Tag Archives: Countrywide Financial

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.

 

Judge Rules Mozilo and Countrywide Execs Must Face Multi-Million Dollar Federal Lawsuit

Angelo R. Mozilo, the perennially smiling and suntanned CEO of subprime giant Countrywide Financial Corp., may have finessed the recent Congressional hearingson the millions in compensation given to the executives of financially devastated subprime lenders even as their investors lost billions, but he hasn’t been able to escape a multi-million dollar shareholder lawsuit filed against him in federal court.

The shareholder derivative action was filed on behalf of Countrywide by the Arkansas Teacher Retirement System, the Fire & Police Pension Association of Colorado, the Louisiana Municipal Police Employees Retirement System, the Central Laborers Pension Fund, and the Mississippi Public Employees Retirement System, against Mozilo and other senior Countrywide officers and the members of Countrywide’s board of directors.

The lawsuit alleges misconduct by the defendants and disregard for their fiduciary duties, including lack of good faith and lack of oversight of Countrywide’s lending practices, improper financial reporting and internal controls, as well as the unlawful sale by Citywide’s officers and directors of over $848 million of Countrywide stock between 2004 and 2008 at inflated prices while in possession of material inside information.

You can read the complaint here

Last week, Judge Mariana R. Pfaelzer of Federal District Court in Los Angeles rejected the attempt by Mozilo and other defendants to dismiss the case and ruled that the case could go forward.

Judge Pfaelzer didn’t buy the arguments of Countrywide executives and directors that they were unaware of lax loan operations that led to ballooning defaults.  Instead, she found that confidential witness accounts in the shareholder complaint were credible and suggested “a widespread company culture that encouraged employees to push mortgages through without regard to underwriting standards.”

The judge found that the plaintiffs identified “numerous red flags” that should have warned directors of increasingly risky loans made by Countrywide.  “It defies reason, given the entirety of the allegations,” Judge Pfaelzer wrote, “that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels. At the same time, it does not appear that the committees took corrective action.”

In fact, rather than taking corrective action, the judge found that Countrywide executives made numerous public statements, proxy statements, and SEC filings that falsely stated both the financial condition of the company and the efforts being made to control potential loses.

The judge concluded that the evidence presented by the plaintiffs “create 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.”

“During the relevant period, Plaintiffs assert that Countrywide began to approve even more risky loans that departed significantly from its established underwriting guidelines. While this increased the volume of loans originated by Countrywide and inflated its market share, this strategy also drastically lowered the quality of the loans and retained interests that Countrywide held for investment, as well as the quality of the mortgage-backed securities it sold into the secondary market. Plaintiffs contend that these low quality mortgages, many of which were approved with low or no documentation from the borrower, exposed Countrywide to a vast amount of undisclosed risk because loan quality is essential to virtually every facet of Countrywide’s business operations. Plaintiffs further assert that the Individual Defendants, due to their roles as members of certain Committees, proceeded with actual knowledge of these problems, or at least deliberate recklessness.”

It is expected that Mozilo’s $474 million in stock sales between 2004 and 2007 will get particular attention because he 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.”

In addition to Mozilo, the defendants include David Sambol (Countrywide Director since Sept. 2007, President and Chief Operating Officer, and various other executive positions), Jeffrey M. Cunningham Director since 1998), Robert J. Donato (Director since 1993), Martin R. Melone (Director since 2003), Robert T. Parry (Director since 2004), Oscar P. Robertson (Director since 2000), Keith P. Russell Director since 2003), Harley W. Snyder (Director since 1991), Henry G. Cisneros (Director from 2001-Oct. 2007), Michael E. Dougherty (Director from 1998-Jun. 2007), Stanford M. Kurland (President and Chief Operating Officer until 2006, and various other executive positions), Carlos M. Garcia (several executive positions and former Chief Financial Officer), and Eric P. Sieracki (Chief Financial Officer and Executive Managing Director).

