Countrywide Buys Congressional Influence - VIP Loan Program

[Guest LAW_*]

Countrywide's Systematic and Successful Effort to Buy Influence and Block Reform

Staff Report

U.S. House of Representatives

111th Congress

Committee on Oversight and Government Reform

Darrell Issa, Ranking Member

March 19, 2009

 

With Countrywide-originated loans serving as fuel and Government-Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac acting as a furnace, the alliance of the companies created an enormous fire that eventually consumed the American economy. Many of the people in position to reform the GSEs and extinguish the flames before the danger spread were receiving perquisites from a VIP loan program operated by Countrywide under the supervision of Chairman and CEO Angelo Mozilo. These included Fannie Mae Chief Executive Franklin D. Raines and two Senators with legislative jurisdiction over the issues at the heart of the emerging financial crisis - Christopher Dodd and Kent Conrad.

 

To augment its voice in the GSE-reform debate, Countrywide dispensed favors to VIPs who it believed might be worthwhile to the company. This group of borrowers included legislators, congressional staffers, lobbyists and other opinion leaders. Countrywide also distributed benefits to business partners, local politicians, homebuilders, entertainers and law enforcement officials.

 

Countrywide's voice was heard in the debate on Capitol Hill about reforming the GSEs. When reform was considered by the 108th Congress, Members publicly expressed faith in Fannie and Freddie. Congressman Barney Frank (D-MA), for example, described them as not facing any kind of financial crisis. "He was wrong."

 

Countrywide's VIP loan program was a tool with which the company built its relationships withMembers of Congress and Congressional staff. It was also a tool it used to protect its relationship with Fannie Mae. Senior Countrywide officials as well as the company's lobbyists openly and explicitly weighed the value of relationships with potentially influential borrowers against the cost to Countrywide in terms of forfeited fees and payments. Preferential treatment for these potentially influential borrowers, the most important of whom were referred to internally as "Friends of Angelo," was part of an expansive effort by Countrywide to ingratiate [Countrywide] with people in Washington who might be able to help the company down the road."

 

Countrywide loan officers waived fees and knocked off points for VIP borrowers at no cost, amounting to thousands of dollars in savings. For VIPs, Countrywide fast tracked the loan process and ignored their own documentation policies. Countrywide customers ordinarily paid hundreds of dollars in upfront fees. Not the VIPs. Regular customers paid one percent of the total amount of the loan to reduce the interest rate by one point. But not the VIPs.

 

When Congress considered reform of the GSEs, the company hoped their "Friends of Angelo" would respond. Fannie and Freddie reform legislation was never passed, let alone voted on by Congress.

 

Borrowers whose loans were processed by Countrywide's VIP loan unit were aware they received preferential treatment. Countrywide VIP account executive Robert Feinberg testified VIP loan officers explicitly communicated to "Friends of Angelo" they were receiving special pricing and preferential treatment. Documents obtained by the Committee confirm this. VIP borrowers were informed Angelo Mozilo priced their loans personally and they relied on their status as "Friends of Angelo" to guarantee preferential treatment for themselves and others. In case borrowers had any doubt about which department was processing a loan, Countrywide loan officers attached business cards to loan documents clearly indicating the officers processing the loan worked in the VIP unit.

 

Accepting the discounts made exclusively available to "Friends of Angelo" violated applicable ethical rules for certain VIP borrowers. Senate rules prohibit acceptance of loans at discounted rates not available to the general public. The Fannie Mae Code of Conduct applicable to directors and executives bars any gift made in order to influence behavior, especially when accepting such a gift appears to create a conflict of interest.

 

Involvement in the VIP loan program casts a cloud of suspicion over the actions - or in many instances non-actions - of those charged with policy-making, legislative, or oversight responsibility for the mortgage industry and the GSEs. The scope and intent of the "Friends of Angelo" and other VIP programs at Countrywide Financial Corporation represent a systematic attempt by the mortgage giant to gain favor from those entrusted to protect the public's interests through oversight and regulation of the home mortgage industry.

[Guest LAW_*]

In 1999, Fannie Mae CEO Jim Johnson and Countrywide CEO Angelo Mozilo reached a strategic agreement giving Fannie Mae exclusive access to many of the loans originated by Countrywide in exchange for a discount on fees Fannie charged when buying loans. The agreement linked the

growth and success of Countrywide to Fannie Mae’s continued desire to acquire a large volume of loans.

