Mortgage lender Countrywide Financial Corp. gave sweetheart deals on mortgage loans to members of Congress and other influential Washington policymakers with the goal of reaping political and financial benefits, according to a Congressional committee report.
The report, released earlier this month, is the result of a three-year investigation by the U.S. House of Representatives’ Committee on Oversight and Government Reform, chaired by Republican Rep. Darrell Issa.
The investigation began after the news media began reporting that several lawmakers and other government officials got loans through a VIP program referred to as "Friends of Angelo." Angelo Mozilo was CEO of Countrywide.
The investigation included more than 120,000 pages of documents provided to the House committee under subpoena by Bank of America, which acquired Countrywide in 2008.
"The committee’s investigation found Countrywide lobbyists and CEO Angelo Mozilo used discounted loans as a tool to ingratiate itself with policymakers in an effort to benefit the company’s business interests," Issa said in a statement.
"A former lobbyist for Countrywide testified that members of Congress, staff, and other government officials were directed to the company’s VIP program as part of an effort to create a favorable impression of the company on Capitol Hill. This preferential treatment — that varied depending on the influence of the borrower — was not routinely offered to the public."
According to the report, benefits for VIP borrowers included waived points — upfront fees that lower the interest rate on a loan — and waived "junk fees." The standard reduction was 0.5 points, and junk fees were typically reduced by $350 to $400, the report said. Combined, the discounts could constitute several thousand dollars in savings for a VIP borrower.
In a May 25 letter to the committee, Mozilo asserted that "these same kinds of terms were generally available to the public" and "exceptions or discounts from either published rates or terms were generally available to borrowers throughout the company based on consideration of various factors," including credit quality, negotiation, competition and relationships with the company.
The VIP unit, he said, primarily offered borrowers "focused customer support" and "expeditious and cost-effective processing and service of loans."
The unit’s customers came from "all walks of life," Mozilo said. As for high-profile customers, "quality and stability of employment" can speak to the borrower’s ability to repay a loan, he said.
"I believed that loans to customers of a certain public stature, such as actors, athletes, prominent businesspeople, community and political leaders, and other public figures, can bear on this important aspect of credit quality," Mozilo said.
"To a lesser extent and always provided that we determined that the loan was likely to be repaid and profitable, I personally was proud to have people of prominence select Countrywide to be their lender of choice. Those people could and often did become sources for referral business and enhanced the company brand, showing that high-profile customers who had a choice of lenders chose Countrywide for their loans."
But records show that VIP borrowers with low credit scores, low or undocumented income, and other negative loan characteristics received discounted loans, according to the report.
In addition, Countrywide VIP account executive Robert Feinberg testified that VIP borrowers benefited from "exceptions to Countrywide company policies regarding minimum credit scores, income and employment documentation, and access to interest rate ‘float downs,’" the report said.
Hundreds of VIP loans made
Between January 1996 and June 2008, Countrywide’s VIP unit made hundreds of loans to current and former members of Congress, congressional staff, high-ranking government officials, and executives and employees of government-sponsored enterprise (GSE) and mortgage giant Fannie Mae, the report said.
"Documents and testimony obtained by the committee show the VIP loan program was a tool used by Countrywide to build goodwill with lawmakers and other individuals positioned to benefit the company," the report said.
"In the years that led up to the 2007 housing market decline, Countrywide VIPs were positioned to affect dozens of pieces of legislation that would have reformed Fannie (Mae) and Freddie (Mac) and protected taxpayers."
In 1999, Countrywide — then the nation’s largest residential mortgage lender — signed an exclusive agreement with Fannie Mae to sell the latter billions of dollars in mortgages at a discounted rate, thereby linking the growth of the two companies, according to the report.
"VIPs who worked at Fannie Mae enjoyed expedited loan processing and pricing discounts. Countrywide also waived company guidelines for Fannie Mae’s senior executives to a greater extent than it did for ‘regular’ VIPs," the report said.
This includes former Fannie Mae CEO Daniel Mudd, one of six former top executives of Fannie Mae and Freddie Mac to be charged by the U.S. Securities and Exchange Commission with securities fraud in December for allegedly misleading investors about the extent of the mortgage giants’ exposure to higher-risk subprime loans.
Countrywide took a loss on a $3 million refinance loan to Mudd, who received a 1 point discount on the loan, according to the report.
