Countrywide Friends Got Good Loans
Mozilo Sought, Received
Better Rates for Some;
Problems for Fannie Mae?
By GLENN R. SIMPSON and JAMES R. HAGERTY
June 7, 2008; Page B1
Countrywide Financial Corp. makes mortgage loans through a vast network of offices, brokers and call centers. But a few customers have gotten their loans a special way: through Countrywide Chief Executive Angelo Mozilo.
These borrowers, known internally as "friends of Angelo" or FoA, include two former CEOs of Fannie Mae, the biggest buyer of Countrywide's mortgages, say people familiar with the matter.
One was James Johnson, a longtime Democratic Party power and an adviser to Sen. Barack Obama's campaign, who this past week was named to a panel that is vetting running-mate possibilities for the presumed nominee. Another was Franklin Raines, a onetime Clinton administration budget director, who left Fannie Mae amid an accounting scandal in 2004.
There is nothing illegal about a mortgage firm treating some borrowers better than others. But if Fannie Mae officials received special treatment, that could cause a political problem for the government-sponsored, shareholder-owned company.
Its code of conduct, a spokesman said, "requires the disclosure of potential conflicts of interest and prohibits acceptance of substantial gifts, including loans with preferential terms, from an organization seeking to do business with the company without prior review and approval by the company." The spokesman said the code has been in effect since the early 1990s.
|Associated Press (top left); Reuters (2) |
|Two former Fannie Mae CEOs, James Johnson (top) and Franklin Raines (bottom), and Countrywide's Angelo Mozilo|
As for Countrywide, "I think it is potentially an accountability and internal controls issue," securities lawyer John Olson of Gibson, Dunn & Crutcher said. A comparison of the Fannie Mae officers' terms with interest rates prevailing when they got their loans raises the possibility Countrywide gave them preferential terms. But it's impossible to tell for sure from public documents. An array of other factors also can account for lower-than-average rates, including a borrower's income, total assets and credit score; how big the loan is compared with the home's value; and how many "points" a borrower may have paid upfront in order to get a lower rate.
One former Countrywide executive said the mortgage lender, the nation's largest, sometimes granted "moderate" concessions on rates for customers whose loans were handled by Mr. Mozilo or other top officers.These loans were reviewed by others at the company, the former executive said, and occasionally Mr. Mozilo had to be told the terms he had promised someone couldn't be granted.
Countrywide, which is based in Calabasas, Calif., declined to comment. Neither would Bank of America Corp., which has agreed to buy the default-battered mortgage lender for a fraction of its value a year ago, in a deal to be voted on by Countrywide shareholders June 25. Countrywide also is under federal investigation for possible securities fraud, according to law-enforcement officials and banking industry executives.
A lawyer for Mr. Johnson described his loan terms as well within industry practice. Mr. Raines didn't respond to requests to comment.
The Fannie Mae spokesman said he had no knowledge of whether Mr. Johnson or Mr. Raines got preferential rates.
Ed McMahon's Struggle
There is no indication the "Friends of Angelo" loans caused losses to Countrywide. But one borrower who is described by some as a FoA hasn't been able to pay his loan. Former Johnny Carson sidekick Ed McMahon faces possible loss of his home in Beverly Hills, Calif., according to a default notice a Countrywide unit filed in February. A spokesman for Mr. McMahon declined to comment on whether the entertainer dealt directly with Mr. Mozilo in taking out a $4.8 million Countrywide mortgage in 2005.
Mr. Johnson led Fannie Mae from 1991 to 1998. He and Countrywide's Mr. Mozilo worked together to streamline the underwriting process. Mr. Mozilo told Dow Jones in 1995 that he was "working very closely ... with Jim Johnson of Fannie Mae to come up with a rational method of making the process more efficient by the use of credit scoring." Their efforts helped to lead to a boom in mortgage lending that brought huge profits to both companies but is now ending badly.
Property records show Mr. Johnson has received more than $7 million in loans from Countrywide since 1998, the first coming in the waning days of his Fannie Mae tenure. He borrowed $392,950 on a row house in Washington's Dupont Circle neighborhood, with the rate set for the first five years at 6.375%.
At the time, initial rates for such loans ranged from about 6.2% to 6.5%, according to data compiled for The Wall Street Journal by HSH Associates Inc., which surveys lenders. Rates depend partly on how much borrowers pay in points, if any, to lower their interest charge. Records don't show whether Mr. Johnson paid points or if so how many.
Mr. Johnson returned to Countrywide several times to finance his growing real-estate holdings. In November 2001, he received a Countrywide loan of $1.3 million for a home in Palm Desert, Calif. The rate was 5.250% for five years, then became adjustable. Rates on such loans averaged about 6% to 6.2% about that time, HSH says.
In June 2003, Mr. Johnson obtained a $971,650 mortgage on a house in upper northwest Washington, D.C., with a rate of 3.875% for the first five years. About that time, the market average was about 4.3% to 4.9%, according to HSH.
In January 2006, Mr. Johnson got a $5 million home-equity line of credit from Countrywide on a residence in Ketchum, Idaho, near the Sun Valley ski resort. And in December 2007 he received a Countrywide home-equity line of credit for $1.01 million and executed a $1 million promissory note in connection with that home.
Asked about the loans, a lawyer for Mr. Johnson, Brian Brooks, wrote that "it appears that the arrangements you cite are well within the band of standard industry practices with regard to price and structure of loans to borrowers of Mr. Johnson's background." Mr. Johnson is now vice chairman of Perseus LLC, a merchant bank with offices in Washington and New York.
Mr. Raines, who succeeded Mr. Johnson at Fannie's helm at the end of 1998, became a repeat customer of Countrywide while he was CEO. Two days before Christmas in 1999, Mr. Raines got a $1 million loan on his house in upper northwest Washington, D.C., refinancing it in November 2001. Property records don't show the interest rate in either case.
In April 2003, Mr. Raines refinanced again with Countrywide, this time getting a 5.125% rate for the first 10 years. According to HSH, the average rate for such a loan around that time was about 5.5% to 5.7%.
On July 31, 2003, Mr. Raines refinanced again, this time shaving a full percentage point off his initial rate, to 4.125%. The market rate at that period averaged about 5.1% to 5.4%, HSH data show.
While his rate appears low, the variables in rate setting make it impossible to determine from publicly available information whether he got better terms than other borrowers with similar characteristics.
Mr. Raines's house, called Beechwoods, is a 98-year-old seven-bedroom stucco colonial with a pool, a movie theater and a shared tennis court, overlooking a national park, according to real-estate listings. It is now for sale for $7.595 million.
Mr. Raines, was forced to retire from Fannie Mae in 2004 when its regulator found it had violated accounting rules in an effort to conceal fluctuations in profit and hadn't maintained adequate risk controls. This April he agreed to a settlement that involved a donation of about $1.8 million to charity. He said the settlement was "not an acknowledgment of wrongdoing."
The loan documentation for at least some of loans to Messrs. Johnson, Raines and McMahon was prepared by a Countrywide employee named Silva Momjian, records state. She declined to comment.
Mr. Raines's successor as Fannie Mae CEO, Daniel H. Mudd, received two mortgage loans for about $3 million each in 2001 and 2003 while he was a Fannie Mae officer. A Fannie Mae spokesman said they were arranged by Mr. Mudd's personal financial adviser and reflected market rates, adding that Mr. Mudd didn't discuss the loans with any Countrywide executive.
Write to Glenn R. Simpson at email@example.com and James R. Hagerty at firstname.lastname@example.org