 

Fannie Mae’s strategy to acquire and hold a large volume of mortgages betrayed its congressionally-mandated mission to increase access to home ownership. This strategy, which relied on the GSEs’ borrowing advantages and may have been motivated by a desire to reach earnings levels to trigger executive bonuses, exposed Fannie Mae to increased risk. Fannie Mae’s new direction fundamentally changed the home lending industry, encouraging originators like Countrywide to aggressively market

subprime loans.

 

Because the growth and success of Countrywide was tied directly to Fannie Mae’s continued hunger for acquiring and holding loans and Wall Street’s continued investment in mortgage-backed securities composed of subprime mortgages, Countrywide CEO Angelo Mozilo offered a key group of VIPs preferential treatment through a special loan division. Countrywide gave preferential treatment to legislators, Congressional staff, cabinet members, Fannie Mae executives, lobbyists, and others well connected in Washington. Countrywide also gave preferential treatment to business partners, local politicians, homebuilders, entertainers and law enforcement officials.

 

At the same time the “Friends of Angelo” VIP loan program was affording preferential treatment to Members of Congress, Congressional staff, and lobbyists, Congress was considering legislation to reform the GSEs. The most notable reform effort died in the Senate Banking Committee, where

Senator Christopher Dodd was a member. Reform legislation was never passed, let alone voted on by Congress.

 

Countrywide’s VIP loan program was a tool with which Countrywide built its relationship with Congress and protected its relationship with Fannie Mae. Senior Countrywide officials and lobbyists openly and explicitly weighed the value of relationships with potentially influential borrowers against the cost to Countrywide in terms of forfeited fees and payments.

 

Countrywide’s Washington lobbyist Jimmie Williams identified influential borrowers for VIP treatment. Williams justified his referrals to the director of the VIP program by explaining the borrower’s position and how he or she could be valuable. Among others, Williams referred the Chief Counsel to the House Financial Services Housing and Community Opportunity Subcommittee Clinton Jones, HUD SecretaryAlphonso Jackson’s daughter Annette Watkins, U.S. Rep. Melvin Watt’s Chief of Staff Joyce Brayboy, and former Democratic National Committee official and Director of White House Political Affairs under President Clinton Minyon Moore.

 

Countrywide loan officers waived fees and knocked off points for VIP borrowers at no cost, amounting to thousands of dollars in savings. Countrywide charged non-VIP borrowers hundreds of dollars in upfront fees. Non-VIP borrowers paid one percent of the total amount of the loan for an interest rate reduction of one point. In many cases, Countrywide facilitated and expedited the loan process for VIPs by ignoring company policies.

 

Countrywide’s internal software calculated rates for borrowers based on established industry criteria, including loan-to-value ratio, debt-to-income ratio, and credit history. If the terms of a loan violated company policy, the software would instruct the loan officer to “correct and resubmit." Countrywide loan officers performed manual overrides to apply the reduced rates specified by Angelo Mozilo. Manual overrides were also necessary to breach company policy in order to accommodate VIP borrowers.

 

Angelo Mozilo personally specified rates and fees for VIP borrowers. When the terms of a VIP loan violated Countrywide policy, Mozilo was notified and would personally authorize overrides. Mozilo substituted his familiarity with and the reputation of VIP borrowers for credit checks and reviews of debt and assets. According to the documents, no VIP borrower was ever given anything less than an "A-paper" loan.

 

Countrywide VIP account executive Robert Feinberg testified it was the practice of VIP loan officers to communicate to “Friends of Angelo” they were receiving special pricing and preferential treatment. Documents obtained by the Committee confirm this. VIP borrowers were informed Angelo Mozilo personally priced their loans and they relied on their status as “Friends of Angelo” to guarantee preferential treatment for themselves and others. Borrowers previously processed through the VIP department expected discounts on subsequent refinances. In case a borrower had any doubt about which department was processing a loan, Countrywide loan officers attached business cards to loan documents clearly indicating the officers processing the loan worked in the VIP unit.

 

Senators Christopher Dodd and Kent Conrad received discounted loans from Countrywide. By waiving fees and reducing rates, Countrywide saved each Senator thousands of dollars. The loans made to the Senators were processed by the Countrywide’s VIP loan program and they were identified as “Friends of Angelo.”

