Mortgage Servicing Fraud
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Henry Cisneros on the hot seat

Web Posted: 02/17/2008 12:50 AM CST

Jennifer Hiller

When Henry Cisneros joined the board of directors of Countrywide Financial Corp. in 2001, the real estate industry was poised for a spectacular ride.

All-time records for home sales started to fall like confetti. Mortgage interest rates dropped, prompting a surge in home buying and refinancing.

Countrywide, the nation's largest mortgage lender, boomed.

Cisneros' financial fortunes would soar, too. He was granted — and sold — more than $5 million in company stock as prices climbed from around $10 per share in 2001 to more than $40 per share in late 2006 and early 2007.

Additionally, he earned a base salary of $70,000 per year and received $1,500 for each board meeting attended, $750 for each phone meeting and health insurance. Overall, Countrywide's directors were among the country's best compensated.

Yet Countrywide's business began unraveling during the watch of Cisneros and his fellow directors. While the company's executives are considered primarily responsible, the case of Countrywide illustrates how quickly a director can find himself accused of having divided loyalties and poorly representing shareholders' interests.

The entire mortgage lending industry has fallen into turmoil in the past year.

"Countrywide was not unique in that they didn't handle this well," said Joseph Bower, professor at Harvard Business School. "After the fact you can go into these situations and say, 'How is it possible that you didn't ask these questions?' It turns out that human beings usually don't ask the right questions."

Cisneros, former San Antonio mayor and the first secretary of Housing and Urban Development under President Clinton, served at Countrywide while it increased the number of adjustable-rate mortgages and subprime loans made to borrowers with less-than-stellar credit histories.

He resigned from the board in October, citing the need to concentrate on his own company, just days before Countrywide reported a $1.2 billion quarterly loss. One-third of its subprime borrowers were late on their mortgage payments at the end of 2007, according to a Jan. 31 financial report. On Friday, the company said payments were overdue on 7.5 percent of the loans it serviced in January.

And Countrywide is being sold to Bank of America in a deal valuing the stock at around $7 per share.

Not surprisingly, shareholders have filed lawsuits against current and former company officers and directors, including Cisneros, accusing the company of making misstatements about practices that artificially inflated stock prices.

North Carolina Treasurer Richard Moore, who oversees a state pension fund that holds 500,000 shares of Countrywide stock, has asked the Securities and Exchange Commission to investigate the chief executive officer's stock sales.

Florida's attorney general recently announced an investigation of Countrywide for possible unfair and deceptive business practices related to its home loans.

Three years ago, Countrywide CEO Angelo Mozilo seemed to predict the company's crisis. He was quoted in National Mortgage News in March 2005 saying he was "deeply concerned" about the subprime mortgage sector.

"This is one aspect of our business that bothers me," Mozilo said at a housing conference in Utah. "It is spinning out of control and it could become a catastrophe."

Cisneros didn't respond to interview requests for this article, but for months has expressed admiration for Countrywide and Mozilo.

At the Jan. 7 San Antonio Housing Forecast, Cisneros spoke to a group of 750 local building and real estate professionals and said Countrywide "had done a fair amount of subprime lending, but responsibly."

He blamed the national housing and mortgage crisis on a variety of villains. They included mortgage brokers, appraisers who inflated home values, investors who made prices climb and rating agencies that didn't properly evaluate the risk in the mortgage-backed securities that were sold on Wall Street to investors around the world.

"There's plenty of blame to pass around," said Cisneros, although he did not mention mortgage lenders or their loan officers as among those who should be blamed.  (hahahaha)

Rising risk

Securities and Exchange Commission filings from 2001 to 2007 show that Countrywide's loans became increasingly risky.

In 2001, when Cisneros joined the board, 12 percent of the loans Countrywide originated had adjustable interest rates.

By 2004, 52 percent of the company's loans had adjustable rates.

Subprime lending to borrowers with credit problems also increased.

In 2001, subprime loans made up 4.5 percent of Countrywide's mortgage loan portfolio, according to regulatory filings.

By 2004, subprime loans made up 10.9 percent of the company's business.

In March 2005, when Mozilo was quoted in National Mortgage News saying the subprime sector could become a "catastrophe," he drew the line between his company and others.

