‘Fund the loans’
Countrywide had been slower than many other mortgage lenders to fully embrace making subprime loans to borrowers with modest incomes or weak credit. By 2004, though, Countrywide had become a player in the market for subprime deals and many other nontraditional mortgages, including loans that didn’t require much documentation of borrowers’ income and assets.
These loans were part of the plan for meeting its CEO’s audacious goal of growing his company from a giant to a colossus. Mozilo had vowed that his company would double its share of the home-loan market to 30 percent by 2008.
Some former Countrywide employees say the pressure to push through more and more loans encouraged an anything-goes attitude. Questionable underwriting practices often helped risky loans sail through the lender’s loan-approval process, they say.
In one example, Countrywide approved a loan for a borrower whose application listed him as a dairy foreman earning $126,000 a year, according to a legal claim later filed by Mortgage Guaranty Insurance Co., a mortgage insurer. It turned out that the borrower actually milked cows at the dairy and earned $13,200 a year, the lawsuit alleged.
The borrower provided the correct information, but the lender booked the loan based on data that inflated his wages by more than 800 percent, the legal claim said.
In another instance, according to a former manager cited as a “confidential witness” in shareholders’ litigation against the company, employees appeared to be involved in a “loan flipping” scheme, persuading borrowers to refinance again and again, giving them little new money, but piling on more fees and ratcheting up their debt. The witness recalled that when the scheme was pointed out to Lumsden, Countrywide’s subprime loan chief, the response from Lumsden was “short and sweet”: “Fund the loans.”
Such episodes weren’t uncommon, the witness said. In early 2004, he claimed, he discovered that Nick Markopoulos, a high-producing loan officer in Massachusetts, had cut and pasted information from the Internet to create a fake verification of employment for a loan applicant. Markopoulos left the company of his own accord, the witness said, but he was soon rehired as a branch manager.
The witness said he contacted a regional vice president to object to rehiring an employee with a history of fraud. But he said the regional VP — citing Markopoulos’s high productivity — overruled his objections.
Markopoulos couldn’t be reached for a response. Lumsden says he doesn’t recall any incident involving “loan flipping” allegations.
Eileen Foster knew little about Countrywide’s fraud problems when she took a job with the company in September 2005.
For Foster, the move seemed like a natural progression. She’d accumulated 21 years’ experience in the banking business, starting out as a teller at Great Western Bank and working her way up to vice president for fraud prevention and investigation at First Bank Inc.
Countrywide brought her on as a first vice president and put her in charge of a high-priority project: An overhaul of how the company handled customer complaints.
The company’s systems for handling complaints, Foster recalls, were disjointed and ineffective. Various divisions had differing policies and there wasn’t much effort to ensure that complaints got addressed. Things had gotten so bad, she says, federal banking regulators ordered the company to do something about the problem. Foster’s task was to standardize the company’s procedures and ensure that people with complaints didn’t get brushed off.
As she set about fixing the problems, she says, she encountered things that gave her pause.
The company’s mortgage fraud investigation unit, Foster says, refused to share data about the complaints it received. Each time she requested the stats, she says, she hit a brick wall.
Foster says she also ran into a hitch when she began distributing a monthly report that broke down complaint data for each of the companies’ operating divisions.
Countrywide Home Loans Servicing, which collected borrowers’ payments each month, was the subject of complaints about its foreclosure practices and other issues. The volume of serious complaints involving the servicing unit topped 1,000 per month, dwarfing the number for other divisions.
This upset officials with the servicing unit, Foster recalls. The complaints weren’t “real complaints,” the servicing execs argued, and Foster was making the unit look bad by including them in her reports.
The upshot: Foster was ordered, she says, not to include many of the complaints about the servicing unit in her reports. She thought it was odd, she says, but she didn’t think it was evidence of a larger pattern. She figured it was mostly an exercise in backside-covering.
“When we lost at the meeting, I was like, ‘OK, they want to just cover this up,’” Foster says. “But it wasn’t anything to the scale that I thought it would cause great harm.”