[Guest LAW_*]

The Role of the "Friends of Angelo" in the Financial Crisis

 

In response to the Great Depression, Congress created the Federal National Mortgage Association (“Fannie Mae”) to provide local banks with federal money to finance home mortgages in an attempt to raise levels of home ownership and the availability of affordable housing. By purchasing mortgages originated with local banks, Fannie Mae enabled these banks to increase their lending volume. With the backing of the federal government, Fannie Mae was able to borrow money from international investors at a rate usually reserved for the federal government itself. Fannie Mae’s

capacity to buy and sell mortgages created a secondary mortgage market in which it was the only participant.

 

In 1968, Fannie Mae was partially privatized by President Johnson to relieve budget constraints created by the Vietnam War. Fannie Mae was placed under the direction and supervision of a board of directors and shareholders. Because newly privatized Fannie Mae continued to enjoy the benefits of its federal charter, which included an exemption from taxation and Securities and Exchange Commission (SEC) oversight as well as implied government backing of debt, it was operated as a

Government-Sponsored Enterprise (“GSE”). As a GSE, it is not subject to SEC securities registration and reporting requirements applying to public companies. In 1970, a second GSE, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) was created to provide competition for Fannie Mae.

 

The GSEs now had to simultaneously serve the mission of fostering access to home ownership set forth in their charters and the mandate from shareholders to make a profit. In pursuit of both goals, the GSEs used their borrowing power to buy and hold mortgages. The GSEs profited from their mortgage portfolios through the difference between the rate they borrowed to buy mortgages and the interest rate paid on the mortgage by the homeowner. This strategy required buying loans in volume.

 

The relationship between Fannie Mae and Countrywide was mutually beneficial. Fannie was eager to buy loans originated by Countrywide to develop a portfolio of mortgage-backed securities. Countrywide racked up fees and payments selling loans, aggressively marketing its products to all types of borrowers. The relationship between the two companies led to “record earnings” for Fannie Mae and status for Countrywide as “the nation’s leading mortgage lender.”

 

With Countrywide-originated loans serving as fuel and the GSEs acting as a furnace, the alliance of the companies created an enormous fire that eventually consumed the American economy. Many of the people in position to reform the GSEs and extinguish the flames before the danger spread were receiving perquisites from a VIP loan program operated by Countrywide under the supervision of Chairman and CEO Angelo Mozilo. These included Fannie Mae Chief Executive Franklin D. Raines and two Senators with legislative jurisdiction over the issues at the heart of the emerging financial crisis – Christopher Dodd and Kent Conrad.

 

Involvement in the VIP loan program casts a cloud of suspicion over the interests of those borrowers charged with policy-making, legislative or oversight responsibility for the GSEs. Some of the Countrywide VIPs – the most exclusive of which were deemed “Friends of Angelo” – identified in this report had legislative or policy-making responsibility for the GSEs during a crucial time period when careful oversight and reform proved necessary. Reform never happened. These influential people – including legislators, business leaders, and opinion leaders – may have looked the other way because of the preferential treatment afforded them by the mortgage giant.

[Guest LAW_*]

The Rise of Fannie Mae

 

Fannie Mae has its roots in the New Deal, when it was established to increase the amount of money available for mortgages. Over the years, its main business has been to issue debt and then use the proceeds to buy mortgages from lenders, allowing those lenders to give out new mortgages. Originally a government agency, Fannie Mae was privatized in 1968 with the goal of “increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans."

 

As a GSE, Fannie Mae is not required to pay state and local income taxes. Only the federal government can borrow money at a lower rate than Fannie Mae. With the implied backing of the federal government, a favorable perception among investors of Fannie developed. “There is an implied guarantee,” said Sen. John Sununu, a member of the Senate Banking, Housing, and Urban Affairs Committee who sponsored legislation to reform Fannie Mae. "Investors think they are the next best thing to Treasuries."

 

In 1981, Fannie Mae and Freddie Mac began to bundle and sell mortgages as a new security product for sale to investors as mortgage-backed securities (“MBSs”). By clearing conforming loans off the books of lenders, the creation of MBSs made more money available for new mortgages. Eventually, one out of every seven home mortgages made in the U.S. was channeled through Fannie Mae. The sale of MBSs returned Fannie Mae to profitability in 1985 after high interest rates in the early 1980’s caused massive losses for the company. In 1988, Fannie Mae shares were added to the Standard and Poor’s 500 stock index.