Mozilo said Countrywide didn't make the kind of no-documentation subprime loans to borrowers with extremely low credit scores that most concerned him.

That same year, the company produced more than $44.6 billion in subprime loans, about 9 percent of its loan total.

By 2006, Countrywide had trimmed back its subprime loan production to $40.6 billion, or 8.7 percent of its mortgage portfolio. And in January, the company made no subprime loans.

Information from LoanPerformance, which compiled numbers from the Federal Reserve, Inside Mortgage Finance and Source Media, estimates that Countrywide did less subprime lending than the industry average.

About 20 percent of all mortgages loans in 2006 went to subprime borrowers, according to LoanPerformance. And 34 percent of all loans went to non-prime borrowers — those who were categorized as subprime or as Alt-A, a term that signifies a homebuyer who is just below the top tier of borrowers.

Board responsibility

Analysts say it's unlikely a board member like Cisneros would have had a major say in company decisions. There's a widely held belief that Mozilo ran the company he founded as he wanted.

"This is Angelo's company," said Paul Miller, analyst with Friedman, Billings, Ramsey & Co. "The board didn't do very much to rein him in."

Still, board members have a responsibility to watch over the CEO, said Praveen Kumar, chairman of the finance department at the University of Houston's Bauer College of Business.

"The board of directors is supposed to be representing the interests of the shareholders," Kumar said.

In reality, CEOs choose the directors and control the company, said Kumar, who studies corporate boards.

One of the best ways directors can retain influence, though, is by limiting the CEO's pay, Kumar said.

High CEO compensation often spells trouble for a company.

"All of our research shows that one of the first manifestations of lax corporate governance is excessive CEO compensation," Kumar said. "It's one of the very few places with the board of directors where you can infer what's happening in all the other dimensions of the company."

His research also has shown that, controlling for other factors, the more company stock board members hold — thus, the bigger financial stake they have — the less the CEO earns.

Stock and salary

At Countrywide, Mozilo's compensation has drawn the ire of shareholders and some board members have been criticized for not holding their stock.

Mozilo's contract was renewed while Cisneros served on the board, but Cisneros wasn't a member of the compensation committee that negotiated and approved the terms. The board endorsed the contract in an executive session in late 2006, according to regulatory filings, but it is not clear how Cisneros or other board members voted.

The CEO earned $141.9 million in 2005. In 2006, he earned $102 million, including money for his salary, stock options, pension and incentive compensation, according to the Corporate Library, a shareholder advocacy organization.

The salary ranked as the seventh-best CEO pay in the U.S. that year.

The Corporate Library issued warning reports about Countrywide's CEO pay and governance in 2004 and 2005, citing CEO pay as the most troublesome aspect of the company. In 2004, Mozilo earned $57 million, ranking him 24th on the Forbes list of best-paid CEOs, and first among diversified financial companies.

Countrywide's directors also were among the best paid in the country, receiving salaries and stock.

In all, Countrywide directors each received between $344,988 and $538,824 in 2006, while most companies of Countrywide's size paid directors about $200,000, on average, according to a Pearl Meyer & Partners annual survey of director pay.

Even taking into account the size of Countrywide, "that's a lot of money for a director," said Gordon Walker, chairman of the strategy and entrepreneurship department at Southern Methodist University's Cox School of Business.

Between 2004 and 2007, Cisneros sold more than $5.6 million worth of the Countrywide stock he had been granted as a board director, according to the company The Houston-based financial data mining company tracks the Form 4 documents that company insiders — executives, directors and major shareholders — file with the Securities and Exchange Commission when they buy or sell stock.

In all, directors and executives sold $997 million in Countrywide shares in that time.

While other Countrywide directors and executives have been criticized for exercising options and selling stock when prices hit historic highs, Cisneros appears to have sold all along, according to regulatory filings.

Cisneros has said in previous interviews with the San Antonio Express-News that he used the Countrywide proceeds to help start CityView, a Santa Monica, Calif.-based company that provides financing for urban home builders. Cisneros is the executive chairman, and the company has a San Antonio office.

Cisneros last sold Countrywide stock in May for $39.50 per share, for a total of $200,462. The stock price started dropping in June and never recovered.

