Posted on June 13th, 2008 in Mr Mortgage's Personal Opinions/Research
This is not a Countrywide-specific story. Countrywide was not without wrong doing, as we are all finding out. But, these ‘Friends of Mozillo’ favors were commonplace and rather petty considering many more serious allegations brought up in the past several months about Countrywide and every other mortgage/investment banker in existence. Elected politicians receiving ‘gifts’ is very bad and by no means petty, especially considering which politicians are involved. But I am not going to get into that for this piece.
Portfolio Magazine, which I admit I like, just published a ‘Friends of Angelo’ story in which they summarize what they consider to be ‘preferential treatment’ in the paragraph below. To be honest, I don’t see anything too outside standard operating procedures over the past five-years. These were all fairly routine practices if you ask me. In the following several paragraphs, I will tell you ‘how it really is’.
Portfolio: “According to company documents and emails, the V.I.P.’s received better deals than those available to ordinary borrowers. Home-loan customers can reduce their interest rates by paying “points”—one point equals 1 percent of the loan’s value. For V.I.P.’s, Countrywide often waived at least half a point and eliminated fees amounting to hundreds of dollars for underwriting, processing and document preparation. If interest rates fell while a V.I.P. loan was pending, Countrywide provided a free “float-down” to the lower rate, eschewing its usual charge of half a point. Some V.I.P.’s who bought or refinanced investment properties were often given the lower interest rate associated with primary residences.”
Take it from this 20-year mortgage vet that what Mozillo gave his ‘insiders’ was nothing more than most mortgage and investment banks gave their top retail, wholesale or correspondent customers. This just goes to show you how lax everything was over the past 5-years. The investment banks were so hungry for parts (loans) for their Frankenstein securities that they bought almost anything. Heck, why not when 80% of what was produced was going to be bundled up and sold anyway?
This is why I firmly believe that originating banks and/or original investors will ultimately end up responsible for all of this. Forced buybacks for early payment defaults (first 12-months), ‘white-lie’ fraud (liar loans), unauthorized ‘exceptions’ (outside of investor guidelines without investor approval) and lender ‘negligence’ (sloppy underwriting/quality control) are already being demanded by whole loan and securities owners if a default audit unveils any of these deficiencies. If you are diligent enough, I am willing to bet an auditor can find one of the above mentioned deficiencies in 80% of all Prime, Alt-A and subprime loans made over the past five-years.
I have written about this many times and the WSJ recently published an article on May 28th, 2008, confirming many of my views. ‘Investors Press Lenders on bad Loans’ . The article cites a lawsuit filed in LA Superior Court where units of the mortgage insurer, PMI Group, alleged WMC Mortgage Corp breached it’s ‘reps and warrants’ on a pool of subprime loans insured by PMI in 2007. Within eight months, the delinquency rate was at 30%. The suit also alleges that a detailed audit of 120 loans that PMI asked WMC to repurchase found evidence of ‘fraud, errors and misrepresentations’. WMC was owned by GE by the way.
The auditing of defaulted loans looking for fraud or lender negligence is escalating at a feverish pace. This is being spearheaded in many cases by the mortgage and bond insurers, but even Fannie, Freddie, banks and the investment banks are picking up the pace. At this point in time considering the damage that has been done to the insurers, they have nothing and everything to lose. The biggest finger-pointing contest of all time is commencing and the prize may be the firm’s very existence.
Perhaps soon one of the insurers will release detailed reports on the amount of fraud and negligence on the defaulted prime, ALT-A, subprime and home equity loans that they insure in an attempt to make themselves look good. When this news breaks it will shock the world.
Most think they have a handle on how pervasive outright fraud was. But few have a handle on the ‘white-lie’ fraud and broader negligence, such as increasing income and/or asset levels on stated income/asset loans and making unauthorized investor guideline ‘exceptions’ on large percentages of loans. Unauthorized ‘exceptions’ were made in many cases, unilaterally, by someone as low down the totem pole and a document drawing clerk.
The following is another recent article that does a great job summarizing lending malpractice even at the investor level. NPR ran a great story recently as well regarding Wall Street investment banks looking the other way . The writer adds, “it suggests that auditors for Wall Street investment bankers knew how preposterous these loans were, and that could mean Wall Street liability for aiding and abetting fraud”.
Ultimately, I believe that outright fraud, ‘white’lie’ fraud, unauthorized ‘exceptions’ and lender ‘negligence’ will be major factors in the ownership of loans and the accompanying losses. Especially fraud and negligence surrounding inflated income and assets used on limited documentation loans, which were a large percentage of all loans across all paper types.
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