[Guest LAW_*]

Fannie Mae and Countrywide

 

James “Jim” Johnson was named chairman and CEO of Fannie Mae in 1991. He had been initially recruited to the company by David Maxwell, former general counsel for the Department of Housing and Urban Development (“HUD”). Shortly after assuming the top position at Fannie, Johnson went on tour to meet with top executives at the mortgage banking firms with which Fannie had business. In California, Johnson met Angelo Mozilo, whose company Countrywide was already selling conforming loans to Fannie Mae. Fannie’s business with Countrywide was handled by their west coast office, "conveniently located right across the street from Countrywide’s headquarters."

 

Johnson and Fannie Mae accountants in charge of tracking the sources of the loans purchased by the GSE noticed Countrywide’s rapid growth. Johnson realized Fannie Mae would be buying the majority of its loans in the future from non-bank mortgage companies like Countrywide, so Johnson made an effort to court Mozilo. At the time, Countrywide was originating billions in loans and was on its way to becoming “the largest residential lender in the United States." “When Jim realized how much

volume Countrywide was taking down, especially in California, he made it his mission to get to know Angelo," said a Johnson aide.

 

Johnson forged a relationship with Mozilo because he realized acquiring a portfolio of mortgages and mortgage-backed securities would generate profit for Fannie. With its inherent advantages, Fannie Mae used its borrowing power to purchase and hold mortgages, profiting from the difference between the low price it paid to borrow the money and the higher interest rate it received on the mortgage.

 

In 1999, Fannie Mae reached an agreement with Countrywide Financial Corporation (“Countrywide”) making billions of dollars worth of loans available to Fannie Mae in exchange for a volume discount. This was an exclusive arrangement between Fannie Mae and Countrywide designed by Fannie Mae to lock competitor Freddie Mac out of the market for Countrywide’s loans.

 

Johnson wanted Fannie Mae to buy as many Countrywide loans as possible to force competitor Freddie Mac to shop elsewhere. Mozilo agreed to sell Countrywide’s loans to Fannie Mae, and in exchange Fannie agreed to lower the “guarantee” fees the GSE charged originators when it bought their loans. The relationship amounted to a volume discount, linking Fannie Mae and Countrywide “at the hip.”

[Guest LAW_*]

A New Direction for Fannie Mae

 

Under Johnson and his successor, Franklin D. Raines, Fannie moved away from the goal stated in its charter to provide access to home ownership for low- and middle income Americans and adopted a strategy to maximize profit by acquiring and holding mortgages and MBSs. Critics argued acquiring this portfolio was not worth the risk to taxpayers because it did nothing to put people in homes and existed only to make money for the companies' executives and shareholders. The move did not seem to correlate to Fannie’s stated goals, and the new strategy drew the attention of Congress. “It doesn’t do anything to support their core mission,” said Senator Sununu, “and it increases their exposure to interest-rate risks."

 

Under pressure from the Clinton Administration to increase home ownership rates among low- and moderate-income borrowers, Fannie Mae CEO Franklin D. Raines lowered his company’s lending standards to include “individuals whose credit is generally not good enough to qualify for conventional loans." At the time of this move by Fannie Mae into the non-conventional market, a record number of Americans owned their own homes.

 

To meet the Administration’s goals, Fannie and Freddie bought “subprime” and "Alt-A” loans. Subprime loans are given to borrowers perceived to be higher default risks because of low credit ratings. Alt-A loans are given to borrowers with solid credit but have a combination of higher-risk characteristics such as high loan-to-value or debt to- income ratios or allow for reduced documentation of income and assets. By 1997, Fannie Mae was offering to buy 97% loan-to-value mortgages (3% down payment), and by 2001 was offering to buy zero-down payment loans.

 

Raines also announced a new goal to double Fannie Mae’s earnings-per-share in five years, from $3.23 to $6.46.32 This ambitious – or perhaps reckless – goal became part of the culture at Fannie. According to a report by the Office of Federal Housing Enterprise Oversight (“OFHEO”), “$6.46, the EPS goal, became the corporate mantra — everything else was secondary to hitting that target."

 

The OFHEO report quoted a speech given in 2000 by Sampath Rajappa, head of Fannie Mae’s Office of Auditing, to his accounting team:

 

By now every one of you must have 6.46 branded in your brains. You must be able to say it in your sleep, you must be able to recite it forwards and backwards, you must have a raging fire in your belly that burns away all doubts, you must live, breathe and dream 6.46, you must be obsessed on 6.46. . . . After all, thanks to Frank, we all have a lot of money riding on it. . . . We must do this with a fiery determination, not on some days, not on most days but day in and day out, give it your best, not 50%, not 75%, not 100%, but 150%. Remember, Frank has given us an opportunity to earn not just our salaries, benefits, raises . . . but substantially over and above if we make 6.46. So it is our moral obligation to give well above our 100% and if we do this, we would have made tangible

contributions to Frank’s goals.