After that sale, Cisneros still owned 25,337 shares of the company, according to SEC documents. He told the Express-News in September that he was holding on to that stock to show support for the company.

His stock sales and those of other Countrywide officials should have worried shareholders, University of Houston Professor Kumar said.

"It's an issue of ethics and best practices," he said. "If they sell, it's like an army who deserts at the first time of trouble. What is everyone else supposed to think?"

Walker, though, said it's a balance between having a stake in a company and being over-invested in one asset.

"If a director has a substantial amount of stock and wants to start a new business and tells the CFO and CEO they want to sell the stock, I don't see any problem with it," he said.

On the Countrywide board, Cisneros most recently served on the audit and ethics committee, which oversees financial statements, regulatory requirements and business ethics.

He also served on the operations and public policy committee, which handles risk exposure and responsible lending, among other issues, and the corporate governance and nominating committee, which primarily helped the company find new board members.

In the wake of the company's troubles, Walker said scrutiny will focus on the audit and ethics and operations and public policy committees that Cisneros sat on, as well as the finance committee.

Shareholders will want to know why directors did not properly prepare for the tightening of the credit markets in 2007, when it became difficult for Countrywide and other lenders to sell mortgage loans to investors.

"The number of subprime loans and option ARM loans were increasing. That's worth asking about if you're a director," said Richard Clayton III, research director at CtW Investment Group, a pension investment firm whose 6 million union members lost an estimated $500 million as Countrywide stock fell. "It's a clear change in the direction of the company that ought to have raised a red flag for directors."

But Walker and Kumar said many companies with blue-chip boards have missed red flags.

"It's like déjà vu all over again," Kumar said, citing Enron as an example of a company with a highly qualified board that didn't notice the warning signs. "I've seen this before."

Leaving Countrywide

Cisneros resigned from the board Oct. 18.

Two other directors left last year, too. Kathleen Brown of Goldman Sachs resigned in March and Michael Dougherty, an investment banker based in Minneapolis, left the board in June when his term ended and he didn't seek reelection.

The departure of three of 10 directors was another sign of trouble, Kumar said.

"That's too much of a coincidence," he said. "They can anticipate problems earlier than anyone. If they leave, it's not at all a good signal. It means they anticipate problems and don't want to be in the hot seat."

For board members like Cisneros, that hot seat has been getting increasingly uncomfortable, said Peter Gleason, chief operating officer and director of research at the National Association of Corporate Directors, a nonprofit corporate governance group.

"As a director you fully expect that you're going to get sued," Gleason said, though companies typically carry insurance for their directors so that they aren't held financially responsible for a company's downfall.

Mozilo praised Cisneros as he left Countrywide and pointed out the company had expanded its financial literacy initiatives, mortgage education, and lending to minorities and lower-income borrowers during Cisneros' tenure.

"His expertise, especially as it relates to the vital need to increase homeownership rates among minority and lower-income families, aligned well with Countrywide's fulfillment of our mission to lower the barriers to sustainable homeownership," Mozilo said in an Oct. 24 news release.

At January's Housing Forecast, Cisneros spoke about the mortgage industry and said "inappropriate mortgage products" — such as no-document loans and loans with adjustable rates — enabled some buyers to get mortgages they could not afford.

"That inflated the boom beyond what it should have been," he said.

And Cisneros predicted a turbulent 2008 for the San Antonio housing market.

"Entire companies will be for sale to those who will have shepherded their capital," he said.

He wasn't talking about Countrywide, but he could have been.

Business Writer David Hendricks contributed to this report.

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Excellent post Digger. It just goes to show how Countrywide did committ fraud. Anyone with a bit of sense should investigate the fact that not all homewoners are delinquit on their mortgages. That maybe Countrywide is hiding some important documents? They have already admitted to committing fraud and forgery. Maybe someone should look at investigating all of these mortgage servicers and lenders and see if their are more forgeries and fraud? HMMMMM!!!!!. When are we going to get someone to admitt the WHOLE truth about the homeowners who are paying but are being reported late???? Their plan was to foreclose on homes and also get the banks to bail them out and to collect any amount of money they could from us. Sounds like triple profits are to be made.

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