Homeowners can only be foreclosed and evicted from their homes by the person or institution who actually has the loan paper, only the note-holder has legal standing to ask a court to foreclose and evict. Not the mortgage, the note, which is the actual IOU that people sign, promising to pay back the mortgage loan. 
  
            Before Mortgage Backed Securities,(MERS) most mortgage loans were issued by the local Savings & Loan. So the note usually didn't go anywhere: It stayed in the offices of the S&L down the street. 
  
            But once mortgage loan securitization happened, things got sloppy, they got sloppy by the very nature of Mortgage Backed Securities. 
  
            The whole purpose of MBS's was for different investors to have their different risk appetites satiated with different bonds. Some bond customers wanted super-safe bonds with low returns, some others wanted riskier bonds with therefore higher rates of return. 

             Therefore, as everyone knows, the loans were "bundled" into REMIC's (Real-Estate Mortgage Investment Conduits, a special vehicle designed to hold the loans for tax purposes), and then "sliced and diced", split up and put into tranches, according to their likelihood of default, their interest rates, and other characteristics. 

            This slicing and dicing created "senior tranches", where the loans would likely be paid in full, if past history of mortgage loan statistics was to be believed. And it also created "junior tranches", where the loans might well default, again according to past history and statistics. (A whole range of tranches were created, of course, but for purposes of this discussion, we can ignore all those countless other variations.)

            These various tranches were sold to different investors, according to their risk appetite. That's why some of the MBS bonds were rated as safe as Treasury bonds, and others were rated by the ratings agencies as risky as junk bonds. 

            But here's the key issue: When an MBS was first created, all the mortgages were pristine, none had defaulted yet, because they were all brand new loans. Statistically, some would default and some others would be paid back in full, but which ones specifically would default,  No one knew, of course. However, that having been said, there is another aspect to this part of the Great Mortgage Collapse now in progress. Angelo Mosilo's , Countrywide Mortgage' company had been dealing on the very shady side for some time. What Mozilo was doing was to actively recruit people with bad or no credit, deliberately supply faked credit applications, grant expensive home mortgages solely on these faked reports as interest only loans  and then, having settled their patsies in new homes, sell the mortgages based on fake information to banks. Mozilo's people knew that after a passage of time, all interest only loans would raise their rates and that as they were well aware that their clients could never afford the increased payments, they sold these faulty papers as quickly as they could.

   `        Same with mortgages. 

            So in fact, it wasn't that the riskier loans were in junior tranches and the safer mortgage loans were in the senior tranches: Rather, all the loans were in all the tranches, and if and when a mortgage in a given bundle of mortgages defaulted, the junior tranche holders would take the losses first, and the senior tranche holder take the loss last. 

            But who was the owner of the junior tranche bond and the senior tranche bond,  Two different people. Therefore, the mortgage note was not actually signed over to the bond holder. In fact, it couldn't be signed over. Because, again, since no one knew which mortgage would default first, it was impossible to assign a specific mortgage to a specific bond. 

             Therefore, the question became as to how to make sure the safe mortgage loan stayed with the safe MBS tranche, and the risky and/or defaulting mortgage went to the riskier MBS tranche,  

            Now appeared on the scene, a government-sponsored MERS, the Mortgage Electronic Registration System. 
  
            MERS was the repository of these digitized mortgage notes that the banks originated from the actual mortgage loans signed by homebuyers. MERS was jointly owned by Fannie Mae and Freddie Mac , like MERS, a U.S Government-sponsored and controlled entity
  
            The purpose of MERS was to help in the securitization process. Basically, MERS directed defaulting mortgages to the appropriate tranches of mortgage bonds. MERS was essentially the operating table where the digitized mortgage notes were sliced and diced and rearranged so as to create the Mortgage Backed Securities.  

             However, legally, and this is the important part, MERS didn't hold any mortgage note: The true owner of the mortgage notes should have been the REMIC's. 

            But the REMIC's didn't own the note either, because of a fluke of the ratings agencies: The REMIC's had to be "bankruptcy remote", in order to get the precious ratings needed to peddle Mortgage Backed Securities to insitutional investors. 

            So somewhere between the REMIC's and the MERS, the chain of title was broken. 

            Now, what does "broken chain of title" mean,  Simple: When a homebuyer signs a mortgage, the key document is the note which is the actual IOU. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a Mortgage Backed Security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the "chain of title". 

            You can endorse the note as many times as you please, but you have to have a clear chain of title right on the actual note:  The original, and all future holders and sellers had to have their notarized signatures on this note, by law.

            If for whatever reason, any of these signatures is skipped, then the chain of title is legally considered to be broken. Therefore, missing, or forged, signatures and notary attestations mean that  legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay. 