 

Fannie’s new strategy changed the home lending industry. By the end of the 1990s, the industry was transformed:

 

Huge national lenders like Countrywide could set up shop in any state by obtaining a low-cost license, originate mortgages (through either non-deposit-gathering branches or loan brokers), and sell them to Fannie Mae or Freddie Mac, receiving cash for their loans. The cash would be used to make more loans. Wall Street firms would sell the Fannie/Freddie-guaranteed MBSs to institutional investors, which meant pension funds, life insurers, commercial banks, or even S&Ls.

[Guest LAW_*]

Countrywide Focuses on Subprime Loans

 

In September 1999, the New York Times reported the move into the subprime market to reach earnings goals meant Fannie Mae was “taking on significantly more risk, which may not pose any difficulties during flush economic times. But the governmentsubsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to the one needed for the savings and loan industry in the 1980s."

 

With Fannie able to buy non-conforming mortgages from lenders, Mozilo saw an opportunity. Countrywide had reason to prefer selling loans to individuals with low credit ratings and low- or moderate-income (“subprime” loans). Profit on these loans was higher than standard prime mortgages. Citing regulatory filings, the New York Times explained how much more profitable subprime loans were for Countrywide compared to higher-quality prime loans; in 2004, “subprime loans produced gains of 3.64 percent, versus 0.93 percent for prime loans."

 

Fannie’s appetite for subprime loans originated by Countrywide and others was motivated by a desire to achieve earnings targets. Improved earnings meant multi-million dollar bonuses for executives. The 2006 OFHEO concluded Fannie's executives "deliberately and systematically” created earnings “illusions” to hit Fannie's earnings per-share targets from 1998 through 2004. Raines was ousted as CEO of Fannie in the wake of the accounting scandal. Fannie agreed to pay a $400 million fine to settle the matter with the SEC.

 

The access GSEs had to borrowed money at lower rates than those available to private firms meant Wall Street was no longer able to compete with Fannie and Freddie for “A” paper loans, so they instead went after non-conforming loans. The increased demand for subprime mortgages was noticed by Countrywide.

 

With the knowledge it could sell the riskiest loans to Wall Street and the GSEs, Countrywide offered a variety of loan products to borrowers with questionable credit worthiness. Countrywide’s product list showed the company offered loans of $500,000 to borrowers rated C-minus, the second-riskiest grade. Countrywide made loans to borrowers with credit scores as low as 500. Countrywide also offered loans to borrowers that were 90 days late on a current mortgage payment twice in the last 12 months, borrowers that had filed for personal bankruptcy protection, and borrowers that had faced foreclosure or default notices.

 

With incentive to sell more mortgages in order to collect payments and fees, and with the risk of lending to borrowers that were unlikely to pay back a loan backed by Fannie and Freddie and other securitizers, Countrywide began using aggressive tactics to attract customers. Countrywide’s incentive to push subprime loans arose from investor preference for pools of subprime mortgages because these loans often included prepayment penalties and interest rates that would reset at a higher level at a fixed date, generating a larger cash flow.

 

To increase its portfolio of subprime mortgages, Countrywide incentivized its brokers with commission rates based on the value of the mortgage. "The whole commission structure in both prime and subprime was designed to reward sales people for pushing whatever programs Countrywide made the most money on in the secondary market," an unnamed Countrywide sales executive told the New York Times.

 

Countrywide resisted efforts by states to curtail their sales tactics and loan programs. “Anytime states tried to pass responsible lending laws, Countrywide was fighting it tooth and nail,” said Ira Rheingold, executive director of the National Association of Consumer Advocates, according to the New York Times.

 

The company’s aggressive sales tactics led to a lawsuit filed by 11 state attorneys general, alleging predatory lending violations. In 2008, Countrywide settled with the states, marking “the largest predatory lending settlement in history." According to California Attorney General Edmund Brown, Jr., "Countrywide's lending practices turned the American dream into a nightmare for tens of thousands of families by putting them into loans they couldn't understand and ultimately couldn't afford."