One of the defendants, Countrywide Director Henry G. Cisneros, has had a particularly shaddy record since being forced to resign as President Clinton’s Secretary of Housing and Urban Development in 1997. Cisneros pled guilty to making false statements to federal officials in an investigation of illegal payments he made to his mistress. He was pardoned by Clinton in January 2001.

You can read the judge’s decision here.

UPDATE:

Read about Bank of America’s firing of David Sambol, Countrywide’s president and COO (and a principal defendant in the shareholder lawsuit).

 

FBI Expands and Intensifies Criminal Investigation of Mortgage Industry

The New York Times reported today that the federal taskforce established in January to investigate the mortgage industry is intensifying its efforts. 

The initial purpose of the taskforce, comprised of the Federal Bureau of Investigation and the criminal division of the Internal Revenue Service, as well as federal prosecutors in New York, Los Angeles, Philadelphia, Dallas and Atlanta, was to examine mortgages that were made with little or no documentation of the earnings or assets of the borrowers. 

The investigation is now also focusing on how these loans were bundled into securities.

The taskforce began with an investigation of 14 unnamed mortgage companies; in March, FBI Director Robert Mueller said that the FBI’s probe into potential mortgage fraud had grown to include investigations into 19 separate mortgage companies and involved an estimated 1,300 home mortgage fraud cases.

It is now believed that the investigation has expanded even further.

According to an unnamed official, the expansion of the probe was triggered by the financial industry’s disclosure last week of additional billions of dollars in write-downs from bad mortgage investments.

“This is a look at the mortgage industry across the board,” the official said, “and it has gotten a lot more momentum in recent weeks because of the banks’ earnings shortfalls.”

 

 

 

FBI Expands Probe of Mortgage Fraud — Now Involving 19 Mortgage Companies and 1,300 Cases. Reverse Mortgages Also Under Scrutiny.

The FBI is expanding its wide-ranging probe of the mortgage industry.

At a Senate hearing on Wednesday, FBI Director Robert Mueller said his agency is currently investigating an estimated 1,300 home mortgage fraud cases, and that the FBI’s probe into potential mortgage fraud now includes investigations into 19 separate mortgage companies.

The FBI, he said, has already “identified 19 corporate fraud matters related to the sub-prime lending crisis … targeting accounting fraud, insider trading, and deceptive sales practices.” 

Mueller also said that the FBI expected to expand its investigation even further. 

There was, he said, “no end in sight” to the growing number of fraud cases. 

“We’ve had a tremendous surge in cases related to the sub-prime mortgage debacle,” Mueller told a Senate Appropriations panel. “We expect them to grow even further.”

“I’m not sure at this point we can see the extent of the surge,” he added.

Mueller declined to go into the specifics of the investigation, but in previous announcements the FBI said it was looking into possible accounting fraud, insider trading or other violations in connection with loans made to borrowers with weak, or subprime, credit.

Mueller said he believes part of the problem is “rampant conflicts of interest in the corporate suites.” He said that FBI investigations “further emphasize the need for independent board members, auditors, and outside counsel. Shareholders rely on the board of directors to serve as the corporate watchdog. … [But] board members are often beholden to the executives they are expected to oversee.”

With one exception, the agency declined to identify the companies under investigation but has said that the inquiry, which began last spring, involves companies across the financial industry, including mortgage lenders, loan brokers and Wall Street banks that packaged home loans into securities.

The FBI has also said that the “hotspots” for its mortgage fraud investigations include California, Texas, Arizona, Florida, Ohio, Michigan, and Utah.

The one company that Mueller did acknowlege as being involved in the probe, Doral Financial Corp., had its former treasurer indicted last month for investment fraud. 

The FBI has also acknowledged in the past that the largest U.S. mortgage lender, Countrywide, is under investigation for misrepresenting its financial position and the quality of its mortgage loans.

It is also known that several major investment banks, including Goldman Sachs, Morgan Stanley, and Bear Stearns, have been asked to provide information to the government, and Beazer Homes has said that it had received a federal grand jury subpoena related to its mortgage business.