            To repeat: If the chain of title of the note is broken, then the borrower no longer owes any money on the loan. 
 

            This sentence is the entire crux of the issue.
  
            The broken chain of title wouldn't have been an issue if there hadn't been an unusual number of foreclosures. Before the housing bubble collapse, the people who defaulted on their mortgages wouldn't have bothered to check to see that the paperwork was in order. 

            But as everyone knows, following the housing collapse of 2007-which is still in progress, there's been an enormous number of foreclosures, and foreclosures on a lot of people who weren't part of the Mozilla-scam wherein people with little or now credit were given, by crooked mortgage brokers, false credit reports in order to obtain "interest only" loand, which they could never begin to pay when the full payments kicked in.were in the same position as smart and cautious people who got squeezed by circumstances. 

             Unfortunately for the crooked banks, mortgage companies and their many friends in the government, to include the White House the latter group started contesting their foreclosures and evictions, and so started the process of investigating  the chain of title issue . . . and that's when the paperwork became important. So at that point, it was evident to the crooks that the chain of title became important and the botched paperwork became a non-trivial issue. 
  
            Now, the banks had hired "foreclosure mills", law firms that specialized in foreclosures, in order to handle the massive volume of foreclosures and evictions that occurred because of the collapse of the rigged housing bubble. These foreclosure mills, as one would expect, were the first to spot the broken chain of titles. 
  
            Not, it has become painfully evident that these foreclosure mills faked and falsified documentation, so as to fraudulently repair the chain-of-title issue, thereby "proving" that the banks had judicial standing to foreclose on a delinquent mortgage. In many, proven, cases, these foreclosure mills even forged the loan note itself..

            Yes, to repeat  The foreclosure mills actually, deliberately and categorically faked and falsified documents, in order to expedite these foreclosures and evictions. 

            So in other words, a massive fraud has been, and still is being carried out, with the inevitable innocent bystander getting caught up in this fraud: One can site here the appalling example of the man who got foreclosed and evicted from his home in Florida, even though he didn't actually have a mortgage, and in fact owned his house free-and-clear. That family that was foreclosed and evicted, even though they had a perfect mortgage payment record.

            The sole reason why these criminal frauds began to get into the generally obedient American media is not because the banks suddenly discovered "procedural errors" but when the title insurance companies, well aware of the frauds refused to insure the title for the pragmatic, not idealistic, reason that they would have been considered liable in the eyes of the law had they furthered the frauds. 

            In every sale, a title insurance company insures that the title is free and clear:; that the prospective buyer is in fact buying a properly reviewed and verified piece of legal property, and that all of the title issues on this specific property are legally in order and correct.  Title insurance companies, fully aware of the frauds, stopped providing their service because, of course, they didn't want to expose themselves to the risk that the chain-of-title had been broken, and that the bank had illegally foreclosed on the previous owner. In the final analysis, the title companies were in the position of guaranteeing something they could not do and, faced with the certainty of lawsuits, they rebelled and refused further participation in what was an obvious fraud.

  

            When the title companies refused to cooperate in the frauds, the Attorneys General of all the states started criminal investigations into the frauds.

            The fact that Ally Financial (formerly GMAC), JP Morgan Chase, and Bank of America suspended foreclosures, feigning shock and horror, is a certain sign that the mortgage problem was a mega-problem for at least 60 million American home and business owners. Banks that size, with that much exposure to foreclosed properties, simply do not suspend foreclosures because they are  good corporate citizens who want to do the right thing, with all the paperwork in strict order, they're halting their foreclosures for a reason. 
  
            The furtive and pathetic move by the United States Congress to sneak by the Interstate Recognition of Notarizations Act was a blatant attempt to help out their financial friends but unfortunately, Congress can pass no ex post facto (after the fact) laws and even the bank-friendly President Obama refused to sign this into law. In sum, the all-powerful banking lobby wanted to force through that law so that their foreclosure mills' forged and fraudulent documents would not be scrutinized by out-of-state judges. It is entertaining to note that the cowardly Senators who jammed this bill through, did so by a voice vote, so that there would be no registry of who had voted for it, and therefore no personal accountability to outraged and defrauded Americans.
  
            And just as soon as the White House announced the pocket veto, the very next day!, the Bank of America halted all foreclosures, nationwide. It is interesting to note that the same Bank of America had bought out mortgage-swindler Mozila's , Countrywide Mortgage' and was continuing his fraudulent practices.

            It is really delightful to relate that the corrupt and all-powerful American banks have come a cropper is because if they have been foreclosing on people they didn't have the legal right to foreclose on, then those people have the absolute right to get their property back. And the people who purchased  those foreclosed houses from the bank did not actually own the houses they paid for.  And should these bargain-hunters find that they themselves can be evicted, they can only file lawsuits in the hopes of recovering any fees paid in the purchase of what is, in most cases, property no one can legally own because the records are defective.

