“Everybody wins if we can increase minority homeownership, so together we’re taking on the challenge of getting more people into homes,”37 Mozilo stated in living color on a full page in Fannie Mae’s 2003 annual report, pictured wearing a flamboyant black chalk-striped suit and a garish yellow tie that made him look more like a Prohibition-era rumrunner than a mortgage banker. The report continued,
Fannie Mae shares this vision, and together we’re working harder than ever before to make homeownership accessible to more Americans. . . . Right now only 50 percent of minority families own homes. The task for companies like Countrywide is moving it from 50 percent to 80 percent. . . . As Mozilo notes, “You can’t quantify the emotional impact of home ownership in people’s lives.” So as long as there is a gap in minority and non-minority homeownership rates, Fannie Mae and Countrywide will continue to make sure all Americans have the chance to realize the dream of homeownership.
These are absolutely ludicrous statements. Never mind minorities—achieving Mozilo’s goal of 80 percent home ownership meant that a household earning $15,000 per year38 (that’s just $288 a week, regardless of the color of your skin) would own a home with all of the financial responsibilities for mortgage payments, insurance, property taxes, and upkeep. But astonishingly, no one in a position of power called Mozilo or Fannie Mae out. No member of Congress, no shareholder, and no member of the respective boards of directors challenged the premise of this socially noble-sounding rhetoric.
Mozilo had devised a deviously brilliant formula. Under the cultural creep of hypersensitive political correctness, who could possibly question a statement with the word minority in it without coming across as racist? Who could question home ownership for all without seeming elitist? But home ownership was not Mozilo’s or Raines’s real goal; it was a mere smokescreen to shroud the ill-gotten gains of a few perpetrating a grand fraud on the American people. In rich irony, the worst of the fraud would be perpetuated on the most vulnerable: the low-income minorities that Countrywide and Fannie claimed were the beneficiaries of their noble policies and programs.
“Act now to make every month National Homeownership Month,”39 Mozilo urged in Mortgage Banking magazine. Washington politicians, many already in the pocket of Countrywide as part of his VIP lending program, heeded the call.
Under pressure that Mozilo and Raines helped create, the Clinton administration ordered Fannie Mae to increase home ownership rates among low-income borrowers. To comply with the mandate, Raines lowered his company’s lending standards to include “individuals whose credit is generally not good enough to qualify for conventional loans.”40
Fannie Mae starting buying up risky subprime and Alt-A loans at an accelerating pace to meet its ever-increasing government goals. Down payment requirements fell to 3 percent, then to zero. Fannie took risky loans and bundled them together with gilt-edged ones. Wall Street was glad to buy up these mortgage cocktails without even questioning the ingredients, because Fannie Mae was deemed a government-insured behemoth “too big to fail.”41
Countrywide, for its part, had a field day. With a combination of high interest and big fees on shaky loans funded by cheap money from Fannie, Mozilo was driving a government-subsidized profit machine unwittingly backed by the American taxpayer. Whereas the profitability of a high-quality prime loan was less than one percentage point of the mortgage’s value, subprime loans produced nearly quadruple the profit.42 On some subprime loans that carried high prepayment penalties, Countrywide’s profit margins could reach 15 percent of the loan value—$75,000 on a $500,000 mortgage.
To Beg or to Bribe?
Mozilo was also working every political angle he could find to corrupt the markets in his favor and protect his personal cash cow, Fannie Mae. Referrals of VIPs with the potential to influence legislation affecting Countrywide often came from Mozilo’s man in Washington, Jimmie Williams, Countrywide’s chief lobbyist. According to a former Countrywide managing director, Sydney Lenz, Williams and Countrywide’s Washington guys routinely identified potential customers on Capitol Hill to “keep their edge,” then actively offered to buy their influence with special Friends of Angelo loan deals.43
One beneficiary was Franklin Raines himself. According to a congressional investigation, when Raines refinanced his mortgage in June 2003, his assistant telephoned Countrywide on his behalf. According to the phone message, she stated that “per Angelo, Frank needs to refi.” Countrywide gave him a full percentage point off of a million-dollar loan and waived other fees that, according to the Wall Street Journal, would have ordinarily cost Raines at least $10,000 at closing.44 The loan also represented a $215,000 reduction in cost over the life of the loan—an outright kickback not available to regular customers such as, say, a butcher like Mozilo’s father.
These weren’t just one-off deals, either. Mozilo and his team took a systematic and analytic approach to buying political power, weighing the financial cost of the favor against the potential benefit of influence on legislation or regulation. In one case during 2002, the mayor of Billings, Montana, approached Jimmie Williams about canceling the mortgage insurance he was legally obligated to pay on his home loan. During an ensuing internal e-mail discussion, Lenz blatantly laid out the cost-benefit analysis for Williams.
I’m usually in favor of settling on the side of the borrower with political influence. However, in this case, I think the MI [mortgage insurance] payment for the life of the loan has the potential of being a greater number than the Mayor of Billings Montana[’s] influence. Jimmie, since you work with the mayors, what’s your opinion?45
Williams responded by reciting the mayor’s credentials, mentioning his wife’s role at the Democratic-leaning New Republic magazine and noting he “sits on the Advisory Board of the U.S. Conference of Mayors” and he “is also very likely to hit the speaking circuit.” Ultimately the decision was made and issued via another e-mail.
