Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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Nye Lavalle

Countrywide Seeks Rescue Deal Bank of America Eyes Stricken Home Lender As Crisis Grinds On

January 11, 2008
Bank of America Corp. is near agreement to take over tottering mortgage giant Countrywide Financial Corp., in a move that could build a bulwark against the mortgage-default crisis by protecting one of its biggest casualties from collapse.

Bank of America had insisted for months no takeover was in the works, but people familiar with the talks said a deal could come very soon. It isn't clear how much Bank of America, the largest U.S. bank in stock-market value, has offered for Countrywide, the bigest mortgage lender, whose stock has dropped 88% from its recent high. It is still possible that an agreement could be delayed or fall apart. For federal approval, the deal could depend on exploiting a little-known regulatory loophole to allow the merged bank to hold more than 10% of the nation's deposits.

But Countrywide's fall and expected rescue mark a milestone in the unfolding international financial crisis. The turmoil was triggered a year ago by the bust of the American housing market and the resulting wave of mortgage defaults, but it is spreading -- and authorities are struggling to contain it.

A weakening economy and rising mortgage delinquencies have begun to feed off each other in a dangerous spiral, as falling home values and tightening credit begin to sap consumers' spending. Chain stores yesterday reported weak December sales, and American Express Co. reported reduced spending and increased delinquencies among customer base, known for being upscale. Unemployment last month jumped and economists have dramatically raised the odds of a recession to 42%, according to the latest survey.

To combat those trends, Federal Reserve Chairman Ben Bernanke yesterday indicated a new willingness to cut interest rates more deeply. That came after the Bush Administration began floating the idea of direct economic stimulus such as tax rebates. Bank of America's move provided an immediate shot in the arm, as the battered stocks of Countrywide and some other mortgage lenders rose on optimism that the possible takeover by Bank of America could signal an end to the relentless bad news from lenders.

More broadly, a failure of Countrywide would have posed a major risk to the U.S. economy, since the lender services about one of every six loans in the country. Bankruptcy likely would have shifted huge financial risk to Fannie Mae and Freddie Mac. A Treasury spokesman said agency officials played no role in any talks about a rescue by Bank of America.

Bank of America declined to comment on any deal, citing a longstanding policy on not commenting on rumors and speculation. Countrywide representatives didn't immediately respond to a request for comment.

Countrywide's acquisition would mark the end of a mortgage lender long known as an innovator, survivor of slumps and fierce competitor that rocketed to No. 1 in U.S. mortgage lending by the early 1990s. It has remained the biggest by hiring thousands of loan officers from rivals that merged, and lowering its lending standards along with others -- leading to rising defaults recently.

During the housing boom, Countrywide was a big promoter of option adjustable-rate mortgages, which give borrowers choices of how much to pay each month and can increase a loan's balance. A smaller chunk of Countrywide's business came from subprime loans, but the lender was exposed to many past subprime loans and other risky loans it sold.

"From the Countrywide stockholder perspective, this is manna from heaven," said analyst Richard X. Bove of Punk Ziegel & Co. "They've got this lousy stock and if Bank of America paper replaces Countrywide paper, they own one of the best banks in the country and they're bailed out."

For Bank of America, the deal would instantly allow it to realize its ambition of becoming a mortgage giant. But it also would bring some ticking time bombs, whose powers to destroy value won't be clear at least until the housing market bottoms out, which may not be for a year or more.

Bank of America has more than $100 billion in its own home-equity loans, second mortgages that have shown signs of strain as the housing crisis spreads. Bank of America would be taking on another $32.47 billion in Countrywide home-equity loans. Though Countrywide has virtually stopped making subprime loans, it has exposure to its past originations. As of Sept. 30, Countrywide's savings bank held $26.84 billion of option adjustable-rate mortgages, which allow borrowers to start with minimal payments and face far higher ones later.

These two categories of high-risk loans accounted for three-quarters of Countrywide's loan holdings at the end of the third quarter. Countrywide says some of that risk is covered by mortgage insurance, but some investors are nervous about mortgage insurers ability to pay off all the claims they face in the next few years.

Bank of America has also already strained its capital levels by paying $21 billion for Chicago's LaSalle Bank over the summer, and could risk more capital if Countrywide faced big write-downs.

Another worry is that investors in mortgage securities are looking for chances to force Countrywide to repurchase many of the loans it sold in recent years. Provisions of those sales require repurchases in some cases, such as when loans default early or otherwise don't live up to the "representations and warranties" provided by Countrywide at the time of the sale. "It is our intention to defend our positions vigorously," the company said in a recent securities filing.

A purchase of Countrywide, however, could be coming at a big discount, and could ease the losses Bank of America has suffered on investment in the company in August., Then, it bought preferred shares convertible to a 16% stake for $2 billion. Just since then, Countrywide's stock has fallen by about half. Its overall market value has sunk to just $3 billion -- equivalent to about two months of profit for Bank of America.

Countrywide's stock has plunged in recent days amid intensifying anxiety among investors, and Countrywide was forced to deny earlier this week that it planned to file for bankruptcy.

Bank of America has been seen as a potential buyer of the troubled lender since buying the stake in August. The Charlotte, N.C., company has first right of refusal in any sale of Countrywide, and Bank of America has a long history of opportunistic takeovers of banks facing distress.

There appeared to be a big obstacle after the Federal Reserve approved Bank of America's acquisition of LaSalle in September. The combined bank grew to hold 9.88% of the country's deposits. Federal law prohibits a bank holding company from controlling more than 10% of U.S. deposits after acquiring another bank.