            But this is not a moral issue for the banks. When banking institutions become so powerful they are the de facto rulers of the county, morality is not an issue. After all, ethics and morals are excellent norms but not effective techniques. It is a matter of legal liability and the enormously rich banks have put themselves in the position of being sued, massively at that, for their fraudulent and often criminal actions.

            The fraud committed by the foreclosure mills casts enough doubt that now, all foreclosures come into question. Not only that, all mortgages now come into question. 
  
             Although the great mass of the defrauded Americans have not yet realized it, the current situation is such that there is a strong possibility, if not to say probability that  mortgage-paying homeowners may be able to get out of their mortgage loan and keep their house, without any further payment.

            All any victim has to do is to demand, in writing, that the banks and lending agencies produce legal proof (which because of the slicing and dicing of mortgages and the resale of these bits and pieces far and wide is totally impossible) of title ownership, no one can legally evict them and should this happen, all of the parties involved would become instant targets for successful and destructive law suits.

              Although the victimized American public is only just beginning to realize it, this all-pervasive, government assisted fraud is becoming a major national and world economic disaster. Not only will the value of any American mortgage-backed security vanish worldwide but there will be pure hell to pay, both when the swindled go into court and when the rest of the citizenry realize they don't need to pay their debts!

            But if the American public expects that the banker-bought Obama administration will take any kind of strong action against the enormous scam, they will be badly mistaken. Public faith in government integrity is at an all-time low and the waffling and weakness of the White House bodes ill for the future.

            Instead of firm leadership and equally firm statements from them about not only ending the growing crisis but punishing the transgressors, we are getting mumbling ,soft speech and   non-sequesters  from a President, and Congress who are in debt to the generous banking community and, with national elections looming, pray for the public and the media, to find other, safer topics to discuss.

            In an interview on C-Span, the chairwoman of the Federal Deposit Insurance Corporation, Sheila C. Bair, suggested the fallout from this issue " might not be as severe as many now predict. If it turns out this is just a process issue, then I don't anticipate the exposures to be significant," she said  New York Times,  October 17, 2010

            The full extent of the foreclosure/fake mortgage scandal is finally emerging from behind carefully cultivated concealing underbrush, and an alarmed Congress is now calling for a "hearing" on the subject and throughout the country, the housing market has virtually gone into hibernation. 

Mortgage Documents for Bank of America, Wells Fargo, U.S. Bank and Dozens of Other Lenders and Shells

October 15, 2010

Washington's Blog

The Washington Post notes:

In Georgia, an employee of a document processing company, Linda Green, for years claimed to be executives of Bank of America , Wells Fargo, U.S. Bank and dozens of other lenders while signing off on tens of thousands of foreclosure affidavits. In many cases, her signature appeared to be forged by different employees.

Green worked for a foreclosure document company owned by Lender Processing Services. The company is being investigated by a U.S. attorney in Florida for allegedly using improper documentation to speed foreclosures.

Lenders have already started to withdraw foreclosures that had Green's name on them.

Green also submitted to courts documents that listed "Bogus Assignee" as the owner of a mortgage instead of the real name. In another case, she signed as the vice president of "Bad Bene," a made-up company.

***

"There are procedures to be followed in order to get a foreclosure, and you either get it right or not. Either you're pregnant or not. There's no in-between," [Arthur M. Schack, a Kings County Supreme Court judge in Brooklyn,] said

            Beth Ann Cottrell said in a sworn deposition in May that she signed off on thousands of foreclosures a month for JPMorgan Chase even though she did not verify the accuracy of the information.

            In one instance in Palm Beach, Fla., Cottrell signed off on two documents that stated conflicting amounts of mortgage, the court testimony states. Cottrell claimed that both were signed by the borrower at closing. But the homeowner recognized that her signature had been forged, her attorney Christopher Immel said. The attorney added that such forgeries are common among the cases he's seen. JPMorgan Chase declined to comment.

            In Georgia, an employee of a document processing company, Linda Green, for years claimed to be executives of Bank of America, Wells Fargo, U.S. Bank and dozens of other lenders while signing off on tens of thousands of foreclosure affidavits. In many cases, her signature appeared to be forged by different employees.

            Green worked for a foreclosure document company owned by Lender Processing Services. The company is being investigated by a U.S. attorney in Florida for allegedly using improper documentation to speed foreclosures.

            Lenders have already started to withdraw foreclosures that had Green's name on them.
             Washington Post  September 23, 2010

Szymoniak pointed out in July:

There are examples of the many different Linda Green signatures/forgeries. Green's "signature" appears on HUNDREDS OF THOUSANDS of mortgage assignments - as an officer of at least 20 different banks and mortgage companies.Doing the Math

The total mortgage loan amount on 500 "Linda Green" Mortgage Assignments is $126,956,912, or approximately $125 million for each 500 Assignments. The average output of Assignments from the Docx office in Alpharetta [Green's actual employer], Georgia in 2009 was 2,000 Assignments per day.