In addition to announcing an expansion of the number of cases and companies being investigated, Mueller also indicated a new direction for the FBI’s inquiry: reverse mortgages. 

Reverse mortgages release the equity in a property to the homeowner in one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves the home.  In the U.S., reverse mortgages are available for people 62 years old or older.

Reverse mortgages are typically used to finance retirement or pay unexpected medical bills.  While reverse mortgages can make sense for seniors, the FBI is concerned about possible abusive sales practices that prey on seniors, such as aggressive and untruthful marketing and excessive fees.

Mueller said that the increasing number of mortgage cases has forced the FBI to shift agents from other areas, such as health care fraud and other financial crimes, to focus on mortgage lending practices.

The FBI has also previously indicated that it is cooperating with the Securities and Exchange Commission, which is conducting more than three dozen civil investigations into how subprime loans were made and packaged, and how securities backed by them were valued. 

UPDATE:

For the latest news of the FBI’s expanding probe of the mortgage industry, click here.

 

Countrywide Closer to Indictment — And Still Making Zero Down-Payment Loans

Countrywide Home Loans is one step closer to possible federal criminal indictment following a bankruptcy judge’s decision to allow the Justice Department wide authority to investigate whether the largest U.S. mortage lender has serially cheated bankrupt borrowers in bankruptcy cases.

Judge Thomas P. Agresti of the U.S. Bankruptcy Court for the Western District of Pennsylvania said U.S. Trustee Kelly Beaudin Stapleton has the power to subpoena documents and question Countrywide officials under oath about questionable actions the lender allegedly took in borrower-bankruptcy cases.

Countrywide had argued that the U.S. trustee had limited authority to investigate specific issues in particular cases or proceedings and could not seek discovery related to general policies and procedures Countrywide followed in its business affairs.

The U.S. Trustee contends that Countrywide filed inaccurate proofs of claim, filed unwarranted motions for relief from the bankruptcy stay, inaccurately accounted for funds, and made unfounded payment demands to debtors after discharge.

According to Judge Agresti’s opinion in In re Countrywide Home Loans Inc., No. 07-00204, 2008 WL 868041 (Bankr. W.D. Pa. Apr. 1, 2008), similar allegations have been raised against Countrywide in at least 293 separate borrower-bankruptcy cases just in the Western District of Pennsylvania.

In addition, Countrywide has been accused of similar abuses against borrowers across the country, and faces additional trustee lawsuits in Georgia, Ohio and Florida.

The judge’s decision in Pennsylvania does not bind other bankruptcy courts, but it could influence judges in other courts as the Justice Department pursues alleged abuses by Countrywide in other states.

In rejecting Countrywide’s claim that allowing the probe would cause chaos in the mortgage industry, the judge wrote that “The U.S. Trustee has made a showing of a common thread of potential wrongdoing.”

“The apparent point of Countrywide’s argument is that recognizing the authority of the U.S. Trustee to conduct these examinations could have the unintended consequence of leading to an unregulated ‘free-for-all,”’ he continued. “The court find’s Countrywide’s argument … to be without merit.”

In 2006 Countrywide financed 20% of all mortgages in the United States.

Countrywide itself narrowly avoided bankruptcy due to its exposure to subprime mortgages when Bank of America agreed to purchase the home mortgage giant in January for $4.2 billion.

Countrywide is still in the business of making home loans, and according to a recent article in Slate.com, it is still making zero down-payment loans.

In some instances, according to the article, Countrywide is foreclosing on properties, then offering new buyers zero down-payment mortgages plus their own free appraisal of the foreclosed property.

According to the Countrywide Foreclosure Blog, Countrywide’s own website currently lists 14,541 bank-owned (REO) properties for sale with a combined asking price of $2,984,273,174.  The largest number of these properties, by far, are in California, with 4,493 properties with a combined asking price of $1,294,972,540.

UPDATE:

For an update on the federal judge’s decision to allow a multi-million dollar shareholders’ lawsuit against Angelo R. Mozilo and other Countrywide executives to proceed, click here.