Due to the Mayor’s (and his wife’s) potential influence and accessibility to media outlets and publications, offer him a refi and either give him a .25 credit toward the discount or a $500.00 credit toward closing costs. Either way, we’re showing our good faith.46
Mozilo often priced the VIP loans himself and proudly made the specialized treatment known to the recipients through notes or business cards attached to their lending documents. While hundreds of potential benefactors were members of the Friends of Angelo club, particularly troubling were those with primary responsibility to determine how Fannie and Freddie would be administered. In addition to Raines and Johnson, recipients of these buy-offs included:
Senator Kent Conrad (D-ND), chairman of the Budget Committee and a member of the Finance Committee, arranged a $1.07 million refinance in 2004 for a mortgage on a vacation home in Bethany Beach, Delaware. Mozilo ordered “take off 1 point,” noting, “make an exception due to the fact that the borrower is a senator,”47 saving Conrad $10,700 up front, or $240,096 over 30 years.
Senator Christopher Dodd (D-CT), 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.48
Senator John Edwards (D-NC), 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.49 “Edwards will probably be either the vice pres or pres candidate for the Democrats for 2004,” Mozilo informed his VIP loan staff via e-mail. “Do whatever it takes to get it closed by the 23rd and call me for the pricing.”50
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. Jackson’s second loan was for a $308,000 vacation home on a golf course in Hilton Head Island, South Carolina. Both of Jackson’s loans included undisclosed discounts.51
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.” Countrywide’s normal lending policies were manually overridden for Jones, who would not have ordinarily qualified for the loan he was given.52
Daniel H. Mudd, Fannie Mae CEO, who succeeded Raines, received two mortgage loans for about $3 million each, with undisclosed discounts.53
At the same time Mozilo was personally granting generous preferential treatment to members of Congress, congressional staff, lobbyists, regulators, and assorted influential bureaucrats, Congress was considering legislation to reform the GSEs. The most notable reform effort died in the Senate Banking Committee, where Senator Christopher Dodd—a Friend of Angelo whose sweetheart deal saved him $75,000—was a member. Reform legislation never passed out of Dodd’s committee, let alone get voted on by Congress.54
Carnival Barker of Loans
If you had influence, you got a great deal from Countrywide. But if you were just a nobody, you still got a mortgage even if you were a deadbeat—as long as you paid Countrywide’s full-fare rates and fees. According to Countrywide’s own product list, it would lend $500,000 to a borrower rated C-minus, the second riskiest grade. It would lend to borrowers with credit scores as low as 500 out of 850. It would lend to borrowers who had filed for personal bankruptcy or those who had been delinquent for more than 90 days on a previous mortgage twice in the previous 12 months. One Countrywide manual stated that a loan could be made to a borrower even if he or she had just $550 of income left to live on each month after making the housing payments.55 If you paid the up-front fees, apparently all that Countrywide required was that the borrower exist—and if the game could have gone on a little longer, we have no doubt it would have relaxed even that last remaining standard by creating exceptions to the definition of existence itself.
Mozilo prided himself on the explosion of new products he created to lure even the most unqualified consumers into his lending trap. At one point during an investor presentation, he sounded like a carnival barker as he listed some of the 180 loan products Countrywide offered. “We have ARMs, one-year ARMs, three-year, five-year, seven- and 10-year,” he said, rapid-fire. “We have interest-only loans, pay-option loans, zero-down programs, low-, no-doc programs, fast-and-easy programs, and subprime loans.”56 For the once-staid company that had prided itself on conservative lending practices and below-average defaults, Countrywide might as well have been standing up on a packing crate with a megaphone crying, “Step right up and see the freak show!”
One particularly devious loan structure was called the pay-option adjustable-rate mortgage (ARM). A pay-option ARM allowed a borrower to pay only a fraction of the loan interest due each month and none of the principal. Designed to put the financially strapped into homes they couldn’t afford with conventional financing, the product was a disaster in the making. For starters, any payment shortfall was added to the mortgage balance, which would then grow in size and accrue interest. Even if the borrower made a down payment in a steady or rising housing market, over time the loan balance owed could easily exceed the home’s value. Then, the A in ARM meant that interest rates could adjust or reset higher—sometimes dramatically—slamming unexpected costs on a homeowner who was already hanging by the fingernails on a reduced mortgage payment.