This would be equivalent to (4 x $125 million) or $500 million each day. Assuming that Docx operated 5 days a week for 51 weeks (allowing for holidays), the office was open, producing Assignments, 255 days. It is likely that the Linda Green/Docx crew prepared and filed Mortgage Assignments showing One Hundred Twenty-Seven Billion, Five Hundred Million ($127,500,000,000) in mortgages were Assigned in 2009.

             Remember also that Mortgage Electronic Registration Systems - MERS - which Green repeatedly signed for - is itself a shell company which holds 60% of all American residential mortgages.

            DocX is also the company which published price lists for forging documents, including such gems as:

"Create Missing Intervening Assignment" $35

"Cure Defective Assignment" $12.95

"Recreate Entire Collateral File" $95

Given the above, it is clear why the Florida Attorney General has issued a subpoena to Linda Green's real employer - DocX - requesting the following documents:

2. Copies of any and all underlying documentation that allows for your employee or ex-employee, Linda Green to sign documents in the following capacities:

a. Vice President of Loan Documentation, Wells Fargo Bank, N.A. successor by merger to Wells Fargo Home Mortgage, Inc.;

b. Vice President, Mortgage Electronic Registration Systems, Inc. as nominee for American Home Mortgage Acceptance, Inc.;

c. Vice President, American Home Mortgage Servicing as successor-in-interest to Option One Mortgage Corporation;

d. Vice President, Mortgage Electronic Registration Systems, Inc. as nominee for American Brokers Conduit;

e. Vice President & Asst. Secretary, American Home Mortgage Servicing, Inc., as servicer for Ameriquest Mortgage Corporation;

f. Vice President, Option One Mortgage Corporation;

g. Vice President, Mortgage Electronic Registration Systems, Inc. as nominee for HLB Mortgage;

h. Vice President, American Home Mortgage Servicing, Inc.;

1. Vice President, Mortgage Electronic Registration Systems, Inc. as nominee for Family Lending Services, Inc.;

J. Vice President, American Home Mortgage Servicing, Inc. as Successor -ininterest to Option One Mortgage Corporation;

k. Vice President, Argent Mortgage Company, LLC by Citi Residential Lending, Inc., attorney-in-fact;

1. . Vice President, Sand Canyon Corporation f/kJal Option One Mortgage Corporation;

m. Vice President, Amtrust Funsing (sic) Services, Inc., by American Home Mortgage Servicing, Inc., as Attorney-in -fact;

n. Vice President, Seattle Mortgage Company.

3. Copies of every document signed in any capacity by Linda Green.

Of course, its not just Linda Green.

As Szymoniak points out:

• The offices of Lender Processing Services in Mendota Heights, Minnesota, seems likely to also have produced 2,000 Assignments each working day.Jeffrey Stephan from the GMAC offices in Montgomery County, Pennsylvania also is likely to have produced 2,000 Assignments each day.
• Bryan Bly of Nationwide Title Clearing also is likely to have produced 2,000 Mortgage Assignments each day.
• Scott Anderson of Ocwen Loan Servicing in West Palm Beach, Florida, almost certainly produced an average of 2,000 Assignments a day.
• Herman John Kennerty of America's Servicing Company in Ft. Mill, South Carolina, also is likely to have produced 2,000 Assignments each day.
• Erica Johnson-Seck was almost certainly producing Assignments at this same level for IndyMac.
• Christina Trowbridge, Whitney Cook, and Stacy Spohn of Chase Home Finance in Franklin, Ohio likely had the same output.
• Keri Selman and Renee Hertzler of BAC Home Loan Servicing (formerly Countrywide) in Texas almost certainly produced an average of 2,000 Assignments a day.

 

             If these nine offices each produced 2,000 Assignments a day, the value of the Mortgage Assignments filed by all nine offices in 2009 was One Trillion, One Hundred Forty Seven Billion, Five Hundred Million ($1,147,500,000,000).

            Why the large forgery program,  Why very simply, no one: the banks, the mortgage companies or any of their employees knows, or can locate, the actual owners of the mortgages to be foreclosed. No one will ever be able to locate these owners so the logical process is to fake the court papers. Of course, submitting fraudulent paper to the court is a crime but to banks now in control of American economy and Washington, what is a little fraud between friends,  And when these fraudulently submitted documents result in evictions, why our friendly banks quickly sell the foreclosed property to another sucker. This one is going to take it in the shorts because those homeowners that were evicted from their property by means of deliberately forged papers can then reclaim the house and the new owner will themselves be evicted and can never, ever, recover the money he paid for the foreclosed house without long and very expensive legal action against the bank or agency from which they purchased the home. Lawyers will be in a state of ecstasy and the courts will be jammed with millions of civil actions for years to come.