But the law includes a caveat: The 10% limit doesn't apply to federally chartered thrifts, meaning a bank-holding company may control more than 10% of deposits in the U.S. following a thrift acquisition. Since a Countrywide subsidiary called Countrywide Bank is a federally insured thrift, that may give Bank of America room to maneuver around the deposit cap.

Bank of America is the only bank that has ever neared the 10% deposit cap. Many seasoned banking attorneys were not familiar with the caveat, as no bank has ever tried to acquire a thrift to vault above the 10% limit.

"This could be the biggest loophole in the world," said Gilbert Schwartz a partner at Schwartz & Ballen LLP and former Fed attorney. It was unclear when or how loophole first became known to the banks.

It also isn't known if Bank of America is trying to structure the deal in a way that would help shield the bank from some of the biggest financial uncertainties facing Countrywide.

One possibility is that Bank of America would seek some sort of tangible regulatory "reward" for rescuing Countrywide, said analyst Nancy Bush of NAB Research in Aiken, S.C., such as having the government take some of the bad loans off its hands, or forbearance on the deposit cap that hinders Bank of America's ability to do deals. "We're in an environment in which you could really say, anything can happen," she said.

Bank of America Chairman and CEO Kenneth D. Lewis has often said he likes "the product, not the business," when it comes to mortgages. He has particular disdain for servicing, which includes sending monthly statements, collecting payments and routing them to loan holders. Mr. Lewis prefers that mortgages be offered to bank customers through bank branches, as part of a suite of products including checking, savings and investments.

Many on Wall Street snickered as the value of Bank of America's $2 billion investment in Countrywide tumbled. But some analysts and investors have wondered if the driving reason for making the August investment was to plant a flag at Countrywide and keep any competitor from swooping in.

Just last month, Mr. Lewis told analysts at the Goldman Sachs conference that at some point "arithmetic overcomes all your issues." "But if I ever did anything in the mortgage business, I would have to eat about seven years of my words, so it would have to be pretty compelling."

The financial institutions involved in the deal are overseen by a myriad of federal regulators in Washington. The Fed oversees Bank of America's parent company, while the Office of the Comptroller regulates the Charlotte company's national bank. The Office of Thrift Supervision oversees Countrywide's federal thrift charter, and the Federal Deposit Insurance Corp. insures deposits at both Bank of America and Countrywide Bank.

Former Bank of America Chief Financial Officer Marc D. Oken compared the deal to the buyout of troubled MNC Financial Inc. The former CEO of Maryland National, Frank Bramble, sits on the Bank of America board.

Mr. Oken argues that for all its problems, Countrywide still has the "finest mortgage distribution network in the country," and that Bank of America is likely buying it for a fraction of what it would have cost a year ago.

"I'm proud of these guys," he said. "It's a bold move and it's indicative of the confidence that the board has in the company and the management."

One likely scenario is that Bank of America could arrange an "earn-out," a deal common in private equity where the buyer agrees to a price today but an additional payment should the company meet goals in a year or more.

The takeover would call into question the future role of Angelo Mozilo, a New York-born executive known for his deep tan and frank speaking style, who co-founded Countrywide in 1969 and now serves as chairman and chief executive. Mr. Mozilo, who turned 69 last month , was long praised as an innovator, reliable survivor of periodic slumps and fierce competitor in the U.S. mortgage industry.

But he has run into a barrage of criticism over the past year as Countrywide has stumbled. Critics say the company lowered its lending standards too far in pursuit of market share and squandered capital through heavy repurchases of its own stock. Meanwhile, Mr. Mozilo undermined confidence in the company through his heavy sales of Countrywide shares he has acquired over the years through stock option awards. A takeover could result in another big payday for Mr. Mozilo. David Wise, a New York-based consultant for Hay Group, a compensation-advisory concern, estimated that Mr. Mozilo would receive cash severance payments totaling $36 million.

From 2004 through 2007, Mr. Mozilo sold about $414 million of Countrywide shares. The Securities and Exchange Commission last year opened an informal investigation into the stock sales, which were made through prearranged plans known as 10b5-1 programs. These plans are designed to allow senior executives to sell shares at regular intervals automatically. If executives pledge they don't have insider information at the time the plans are established, they can be used as a defense against insider-trading charges.

Mr. Mozilo modified his longstanding 10b5-1 plans late last year to increase sales of stock that he obtains through the exercise of stock options. Mr. Mozilo has said he increased the pace of selling to diversify his personal investments in an orderly way ahead of his retirement, scheduled for December 2009. He has denied any wrongdoing in connection with the share sales and argued that the options were a tax-efficient way for Countrywide to pay him.

Mr. Mozilo remains a sizable shareholder in Countrywide, the company has said. As of last April, Countrywide said he held about one million shares in the company plus options to acquire another 8.2 million, for a combined stake of 1.5% of the shares then outstanding.

Countrywide said Wednesday that its deposits totaled $61 billion at the end of December and that it had increased "retail deposits," those obtained directly from individual savers, by $2.3 billion in December alone. Last August, customers flocked to Countrywide branches to remove their savings amid fears about the company's health, but the initial investment by Bank of America helped quell those fears and allowed Countrywide to rebuild its deposit base.

Aside from deposits, Countrywide in recent months has relied very heavily on borrowings from the Federal Home Loan Bank System. Those borrowings totaled $51.1 billion as of Sept. 30, up 77% from three months earlier.
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