[Guest LAW_*]

Calls for Reform of Fannie and Freddie Threaten Countrywide

 

In 2003, with interest rates at their lowest since the 1960’s, banks and individuals had incentive to borrow as much as possible, and the GSEs increased their mortgage holdings as more loans were issued to homeowners. President Bush called for reform of Fannie and Freddie in the form of increased capital-reserve requirements to protect the lending institutions and, in turn, the housing market, in case of financial trouble.

 

Simultaneously, other groups called for full privatization of the GSEs, meaning they would no longer be able to borrow money at reduced rates because of the implied backing of the federal government of their debt. If the capacity of the GSEs to purchase subprime loans were constricted by Congress, Countrywide stood to suffer. The lender would be more susceptible to the inherent risk of issuing subprime loans, and its ability to issue loans and collect the associated payments and fees would be diminished.

 

The health of Countrywide was so closely tied to the continued hunger of government-sponsored mortgage buyers for subprime loans that Mozilo and Countrywide operatives in Washington had to take action. Mozilo described what was at stake for Countrywide:

 

"If Fannie and Freddie catch a cold, I catch the fraking flu."

[Guest LAW_*]

Countrywide Mobilizes Its "Friends"

 

As the White House and Congress took increased interest in oversight and reform of Fannie and Freddie, Countrywide invited several key players in the debate to finance or refinance mortgages through the company's VIP loan division.

 

During the course of the Committee's investigation into numerous aspects of the financial crisis, it obtained thousands of internal documents relating to Countrywide’s VIP programs including its "Friends of Angelo" program.

 

According to the documents, a key group of VIPs were offered preferential treatment through a special division. Among the VIPs were an exclusive group of borrowers singled out by Countrywide Chief Executive Angelo Mozilo himself. These VIPs, known as "Friends of Angelo," were afforded preferential and personalized treatment. The loans for the "Friends of Angelo" were sometimes specially priced by Mozilo himself. Preferential treatment for these potentially influential borrowers was part of a broad effort by Countrywide to "ingratiate [Countrywide] with people in Washington who might be able to help the company down the road."

 

Listed below are individuals with primary responsibility to determine how Fannie and Freddie would be administered who also received or were offered benefits through the VIP program:

 

Senator Kent Conrad, Chairman of the Budget Committee and a Member of the Finance Committee, for whom Mozilo instructed the VIP loan department to "Take off 1 point";

 

Senator Christopher Dodd, Member of the Committee on Banking, Housing and Urban Affairs (elevated to Committee Chairman in 2007), who saved approximately $75,000 by refinancing his home at a reduced rate;

 

Senator John Edwards, Member of the Judiciary Committee, who was referred to the "Friends of Angelo" program when trying to finance the purchase of a $3.8 million home in Georgetown;

 

Alphonso Jackson, Secretary of Housing and Urban Development, who received two loans through the VIP program, and whose daughter was referred to the VIP program by a Countrywide lobbyist;

 

James "Jim" Johnson, former Fannie Mae CEO and adviser to the presidential campaigns of John Kerry and Barack Obama, whose loans were priced personally by Mozilo at discounted rates.

 

Clinton Jones III, senior counsel of the House Financial Services Subcommittee on Housing and Community Opportunity, who was referred for "specialized handling" to the "Friends of Angelo" program by a Countrywide lobbyist, resulting in ".5 off and no garbage fees"; and,

 

Franklin D. Raines, CEO of Fannie Mae, for whom Countrywide's VIP loan division applied a discount of "1 point off, no junk" to a $1 million refinance in response to a phone call from his secretary stating "per Angelo, Frank needs to refi."

 

This group, members of which were able to directly influence the debate about how to reform the GSEs and the mortgage originators, represents the most flagrant attempt by Countrywide to buy a voice in the debate.

 

Countrywide's VIP program also made sure to offer preferential treatment to people with secondary access to potential legislation affecting the relationship between the GSEs and the mortgage originator. Mozilo's "friends" also included:

 

Barbara Albrecht, Director of Legislative Affairs for the Mortgage Bankers Association;

 

Martha Belcher, counsel for Fannie Mae;

 

Joyce Brayboy, Chief of Staff for Congressman Mel Watt;

 

Charles Campion, lobbyist for Fannie Mae and Countrywide;

 

Mike Garver, brother-in-law of an aide to a "senior Member" on the House Financial Services Committee;"

 

Patty Johnson, CEO, Rebuilding Together, Inc.;

 

Jan Owen, Government and Industry Relations, Washington Mutual, former Executive Director of the California Mortgage Bankers Association;

 

Robert Sanborn, former Vice President, Fannie Mae;

 

Robert O'Toole, Senior Staff Vice President for the Mortgage Brokers Association;

 

John Potter, Postmaster General;

 

Annette Watkins, daughter of Alphonso Jackson; and

 

CatherineWillis, Director of Government Affairs, National Association of Independent Insurers.