How Countrywide Covered the Cracks

October 16, 2010

by Gretchen Morgenson

New York Times

            On June 27, 2006, Countrywide Financial, the nation's largest mortgage lender, was about to close its books on a record-breaking six-month run. The housing market was on fire and Countrywide's earnings were soaring. Despite all the euphoria inside the company, some executives noticed that Angelo R. Mozilo, the company's brash and imperious chief executive, seemed subdued.

At a town hall meeting that day with 110 of the company's highest-ranking executives in Calabasas, Calif., Mr. Mozilo sat alone on a stage, fielding questions and offering rosy predictions about his company's prospects. But then he struck a sober note in response to a question from one of his colleagues.

The questioner wanted to know what, if anything, worried Mr. Mozilo, according to a participant.

"I wake up every day frightened that something is going to happen to Countrywide," Mr. Mozilo said.

A year and a half later, that day arrived. In January 2008, Countrywide, the company he had built from a two-man mortgage operation into a lending behemoth, had to sell itself to Bank of America at a bargain price because it was being smothered by losses tied to a mountain of sketchy loans.

Yet almost until the moment Countrywide was taken over, Mr. Mozilo was publicly buoyant about its ability to ride out the mortgage crisis. Privately, however, he occasionally offered a gloomier assessment of Countrywide's prospects and practices, according to e-mail and interviews.

What Mr. Mozilo, now 71, knew about Countrywide's problems, and precisely when he knew it, was what eventually led the Securities and Exchange Commission to file civil securities fraud charges against him last year. And on Friday, in the Los Angeles courtroom of John F. Walter, a federal District Court judge, representatives for Mr. Mozilo and for two of his top lieutenants ,  David Sambol, Countrywide's former president, and Eric Sieracki, the company's former chief financial officer ,  settled those charges.

As part of the settlement, Mr. Mozilo and his co-defendants didn't admit to any wrongdoing. But Mr. Mozilo agreed to pay $67.5 million in a penalty and reparations to investors and is permanently banned from serving as an officer or a director of a public company. Mr. Sambol is paying $5.52 million in a penalty and reparations and agreed to a three-year ban from serving as an officer or director of a public company. Mr. Sieracki agreed to pay a $130,000 penalty.

The settlement is a signal event in the credit crisis and its aftermath, including the foreclosure debacle that is now rattling the mortgage market and upending the lives of average homeowners. Although Goldman Sachs settled securities fraud charges earlier this year, Mr. Mozilo is the first prominent chief executive to be held personally accountable for questionable business practices that contributed to the housing bubble, the dizzying financial machinations that surrounded it, and a ruinous lending spree that ultimately threatened to undermine the nation's economy.

Mr. Mozilo and his two former colleagues were accused of misrepresenting the company's declining lending standards during 2006 and 2007 and portraying themselves publicly as underwriters of high-quality mortgages even as they learned that the company's loans were becoming increasingly risky.

The government also contended that Mr. Mozilo and Mr. Sambol improperly profited on inside information about the company's problematic loans when they sold Countrywide shares. From May 2005 to the end of 2007, Mr. Mozilo generated $260 million from his stock sales, while Mr. Sambol's sales produced $40 million, the government says.

Lawyers for Mr. Mozilo declined to comment. Mr. Sambol's lawyer said his client had "put the matter behind him for the benefit of his family and loved ones." Mr. Sieracki's lawyer noted that the S.E.C. had decided not to pursue fraud charges against his client and that his client had not been barred from serving at a public company. Bank of America is paying Mr. Mozilo's legal bills. Countrywide is paying $5 million toward Mr. Sambol's repayment to investors and $20 million of Mr. Mozilo's reparations.

The S.E.C.'s legal team, led by John M. McCoy III, associate regional director of the enforcement division, said the settlement amounted to a hard-won victory.

In a statement on Friday, Mr. McCoy said: "This settlement will provide affected shareholders significant financial relief, and reinforces the message that corporate officers have a personal responsibility to provide investors with an accurate and complete picture of known risks and uncertainties facing a company."

Battered by widespread criticism that it failed to corral scam artists like Bernard L. Madoff and to effectively police Wall Street as a whole during the years leading up to the credit crisis, the S.E.C. may now regain some stature as a successful litigator and investor advocate from its settlement with Mr. Mozilo.