"A Countrywide manager acknowledged the loss on Mudd’s loan was expected to eventually generate a benefit for the company. Account executives were instructed to keep any derogatory information related to Mudd’s loan in-house, in order to avoid jeopardizing ‘any benefit we generate,’" the report said.
Countrywide opposed GSE reform
Both Fannie Mae and Countrywide lobbied against legislation that would have reformed GSEs Fannie Mae and Freddie Mac and would have restricted Fannie Mae’s ability to buy and hold subprime mortgages originated by Countrywide, the report said.
"This report sheds new light on Countrywide’s relationship with Fannie Mae and how Countrywide used its VIP Program to cement its ties to its taxpayer-backed business partner. Other than Countrywide, no other entity’s employees received more VIP loans than Fannie Mae," Issa said in a news release accompanying the report.
"Even as Countrywide’s CEO Mozilo mocked Fannie Mae and top executives for its crony capitalism business model, he would nonetheless personally intercede to ensure executives had access to discounted Countrywide loans. These relationships helped Mozilo increase his own company’s profits while dumping the risk of bad loans on taxpayers."
According to the report, Countrywide lobbyist Jimmie Williams was a major source of referrals to the VIP unit starting around 2000, when he found himself having to deal with "an increasing number of complaints at receptions and other events" regarding Countrywide.
"I could walk in an office on any given day and spend the first 30 minutes talking about someone whose loan was mishandled, whose papers didn’t come, or who didn’t get the rate; and it was happening with more frequency that … I realized it was an impediment. And some of the stories I heard were just major ball drops, and I felt that it got in the way of me doing what my real job was," Williams said.
"I think by that time I felt that, as a representative of the company, I wanted to make sure anyone I referred, which I thought was also my personal reputation, wasn’t mishandled," he added.
According to documents obtained by the committee, several members of Congress and congressional staff received VIP loans, including some positioned to affect GSE and mortgage-related legislation.
Those members of Congress who received VIP loans included former Sen. Christopher Dodd, D-Conn., who was chairman of the Senate Banking Committee; Sen. Kent Conrad, D-N.D., chairman of the Senate Budget Committee; Rep. Howard P. "Buck" McKeon, R-Calif., chairman of the House Armed Services Committee; Rep. Elton Gallegly, R-Calif.; Rep. Edolphus Towns, D-N.Y.; former Rep. Tom Campbell, R-Calif.; and Rep. Pete Sessions, R-Texas.
Sessions specifically requested not to receive a discounted loan and did not get one, according the report’s findings.
Influence, but no ‘quid pro quo’
The report noted that Countrywide made no secret of its VIP unit, which identified itself as such to borrowers in paperwork and over the phone. Nonetheless, many of the lawmakers involved have publicly denied either receiving preferential treatment or knowing they were receiving preferential treatment. The report uncovered no "quid pro quo" in which a policymaker offered anything in exchange for discounted loans, and the U.S. Department of Justice has not prosecuted any Countrywide official for actions related to the VIP program.
"Documents and testimony show that Angelo Mozilo and Countrywide’s lobbyists may have skirted the federal bribery statute by keeping conversations about discounts and other forms of preferential treatment internal. Rather than making quid pro quo arrangements with lawmakers and staff, Countrywide used the VIP loan program to cast a wide net of influence," the report said.
Had 2005 GSE reform legislation been passed, "the huge growth in the subprime and Alt-A loan portfolios of Fannie Mae and Freddie Mac could not have occurred, and the scale of the financial meltdown would have been substantially less," the report said.
The Federal Housing Finance Agency, which regulates Fannie and Freddie, has estimated that taxpayers will have contributed between $220 billion and $311 billion to the GSEs by 2014 and are unlikely to be fully repaid.
"Considering the cost to taxpayers of the failure to reform the GSEs, Congress should consider legislation prohibiting companies from offering discounts and other forms of preferential treatment to Members of Congress and congressional staff. In addition to mortgage lenders like Countrywide, such legislation should cover banks, auto dealerships, jewelry stores, and any other company that offers financing to customers," the report said.
"To foreclose the possibility that a lender might apply a discount to a loan without their knowledge, members of Congress and congressional staff should consider notifying all parties to complex financial transactions that they must not receive discounts due to congressional ethics rules, as Congressman Sessions did."