 

Through the VIP program, Countrywide also gave preferential treatment to strategic allies outside Washington. This group of friends included home builders, developers, business partners, and city planners. Several Countrywide business partners were processed as VIPs; their ability to refer borrowers to Countrywide was the apparent motivation for enrollment. Business partners who received special treatment included William Esrey, former CEO of Sprint, which teamed up with Countrywide to provide property information to homebuyers on their cell phones, and Bruce Karatz, CEO of K.B. Home, a leading homebuilder that partnered with Countrywide to provide mortgage

services for K.B. homebuyers.

 

Countrywide extended courtesies through the VIP program for public relations purposes, giving preferential treatment to entertainers and law enforcement officials. Loans for entertainers Uma Thurman, Stanley Tucci, Ed McMahon, Roy Scheider, and Mort Sahl were processed in Countrywide's VIP loan unit. Shawn Brownell, a Deputy in the Malibu Sheriff’s Department, received discounts through the program. Andrew Bunnin, Manager of the Los Angeles Times, received preferential treatment from Countrywide, as did Jeffrey Young, the National Advertising Director. The Los Angeles Times is the most widely-circulated paper in Countrywide's home state of California, and the fourth-most widely circulated newspaper in the United States.

[Guest Robert Cruz]

Looks like the heroes are the villians and the villians are the heroes in this economic mess.

[Guest LAW_*]

It appears that way from this point of view.

 

Congress Responds

 

With Countrywide exerting influence on the debate about reform of the GSEs in Congress through the VIP program and Fannie Mae and Freddie Mac committing millions in lobbying and campaign contributions, the considerations of those with a financial stake in the outcome of reform efforts were well-represented. Fannie and Freddie reform legislation was never passed, let alone voted on by Congress.

 

During the 108th Congress (2003-04) six bills were introduced as efforts to reform Fannie Mae. None made it out of committee. In the Senate, S. 1656, a reform bill introduced by Senator John Corzine (D-NJ) died in the Senate Banking, Housing, and Urban Affairs Committee. Members of the 108th Congress expressed faith in the solvency of Fannie and Freddie. Congressman Barney Frank (D-MA) for example, described them as “not facing any kind of financial crisis." He was wrong.

 

In 2005, the "Federal Housing Enterprise Regulatory Reform Act," sponsored by Senator Chuck Hagel (R-NE) and co-sponsored by Senators Elizabeth Dole (R-NC), John McCain (R-AZ), and John Sununu (R-NH) proposed an increase in government oversight of Fannie Mae and Freddie Mac loans. Unlike the 2003 reform efforts, this bill made it out of the Senate Banking, Housing, and Urban Affairs Committee. A letter to Senate Majority Leader Bill Frist (R-TN) signed by 26 Republican Senators requested a full Senate vote, warning “If effective regulatory reform legislation . . . is not enacted this

year, American taxpayers will continue to be exposed to the enormous risk Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole." A full Senate vote was not called.

 

Hagel's chief of staff, Mike Buttry, said the legislation "was the last best chance to bring greater oversight and tighter regulation to Freddie and Fannie, and [the GSEs] used every means they could to defeat Sen. Hagel's legislation every step of the way."

[Guest LAW_*]

The Aftermath

 

Having averted Congressional reform efforts, Countrywide and Fannie Mae continued their cozy relationship. As of 2007, Countrywide alone originated 23 percent of Fannie Mae and Freddie Mac’s total volume of mortgages. As the market changed, foreclosures rose and home mortgage loan originations declined. This caused house price appreciation to slow and lenders tightened underwriting standards. More than 30 subprime lenders left the industry or went bankrupt in the 12 months prior to April 2007.

 

Going against the industry trend in 2007, Countrywide increased their number of mortgage loans by more than eight percent compared to the same period in 2006. During the first quarter of 2007, its mortgage lending increased nine percent to $115 billion. Countrywide rationalized this strategy by explaining the volatility in the market was short-term and they stood to benefit longer-term “as the marketplace rationalizes."