"As is the case with most settlements, this is a compromise where nobody comes out a complete winner," said Lewis D. Lowenfels, an authority on securities law at Tolins & Lowenfels. "The S.E.C. gets a substantial monetary settlement and a bar with respect to Mozilo serving as an officer or director. On Mozilo's side, he is probably satisfied to have this behind him. He suffers a considerable stain on his reputation, has to pay a substantial amount of money but retains significant wealth and at the age of 71 may find the possibility of being an officer or director of another public company less enticing."

             Countrywide Financial  began operations in 1969, when Mr. Mozilo and his mentor, David Loeb, refugees from an established mortgage lender, decided to start their own loan originator. The company grew slowly at first, but by 2004, Countrywide was the nation's largest home lender, generating annual revenue of $8.6 billion. Mr. Mozilo ran the company alone after Mr. Loeb retired in 2000. (Mr. Loeb died in 2003.)

An up-by-the-bootstraps entrepreneur ,  his father was a butcher in the Bronx ,  Mr. Mozilo was obsessed with wresting market share away from his buttoned-down rivals in the staid world of banking.

"I run into these guys on Wall Street all the time who think they're something special because they went to Ivy League schools," he told The New York Times in 2005. "We're always underestimated. And we still are. I am. I must say, it bothered me when I was younger ,  their snobbery and their looking down on us."

In an industry that favored low-key behavior and conservative dress, Mr. Mozilo stood apart. He offered blunt opinions about banking and was open about his corporate aspirations. To complement his ever-present tan, he wore flashy clothes and drove expensive cars like Rolls-Royces that were often painted in a shade of gold.

Still, he managed his business for most of its history with a tight focus on the bottom line and on vigilant lending practices.

For years, Countrywide specialized in plain-vanilla, fixed-rate loans. As recently as 2003, such mortgages accounted for 95 percent of the company's loans, according to regulatory filings. Countrywide was the biggest supplier of mortgage loans to Fannie Mae, the federally backed mortgage finance giant that was also hobbled in the credit crisis.

In 2004, Countrywide's sober-minded lending style changed significantly. It began aggressively offering loans to first-time home buyers and to borrowers with modest incomes. These mortgages were known in the industry as "affordability products," but that ho-hum designation belied the potential financial dangers embedded in the loans if borrowers ,  particularly low-income borrowers ,  wound up unable to pay their debts.

Even so, Countrywide embraced such loans with gusto. For example, adjustable-rate mortgages ,  those with a low introductory rate that could ratchet up in later years ,  accounted for about 18 percent of Countrywide's business in 2003. But a year later, they made up 49 percent of its loans.

Subprime loans also grew in 2004, to 11 percent of its originations, up from 4.6 percent in 2003. These loans often required no down payments and very little documentation of borrowers' incomes, assets or employment; they generated immense profits to Countrywide but, again, presented a bevy of risks. And even when the going got rough for some homeowners, Countrywide didn't hesitate to take a hard line with borrowers who fell behind.

A born salesman, Mr. Mozilo promoted his company's prospects wherever he went. In front of a crowd of investors or analysts, he would predict what Countrywide would generate in profits five years down the road and how many of its competitors the company would vanquish. No matter what, Countrywide would survive, he vowed.

"Over the entire history of this country, housing prices have never gone down nationally. They have gone down in some local areas, but never nationally," he told an interviewer for CNBC in early 2005. "Secondly, any homeownership over the 10 years has proved to be the best investment that you could ever make. Over any 10-year period, housing prices go up."

Later that year, he was equally optimistic when he again visited CNBC's studios.

"From our perspective ,  and we've been doing this for 38 years ,  we're still in a terrific mortgage market," he said. "So the road ahead to us appears to be extremely vibrant, very sound."

Even as the wheels were coming off of the Countrywide cart in 2007, Mr. Mozilo's upbeat public pronouncements continued.

"I think you have to keep things in perspective. You know, there's an old saying that you don't know who's swimming naked until the tide goes out, and obviously the tide's gone out," he told CNBC in March 2007, when a number of once-successful subprime lenders were plunging toward bankruptcy. "I think it's a mistake to apply what's happening to them to the more diversified financial services companies such as Countrywide."

When Bank of America invested $2 billion in Countrywide in August 2007 ,  a move that caused many analysts to question Countrywide's financial wherewithal and its ability to remain independent ,  Mr. Mozilo again struck an optimistic note.

"Countrywide's future's going to be great. You know, it's always been great," he told CNBC at the time. "So I think, down the line, this is going to be a better company, a more profitable company and a company that's going to be a great investment for shareholders as we continue down the line. Because the market ultimately will come to us. This is America. People want to own homes."

Privately, however, Mr. Mozilo had long been worried about some of the loans his company favored, as indicated by e-mails he sent to his deputies. And this gulf between Mr. Mozilo's private views and his public proclamations went to the heart of the S.E.C.'s case against him.

