Loan Data Focus of Probe
May Have Included
By GLENN R. SIMPSON
March 11, 2008
WASHINGTON -- Federal investigators probing the business practices of Countrywide Financial Corp. are trying to figure out what Countrywide knew -- or in some cases didn't know -- about the incomes and assets of thousands of its borrowers.
The investigators are finding that Countrywide's loan documents often were marked by dubious or erroneous information about its mortgage clients, according to people involved in the matter. The company packaged many of those mortgages into securities and sold them to investors, raising the additional question of whether Countrywide understated the risks such investments carried.
Countrywide, long the No. 1 mortgage company in the U.S. in terms of dollar value of loan originations, also was considered among the most aggressive in finding ways to make home loans to consumers whose qualifications couldn't be proved or seemed questionable, mortgage industry executives and analysts said. The Federal Bureau of Investigation has begun looking into its practices in pursuing such business, according to people close to the matter.
Shares of Countrywide dropped 14%, or 71 cents, to $4.36, in 4 p.m. composite trading on the New York Stock Exchange yesterday after The Wall Street Journal reported the federal securities-fraud inquiry, which is in an early stage. Bank of America Corp., which is in the process of acquiring the firm for $4 billion, said yesterday that it still plans to complete the purchase later this year. But the plunge in Countrywide's market capitalization to well below the acquisition price means many investors fear the deal may not go through.
A Countrywide spokeswoman didn't respond yesterday to phone calls and emails seeking comment. The company said Friday that it was unaware of any federal investigation. In court filings and public statements in response to lawsuits, it has denied any wrongdoing.
A criminal case in Alaska offers a look at the kinds of practices that have caught the attention of federal prosecutors during the subprime-mortgage crisis and its fallout. In that case, Kourosh Partow, a former Countrywide sales executive convicted of mortgage fraud, sought a lighter sentence on grounds that Countrywide and another subprime firm were aware that their loan documents "were fraught with inaccuracies," his lawyer alleged in a court filing. Executives at Countrywide and American Home Mortgage Investment Corp. "encouraged what could be characterized as manipulation," the filing alleges.
The FBI has said its investigations of the subprime industry are focusing on securitizations -- the process of bundling mortgages into pools and selling tranches to investors. "There are many disclosure issues" in a mortgage securitization, said Joshua Hochberg, former chief of the Justice Department's fraud section who now works at law firm McKenna Long & Aldridge LLP in Washington. "You have to disclose what percentage of the loans are performing and the adequacy of how the loans are underwritten. So there could be fraud if there are knowing and intentional lies in those financial statements." Mr. Hochberg said prosecutors and the Securities and Exchange Commission will examine "whether as things started going south anybody made an effort to keep the problems hidden."
In addition, he said, "The SEC will always look to see whether there is insider trading at a time when you have reason to believe that the loan portfolio is crumbling." Countrywide Chief Executive Officer Angelo Mozilo is the subject of investor lawsuits for selling more than $400 million in company stock in recent years. Mr. Mozilo said at a congressional hearing Friday that he began selling shares he obtained by exercising stock options in 2004 because he was heading toward retirement and wanted to diversify his investments.
Mr. Mozilo said Countrywide stock had accounted for nearly his entire net worth. He said he made his arrangements for phased sales of the stock only in the days immediately following the release of quarterly results so he wouldn't benefit from any exclusive information on how the company was doing. "The shareholders knew exactly what I knew," he said.
"When you securitize a pool of loans, you vouch for the quality of those loans," said mortgage-fraud expert Constance Wilson of software firm Interthinx Inc. "So they may be saying that if in fact Countrywide was aware of any [borrower] misrepresentation, then they couldn't represent and warrant the quality of those securities."
Banking analyst Bert Ely of Ely & Associates said dubious mortgage underwriting apparently was widespread. "If Countrywide's got a problem, everybody's got a problem," he said. Like other subprime lenders, Countrywide had an elaborate process for documenting a borrower's income and assets. But some of its underwriting products required borrowers to provide little to no documentation of their creditworthiness. As the market heated up between 2003 and 2006 and standards loosened, the use of these products increased.
In the Alaska case, Mr. Partow sold hundreds of loans for the company between 2001 and 2006, when he moved to American Home following an FBI inquiry into his loans at Countrywide. "During Partow's tenure the number of loans closed by Countrywide and American substantially increased," his lawyer's court filing states. "Both Countrywide and American profited by this approximate 2% to 10% increase in market share.
"In order to stay competitive, and increase sales, the companies...encouraged what could be characterized as manipulation," the filing asserts, through the selective use of financial information. Internal underwriters at Countrywide and American were supposed to confirm a borrower's eligibility, and "The underwriter had the authority to reject the loan." Yet few loans were rejected, according to the filing.
Countrywide has said it was a victim of his crimes; American Home is in liquidation in bankruptcy court.
Many of the suspected loans were called "stated" loans, in which a borrower was required to attest to his finances but wasn't required to provide proof. Underwriters allegedly were instructed not to check many details of these loans. "This was because those knowledgeable in the business understood that stated loan programs were fraught with inaccuracies," the filing alleged.