Heroic banking executives like John Allison at Branch Banking and Trust Company (BB&T), whom we met in Chapter 3, “The Leader,” had the courage and discipline to walk away from seemingly easy profits, shunning pay-option ARMs like radioactive sludge from Chernobyl. Countrywide slurped them up with gusto because the profit on them was so huge—at least in the short term. Talking points on one internal sales document called “Pay Option A.R.M.’s Made Simple” asks, “What kinds of customers would be interested in these loans?” The answer: “Anyone who wants the lowest possible payment!” It should have read, “Anyone who wants the highest possible risk of financial ruin!” In 2005, the year of peak home prices in the housing bubble that was about to burst, pay-option ARMs accounted for over one-fifth of Countrywide’s mortgages versus just 3 percent the previous year.57
Bad loans were starting to collect like raw sewage in Countrywide’s basement, but to the outside world the picture couldn’t have seemed more glorious. By the end of 2004, Countrywide had leaped in front of Wells Fargo to be the nation’s largest mortgage company. It originated a stunning $363 billion in mortgages that year. A year later, Countrywide originated almost $500 billion in mortgages. Senior executives had taken to telling investors that Countrywide expected to originate $1 trillion worth of mortgages by 2010.58 Mozila was halfway to that goal—though without knowing it, a few steps away from the gates of hell.
Exceptions Are the Rule
Over time, even the risky borrowers of our nation became fully leveraged. So Countrywide began using more aggressive tactics—it started treating even the most creditworthy borrowers as though they were deadbeats. In other words, brokers and sales reps were encouraged to peddle risky high-commission subprime loans to customers even if they could qualify for a safer low-commission loan a notch or two up the quality scale. Mozilo incentivized his brokers with commission rates based on the value of the mortgage, not on the quality of the credit. “The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market,” an unnamed Countrywide sales executive said.59
Let’s say a customer with documented income, a 10 percent down payment, and a 620 credit score could qualify through the FHA for a standard 30-year fixed-rate mortgage at a payment of $1,829 a month. The very same customer priced through Countrywide would have been offered a subprime loan at $2,387 a month—a difference of $6,696 a year.60 Why would such customers pay more than necessary? Because at those rates, Countrywide would lend them more money, using exotic gimmicks like pay-option ARMs to make it seem practically as though the loan would never have to be paid back.
But ultimately, in the last gasp of the housing bubble, Countrywide wrung the last drops of commission dollars out of the exhausted marketplace by basically lending any amount of money to anybody, on any terms, provided the commissions were large enough. Subprime borrowers could get a loan up to $1 million. The maximum loan-to-value ratio was by then 100 percent. The only qualification for doing a stated-income loan—that is, a loan based on what you state your income is, not what you can actually prove it is—was that you were a “wage earner.” Countrywide offered interest-only loans to borrowers with 580 credit scores.61 According to Dave Zitting, an old-fashioned mortgage banker at Arizona-based Primary Residential, the standard became “Breathe on a mirror, and if there’s fog, you got the loan.”62
Countrywide then adopted a “matching strategy,” which committed the company to offering any product or matching any underwriting guideline available from at least one “competitor,” which included subprime lenders. If Countrywide’s stated minimum credit score for a product was 600, but a competitor’s minimum score was 560, Countrywide would reduce its minimum to 560 in order to match its competitor and make the loan. What resulted was a race to the bottom—an amalgamation of the very worst underwriting standards in the industry all under one roof. Countrywide also prohibited its loan officers from the common industry practice of referring risky loan applicants to other brokers or institutions in exchange for a small referral fee.63 These combined practices all but ensured Countrywide would become like a drain trap for the kitchen sink, catching and retaining the foulest of sludge from the market’s garbage disposal.
Despite official lending standards that were, in Countrywide’s own words, “among the most aggressive in the industry,”64 Mozilo would allow loans to be approved on an even more lax, ad hoc basis. Countrywide’s automated underwriting system, called “CLUES,” didn’t even have a “reject” option. Loans were either, (1) approved, (2) approved with caveats, or (3) �
��referred” to another loan desk for further consideration or manual underwriting. Manual underwriting consisted of overriding Countrywide’s own already lenient internal checks and balances on an “exception” basis. The exceptions culture, which started and ended at the top with Mozilo himself, became the rule. So when it came to creditworthiness, Countrywide may have had CLUES, but it didn’t have a clue.
After three separate attempts to underwrite failed even on an exception basis, loan applications would be referred to Countrywide’s Secondary Markets Structured Lending Desk, where no attempt at all was made to underwrite the loan. The sole criterion for approving the loan was whether the secondary marketing desk could sell it to someone else. This is the dark secret at the core of Mozilo’s otherwise seemingly impossible scam factory. How could Countrywide have made such bad loans? Simply because it immediately sold them to someone else. It’s history’s most egregious example of the “greater fool” theory of investing: it’s okay to be a fool, as long as someone else is a greater fool.
That fool was likely to be Fannie Mae. As of 2007, Countrywide alone originated 23 percent of Fannie Mae and Freddie Mac’s total volume of mortgages.65 The greatest fool, then, would ultimately be the American taxpayer. And the problem wasn’t just limited to the explicitly labeled subprime category. Countrywide’s chief risk officer, John McMurray, later revealed to analysts that Fannie would classify loans as prime to meet its affordable-housing goals even with credit scores that would typically be considered subprime. “There is a belief by many that prime FICOs [credit scores] stop at 620,” McMurray said. “That’s not the case. There are affordability programs and Fannie Mae expanded approval, as an example, that go far below 620, yet those are still considered prime.”66
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