Beginning in 2005, for example, he fretted about lending practices at Countrywide, e-mail messages show. One target of his ire was the "pay-option adjustable-rate mortgage," a loan that let borrowers pay a fraction of the interest owed and none of the principal during an introductory period. These loans put homes within many borrowers' financial grasp ,  at least initially.

When a borrower made only modest payments, the shortfall was added to the principal balance on the loan, meaning that the mortgage would grow in size. Given this arithmetic, borrowers could wind up owing more than their homes were worth.

In 2004, pay-option A.R.M.'s accounted for 6 percent of Countrywide's originations. Two years later, they accounted for 21 percent of its loans. The loans were moneymakers for Countrywide; internal company documents show that the company made gross profit margins of more than 4 percent on such loans, double the 2 percent generated on standard loans backed by the Federal Housing Administration.

Countrywide pushed the lucrative loans hard. A sales document called "Pay Option A.R.M.'s Made Simple" asked rhetorically what kinds of customers would be interested in these loans. "Anyone who wants the lowest possible payment!" was one of the answers.

But these loans unnerved Mr. Mozilo, as his e-mails indicate. In April 2006, for example, he learned that almost three-quarters of the company's pay-option customers had chosen to make the minimum payment the prior February, up from 60 percent the previous August, according to the S.E.C.'s complaint. In an e-mail to Mr. Sambol, Mr. Mozilo wrote: "Since over 70 percent have opted to make the lower payment it appears that it is just a matter of time that we will be faced with much higher resets and therefore much higher delinquencies."

Two months later, and just one day after he talked up his company's pay-option A.R.M.'s to investors at a Wall Street conference, Mr. Mozilo wrote an e-mail to Mr. Sambol predicting trouble ahead for many borrowers in these mortgages. They "are going to experience a payment shock which is going to be difficult if not impossible for them to manage," he said.

And in September 2006, Mr. Mozilo wrote an e-mail saying the company had no way to assess the risks of holding pay-option A.R.M.'s on its balance sheet. "The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales," he wrote.

Another Countrywide product that concerned Mr. Mozilo was its so-called 80/20 loan, named for the fact that the combination allowed a borrower to receive money covering 100 percent of a home's purchase price.

Mr. Mozilo had become worried about these loans in the first quarter of 2006, when HSBC Bank, a buyer of Countrywide's 80-20 loans, began forcing the lender to repurchase some that HSBC contended were defective.

"In all my years in the business, I have never seen a more toxic product," he wrote to Mr. Sambol in an April 17, 2006, e-mail cited by the S.E.C. "With real estate values coming down . the product will become increasingly worse."

Such e-mails suggest that by mid-2006, Mr. Mozilo had recognized how reckless some of his company's lending had become. And just three months later, according to the S.E.C. complaint, he met with his financial adviser to increase the amount of Countrywide shares he could cash in under a planned executive stock-sale program.

Mr. Mozilo had always been a big seller, and rarely a buyer, of the Countrywide shares he was granted as a part of his compensation. The timing of some of his sales, however, has drawn the scrutiny of the S.E.C.

For example, on Sept. 25, a day before writing the e-mail about how Countrywide was "flying blind" on pay-option A.R.M.'s, he set up a new planned stock-selling program for himself, known as a 10b-5 plan, the S.E.C. said.

Such plans allow executives to sell stock regularly, without running afoul of regulations governing the sale of stock around significant corporate announcements. Mr. Mozilo also set up plans enabling a family foundation and a trust he oversaw to sell shares.

Altogether, the S.E.C. said, from November 2006 to October 2007, he sold more than five million Countrywide shares under his personal plan. His gains were $140 million, the S.E.C. said.

Mr. Mozilo has long maintained that his stock sales were not unusual, and in the past Countrywide has said that it and Mr. Mozilo were battered by economic forces beyond their control.

"No one, including Mr. Mozilo, could have foreseen the unprecedented combination of events that led to the problems borrowers, lenders and investors face with many of these loans today," a Countrywide spokesman told The Times in 2007. "Countrywide is proud of its role in making homeownership affordable to lower-income households."

But lawyers and analysts say Friday's settlement means that Mr. Mozilo's legacy is likely to be something quite different from that of a banker who brought homeownership to the masses.

"Mozilo is agreeing to a permanent ban on serving as an officer or director of a public company," said James A. Fanto, a professor at Brooklyn Law School and a specialist in corporate and securities law. "That is a significant punishment and does not look good for his legacy."

 

Angelo Mozilo, other former Countrywide execs settle fraud charges

Angelo Mozilo and two others who led the lender make a $73-million deal with the SEC to avoid trial on allegations of fraud and insider trading.

