March 8, 2008
U.S. Scrutinizes Filings
On Financial Strength,
Loan Quality for Fraud
By GLENN R. SIMPSON and EVAN PEREZ
WASHINGTON -- The Federal Bureau of Investigation is probing subprime lender Countrywide Financial Corp. for possible securities fraud, according to law-enforcement officials and finance-industry executives.
The inquiry involves whether company officials made misrepresentations about the company's financial position and the quality of its mortgage loans in securities filings, four people with knowledge of the matter said. It is at an early stage, they emphasized.
"We are not aware of an investigation being conducted by the FBI," Countrywide spokeswoman Jumana Bauwens said in an e-mail. A spokesman for Bank of America Corp., which is in the midst of acquiring Countrywide, declined to comment.
Fifteen other subprime companies also are under scrutiny by federal agents and prosecutors in a broad look at the subprime industry sparked by huge losses on residential mortgages and the securities used to fund them. The investigations are examining mortgage-origination fraud, conflicts of interest and undisclosed relationships within the industry, and the practices used to package mortgage-backed securities for sale to investors.
Countrywide issued more than $100 billion in mortgage-backed securities between 2004 and 2007, according to the newsletter Asset Backed Alert. More than two dozen Wall Street firms helped construct those deals, making it possible that some of them will also face law-enforcement scrutiny.
While Countrywide is based in Calabasas, Calif., near Los Angeles, the inquiry is being handled in New York and overseen in Washington, people familiar with the matter said. Federal prosecutors in New York have primary jurisdiction over securities-fraud cases, while FBI and Justice Department officials are coordinating the subprime probes here.
Federal investigators are looking at evidence that may indicate widespread fraud in the origination of Countrywide mortgages, said one person with knowledge of the inquiry. If borne out, that could raise questions about whether company executives knew about the prospect that Countrywide's mortgage securities would suffer many more defaults than predicted in offering documents.
Another potential issue facing the company is whether it has been candid in its accounting for losses. People familiar with the matter said that Countrywide's losses may be several times greater than it has disclosed.
Countrywide, which agreed in January to be acquired by Bank of America for $4 billion, already is under investigation by the Securities and Exchange Commission for possibly improper accounting. SEC investigators are working closely with FBI agents on several subprime investigations, officials said. The attorneys general of Florida and Illinois have launched probes too.
Countrywide also is the subject of a class-action, securities-fraud civil lawsuit by various government pension funds and their managers, including the city and state of New York. The lawsuit identifies more than 25 firms that helped Countrywide package and sell mortgage-backed securities, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc. The firms have denied any wrongdoing.
Countrywide "misled investors by falsely representing that Countrywide had strict and selective underwriting and loan origination practices, ample liquidity that would not be jeopardized by negative changes in the credit and housing markets, and a conservative approach that set it apart from other mortgage lenders," the suit alleges.
At its peak, Countrywide was the nation's biggest home lender, originating more than $450 million in mortgages annually, or about one-fifth of all home loans. Its "servicing portfolio" of mortgage loans exceeds $1 trillion. Last month, Countrywide disclosed that its losses for the fourth quarter of 2007 were $422 million, more than double the estimate of analysts.
There is no indication that Bank of America, now conducting due diligence at Countrywide, is having second thoughts about completing the acquisition. In fact, people familiar with the matter said Bank of America is rushing to close the Countrywide acquisition as quickly as possible, perhaps in August.
--John R. Wilke and Kara Scannell contributed to this article.