribution network that will offer more ways to meet our customers’ credit needs.”

In a press release, Bank of America vowed to make changes in the way Countrywide operates its mortgage business and stressed a new approach meant to change the company’s image:

“Bank of America will pursue a new goal to lend and invest $1.5 trillion for community development over the next 10 years beginning in 2009. The goal will focus on affordable housing, economic development and consumer and small business lending and replace existing community development goals of both companies. Bank of America also previously announced a $35 million neighborhood preservation and foreclosure prevention package by both companies focusing on grants and low-cost loans to help local and national nonprofit organizations engaged in foreclosure prevention, and to purchase vacant single-family homes for neighborhood preservation. The combined company will modify or workout about $40 billion in troubled mortgage loans in the next two years and these efforts will keep an estimated 265,000 customers in their homes. The combined loss mitigation staffs will be maintained at the level of more than 3,900 for at least one year.”

But most analysts — and some major Bank of America shareholders — are still wondering what Lewis could be thinking in taking on Countrywide’s horrendous public image, its debt, and its expanding liability in numerous lawsuits.

A Bad Week for Countrywide’s David Sambol

This was not a good week for Countrywide president and COO David Sambol. 

First, a federal court refused to dismiss a shareholder suit against Sambol and other executives and directors of Countrywide.

The lawsuit that alleges that Sambol and the other defendants violated their fiduciary duties by lack of good faith and lack of oversight of Countrywide’s lending practices, improper financial reporting and internal controls, and the unlawful sale of over $848 million of Countrywide stock between 2004 and 2008 at inflated prices based on material inside information.

In refusing to dismiss the case, the judge said that the evidence presented by the plaintiffs “create[s] a cogent and compelling inference that the Individual Defendants misled the public with regard to the rigor of Countrywide’s loan origination process, the quality of its loans, and the Company’s financial situation – even as they realized that Countrywide had virtually abandoned its own loan underwriting practices.”

The plaintiffs are seeking millions of dollars in damages.

Second, Sambol was given the heave-ho by Bank of America, the new boss at Countrywide.

When Bank of America announced plans to take over Countrywide in January, CEO Ken Lewis said Sambol would continue to lead the entire mortgage business for B of A once the merger was complete. Sambol was even given a retention bonus of $1.9 million and 335,126 restricted stock units. 

Then in March, Bank of America agreed to set up a $20 million retention account for Sambol, plus $8 million in restricted stock.

But that was then. 

This is now:  

Bank of America announced this week that Sambol is being replaced by Barbara Desoer, B of A’s chief technology and operations officer.

One of the allegations in the shareholder suit is that Bank of America “bought” Sambol’s support for its takeover of Countrywide with extravagant remuneration offers and the promise that he would run the combined company’s consumer mortgage business.

Now it appears that Sambol, along with Countrywide CEO Angelo Mozilo, are too tied to the subprime mortgage debacle and the foreclosure crisis  — and perhaps unlawful stock sales and other breaches of fiduciary duties — for Bank of America to keep around.