 

October 16, 2010

by Walter Hamilton and E. Scott Reckard,

Los Angeles Times

Angelo R. Mozilo, who as head of home-loan giant Countrywide was at the center of the housing boom and bust, agreed Friday to pay a record fine as part of a $73-million settlement of a government fraud lawsuit over the lender's near-collapse.

The deal with the Securities and Exchange Commission requires Mozilo, the highest-profile figure to be accused of wrongdoing in the mortgage meltdown, to personally pay a $22.5-million fine. The government said it would be the largest penalty ever paid by a senior executive of a public company in an SEC settlement.

Mozilo, 71, also agreed to pay $45 million in "ill-gotten gains" to former Countrywide Financial Corp. shareholders, who lost billions when the company's stock price plunged as defaults on home loans surged. But Bank of America Corp., which bought Countrywide in 2008, and Countrywide's insurers will pay that amount under terms of Mozilo's employment contract.

Countrywide's former president, David Sambol, agreed to pay $520,000 in fines and $5 million in restitution. Bank of America will reimburse him for the latter. Eric P. Sieracki, former Countrywide chief financial officer, agreed to pay $130,000 in fines.

The deal allowed Mozilo, Sambol and Sieracki to avoid going to trial next week on allegations that they misled investors about the risky loan portfolio and deteriorating financial condition of the Calabasas company, once the nation's top originator of home loans.

The sting of the penalty, however, was dramatically reduced because Bank of America and insurance will foot much of the bill, said John Coffee, a securities-law professor at Columbia University.

"Both sides are engaging in the usual game of making this settlement look better than it appears," he said. "Both sides have an interest in putting the most positive spin on a settlement."

Mozilo also was barred from ever serving as an officer or director of public companies. Sambol agreed to a three-year prohibition on holding such positions.

The defendants, who were not in court Friday, neither admitted nor denied wrongdoing.

U.S. District Judge John F. Walter approved the settlement in Los Angeles federal court Friday, calling it "fair, adequate, reasonable and in the public interest."

Mozilo is still the subject of a criminal investigation by the Justice Department, according to people with knowledge of the probe who are not authorized to speak publicly. The settlement of the SEC civil case, however, deprives federal prosecutors of the opportunity to see how the testimony and other evidence play out before a jury.

"The defendants, particularly Mozilo, get closure of the SEC case without there being any adverse findings against them," said Jacob Frenkel, a partner at Shulman Rogers Gandal Pordy & Ecker in Rockville, Md.

The settlement closes a chapter in one of the highest-profile dramas to emerge from the housing-market meltdown.

During his nearly 40 years atop the company, Mozilo built it into the nation's No. 1 mortgage originator and a highly visible symbol of the nation's love affair with the housing market.

Known as brash and relentless, the Countrywide chairman and chief executive stood out in the staid and conservative mortgage industry. The son of a Bronx butcher with an up-from-the-bootstraps personal story, the 71-year-old cut a dashing figure with his custom-tailored suits and perpetual tan.

Countrywide specialized for many years in relatively low-risk loans that were insured or guaranteed by government-sponsored agencies. But Countrywide branched out in its later years into subprime and other high-risk mortgages that helped fuel the housing bubble. The company suffered huge losses, including $1.6 billion in the second half of 2007.

The SEC suit, filed against the men in June 2009, alleged that they misrepresented Countrywide's exposure to risky loans. The defendants contended that they fully disclosed the risks and financial condition of the company to investors.

The agency also accused Mozilo of insider trading, alleging that he sped up his sales of Countrywide stock options to cash out $140 million even as the company's condition was weakening.

At the heart of the insider-trading allegations was a so-called stock trading plan, a formal document laying out a pre-planned timetable for executives to sell stock. Trading plans came about a decade ago as a way for executives to insulate themselves from allegations that they sold shares based on their inside knowledge of their company's woes.

But The Times disclosed in 2007 that Mozilo repeatedly changed his trading plan in late 2006 and early 2007, which allowed him to unload hundreds of thousands of additional shares in advance of Countrywide's demise.

Mozilo claimed he did nothing wrong and was simply preparing the personal finances of his large family.

In its suit, the SEC was seeking to recover allegedly inflated profits of $141.7 million from Mozilo and $18.3million from Sambol.

"Mozilo's record penalty is the fitting outcome for a corporate executive who deliberately disregarded his duties to investors by concealing what he saw from inside the executive suite ,  a looming disaster in which Countrywide was buckling under the weight of increasing risky mortgage underwriting, mounting defaults and delinquencies, and a deteriorating business model," said Robert Khuzami, the SEC enforcement chief.

All of the $73-million settlement will go to former Countrywide shareholders, including $25 million that Bank of America has agreed to pay as part of a $600-million settlement with investors.

walter.hamilton@latimes.com

scott.reckard@latimes.com

Times staff writer Stuart Pfeifer contributed to this report.

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