Only later — after she took over the mortgage fraud investigation unit — did she realize, she says, that cover ups were part of the culture of Countrywide, and that efforts to paper over problems had less to do with bureaucratic infighting and more to do with hiding something darker within the company’s culture.
“What I came to find out,” she says, “was that it was all by design.”
Bouquets and handbags
State law enforcers would later charge that Countrywide executives designed fraud into the lender’s systems as a way of boosting loan production. During the mortgage boom, critics say, Countrywide and other lenders didn’t worry about the quality of the loans they were making because they often sold the loans to Wall Street banks and investors. So long as borrowers made their first few payments, the investors were usually the ones who took the hit if homeowners couldn’t keep up with payments.
Countrywide treated borrowers, California’s attorney general later claimed, “as nothing more than the means for producing more loans,” manipulating them into signing up for loans with little regard for whether they could afford them.
Countrywide’s drive to boost loan production encouraged fraud, for example, on loans that required little or no documentation of borrowers’ finances, according to a lawsuit by the Illinois attorney general. One former employee, the suit said, estimated that borrowers’ incomes were exaggerated on 90 percent of the reduced-documentation loans sold out of his branch in Chicago.
One way that Countrywide booked loans was by paying generous fees to independent mortgage brokers who steered customers its way. Countrywide gave so little scrutiny to these deals that borrowers often ended up in loans that they couldn’t pay, the state of Illinois’ suit said.
In Chicago, the suit said, Countrywide’s business partners included a mortgage broker controlled by a five-time convicted felon. One Source Mortgage Inc.’s owner, Charles Mangold, had served time for weapons charges and other crimes, the suit said.
One Source received as much as $100,000 per month in fees from Countrywide, banking as much as $11,000 for each loan it steered to the lender. Mangold, in turn, showered a Countrywide branch manager and other employees with expensive gifts, including flowers and Coach handbags, the suit said.
Countrywide in turn funded a stream of loans arranged by One Source, the suit said, even as the broker misled borrowers about how much they’d be paying on their loans and falsified information on their loan applications. One borrower provided pay stubs and tax returns showing he earned no more than $48,000 per year, but One Source listed his income as twice that much, according to the suit.
Mangold couldn’t be reached for comment. His attorney said in 2007 that Mangold denied all of the state’s allegations against him.
Countrywide, the state’s suit said, kept up its partnership with One Source for more than three years. It didn’t end the relationship until the state sued One Source for fraud and slapped Countrywide with a subpoena seeking documents relating to the broker.
As questionable practices continued, Countrywide’s fraud investigation unit had trouble keeping up, according to Larry Forwood, who worked as a California-based fraud investigator for Countrywide in 2005 and 2006, before Foster took over the fraud unit. His personal caseload totaled as many as 100 cases at a time, many of them involving dozens or hundreds of loans each.
Some cases involved mortgage brokers or in-house staffers who pressured real-estate appraisers to inflate property values. The company maintained a “do not use” list of crooked appraisers who’d been caught falsifying home values, but the sales force often ignored the list and used these appraisers anyway, Forwood says.
Countrywide’s fraud investigation unit did have some successes during Forwood’s tenure. It shut down a branch in the Chicago area, he said, after a rash of quick-defaulting loans sparked a review that uncovered evidence of bogus appraisals and forged signatures on loan paperwork. One manager, Forwood says, tried to rationalize the fraud, telling investigators: What was the big deal if, say, five out of every 30 loans was fraudulent?
When the unit shut down a branch in southern California after uncovering similar evidence of fraud, Forwood recalls, it got some pushback. It came all the way from the top, he says, via a phone call to the fraud unit from Mozilo.
“He got very upset,” Forwood says. “He basically got on the phone and said: ‘Next time you need to do that, clear it with me.’”
Mozilo’s attorney didn’t respond to questions from iWatch News about Forwood’s account.
Continue reading part two of this story.