 

Barely a year later, the “Friends of Angelo” program was the topic of a June 2008 page one Wall Street Journal story and a subsequent series of June-August Portfolio articles for loaning at lower-than-market rates to legislators and executives involved with oversight and management of the mortgage industry and the GSEs. By September 2008, the federal government seized the insolvent GSEs and placed them into conservatorship, pledging $200 billion to cover the companies’ losses. By the end of February 2009, the government committed an additional $200 billion to "remove any possible concerns debt and mortgage-backed securities investors have about the strong commitment of the U.S. Government to support Fannie Mae and Freddie Mac."

[Guest LAW_*]

Free "Float-Down"

 

If interest rates fell while a VIP loan was pending, Countrywide provided a free “float-down” to the lower rate. Lenders charge .125 point or .25 point for a float-down option, which allow borrowers to access lower rates if they become available during the commitment period. According to Portfolio magazine, Countrywide charged .5 point for a float-down.

 

Senator Christopher Dodd, like many other Countrywide VIPs, received floatdowns on his two Countrywide mortgages. According to a former Countrywide employee, Dodd’s float-downs were free.

 

Stephen Brandt was instructed by Mozilo to “knock [the] socks off” of borrower and former Secretary of Health and Human Services Donna Shalala with “great service." Among the perks given to Shalala were .25 point float downs on each of the two loans she was arranging with Countrywide.

[Guest LAW_*]

Ignore the Rules

 

Some VIPs who bought or refinanced second homes were given the lower interest rate associated with primary residences. Lenders consider financing vacation homes more risky because borrowers are more likely to default on a vacation home mortgage than on one for a primary residence.

 

Senator Kent Conrad, chairman of the Budget Committee, first arranged a mortgage through Countrywide when Jim Johnson referred him to Mozilo in 2002. At the time, Conrad was seeking financing for the purchase of a vacation home in Bethany Beach, Delaware.

 

According to Conrad, he "called (Mozilo). I said, 'I'm buying this property. Would you be interested in the mortgage?', and he said, Yeah. Call these people and we'll take a look."' When Conrad refinanced the million-dollar loan in 2004, Mozilo waived one point.

 

Feinberg communicated with Geri Gaginis, Conrad’s executive assistant in the Senator’s personal office, throughout the refinance process. After Gaginis informed Conrad his rate had been locked in and his loan was in process, she informed Feinberg the Senator was very appreciative.

 

Later in 2004, Conrad contacted Feinberg and inquired about refinancing an eight-unit apartment building he and his brothers owned in Bismarck, North Dakota. Conrad had recently refinanced a loan for a property in Delaware through Countrywide and he was given a one point discount. Feinberg was unsure how to handle the new request given the fact the loan violated Countrywide’s policy of providing loans only for buildings of four units or fewer. Feinberg contacted Mozilo and asked him to "Please let me know how to proceed."

 

Mozilo instructed Feinberg to ask Countrywide Managing Director Dave Spector to "make an exception due to the fact that the borrower is a senator."

[Guest LAW_*]

Conclusion

 

Countrywide CEO Angelo Mozilo organized a deliberate and calculated effort to establish relationships with key participants in the GSE-reform debate by affording decision-makers and other influential opinion leaders preferential mortgage loan terms. This effort was successful.

 

His friends, who were known inside of Countrywide as “Friends of Angelo,” in many instances returned the favor. In Congress, for example, legislation adverse to Countrywide’s interests was blocked. At Fannie Mae, Chief Executive Franklin D. Raines – a “Friend of Angelo” – adopted strategies that assisted the continued growth of Countrywide.

 

Some of the people in Congress and at the GSEs who were in the best position to diagnose and prevent a colossal failure of the mortgage industry were targeted by Countrywide for special handling.

 

Members of Congress and leaders of GSEs are explicitly prohibited from accepting gifts and discounts for precisely this reason. Effective oversight requires objectivity, and forging a relationship with and accepting preferential treatment from a major stakeholder in the outcome of a reform effort compromises objectivity.

 

The gift and disclosure rules applicable to Congress do not merely prohibit quid pro quo exchanges of gifts in exchange for specific action. The rules prohibit accepting any gifts to avoid the appearance of a quid pro quo expectation.

 

The rules are restrictive because the stakes are high. In this case, the health of the American economy was at stake.

 

We now know the economy was not adequately protected by some of the very people who could have made a difference – several influential “Friends of Angelo.”

[Guest interbusiness]

In Summary, the housing bubble in the U.S. was caused by historically-low interest rates, lax lending standards, and a speculative fever.