Wednesday, April 30, 2008

Countrywide Loss Focuses Attention on Underwriting

Voltron says: No duh. Look how long this took to hit the main stream media.

Evidence of Abuses
By Outside Brokers;
A Fraud in Alaska

Countrywide Financial Corp. reported an $893 million loss for the first quarter, amid mounting evidence of serious problems with its underwriting of many home loans.


A federal probe of Countrywide, the nation's largest mortgage lender, is turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers, people with knowledge of the investigation say.

Some of the problems are surfacing in a mortgage program called "Fast and Easy," in which borrowers were asked to provide little or no documentation of their finances, according to these people and to former Countrywide employees. Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as "prime," meaning low-risk.


Follow the documents through a fraud case that used the Fast and Easy system1, and take a closer look at a sales document2 Countrywide used to market the loands.

Fast and Easy borrowers aren't required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn't even require loan officers to verify employment, according to an October 2006 presentation by Countrywide's consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.

The quarterly financial results, which included $3.05 billion of credit-related charges, did not provide details about the performance of the company's "no-doc" loans, including the Fast and Easy ones. Late payments increased across the board: About 36% of "subprime" loans to people with weak credit records were at least 30 days overdue, up from 20% a year before. For all loans serviced by Countrywide, a category mostly made up of prime loans, the delinquency rate was 9.3%, nearly double the year-earlier 4.9%.

In early January, as fears mounted that declining home values and rising defaults had left the company close to collapse, Countrywide agreed to be taken over by Bank of America Corp. in a stock swap valued at about $4 billion.

A Fannie Mae spokesman says that the performance of Fast and Easy loans originated by independent mortgage brokers has deteriorated, and that Fannie is phasing out the purchase of such loans.

A spokesman for Countrywide says that Fast and Easy loans are not plagued by defaults. As of March 31, about 3% of Fast and Easy loans were 30 days or more overdue, compared with 3.5% for Countrywide's fully documented prime loans, he says. Fast and Easy borrowers, he says, had to meet credit standards that were tougher than those for prime loans requiring full documentation.

In recent years, about one-third of all Countrywide prime mortgages eligible for sale to Fannie Mae were Fast and Easy.

During a conference call with investors last July, Countrywide acknowledged that Fast and Easy loans were riskier than fully documented prime loans. A chart provided to investors showed that a borrower who wasn't required to document income would be at least 50% more likely to fall behind on payments than a similar borrower who did provide documentation.

The Federal Bureau of Investigation is looking into a wide variety of Countrywide mortgages that didn't require full documentation, not just the Fast and Easy loans. People involved in the inquiry say the FBI has concluded that extensive fraud occurred on the loans, and they are looking into whether the company violated securities law by failing to disclose that to investors.

On Feb. 15 Countrywide announced it was overhauling Fast and Easy to require more scrutiny of borrower income. In a statement last week about its plans for Countrywide, Bank of America said that once its acquisition is completed later this year, it will "significantly curtail" certain loans that don't require full documentation.

Originally, the rules for Fast and Easy required a credit score of at least 700 -- a level attained by more than half of the nation, according to Fair Isaac Corp., which designed the scoring system. The Fast and Easy program covered only fixed-rate mortgages, not riskier adjustable-rate loans. Interest rates were lower than on other loosely documented mortgages because Fast and Easy loans were offered only to borrowers deemed relatively safe -- based on a variety of risk factors assessed by Countrywide's underwriting software.

Brian Koss, who oversaw Countrywide lending offices in New England for four years, says Countrywide executives encouraged Fast and Easy partly because it was cheaper to produce loans with less paperwork.

Originally, borrowers were required to make at least a 10% down payment. But the light paperwork requirements appear to have opened the door to problems.

In late 2001, mortgage broker Kourosh Partow got a job in Countrywide's Anchorage, Alaska, office, despite being under investigation for lending abuses in Wisconsin, where his license was revoked several months later. Mr. Partow began writing Fast and Easy loans for another person who was speculating in real estate, federal prosecutors later said.

"In each instance, Partow simply falsified the borrower's income and often bank accounts so as to make it appear that the borrower easily qualified for the loan program offered by Countrywide with no further internal checks necessary," the Justice Department said in a filing last summer in federal district court in Anchorage.

Countrywide sold some of the loans originated by Mr. Partow to Fannie Mae, and neither firm detected the fraud for years, according to documents filed in the case.

By the time Countrywide began a push in 2003 to expand loan volume, say two former executives, it had relaxed its lending standards, including for Fast and Easy. The minimum credit score for Fast and Easy borrowers fell to 680 from the original 700. And the loans could now be made for as much as 95% of the estimated value of the home, up from the original 90%.

In early 2006, Countrywide executives discovered that the FBI was investigating Mr. Partow for fraud. Mr. Partow had submitted paperwork stating that one borrower, Agim Delolli, made $24,000 a month as president of a construction company, court documents show. For another loan ten months later, he had said Mr. Delolli made $15,000 a month as a car dealer.

In June 2006, Countrywide fired Mr. Partow. After Mr. Delolli agreed to testify against him, prosecutors "determined that Agim was not culpable," says Mr. Delolli's lawyer, Pam Sullivan. Last year, Mr. Partow pleaded guilty in federal court to mortgage fraud and conspiracy. (See how documents in the case showed the fraud.7)


Kevin Fitzgerald, a lawyer for Mr. Partow, said his client believes his two-year prison sentence was unduly harsh given the prevalence of income-inflation at Countrywide and other firms.

Even when the housing market began to cool, Countrywide kept Fast and Easy open to a wide array of borrowers. The program was extended to adjustable-rate mortgage products, according to an Oct. 26, 2006, Countrywide sales presentation. (Take a closer look at the sales presentation.8)

A Fannie spokesman agreed that the verification of employment wasn't required on all loans, but added that Countrywide was expected to verify employment details on a "sampling" of loans. The Countrywide spokesman said his company fulfilled that obligation.

The program was also extended to second mortgages.

Mortgage brokers and former Countrywide executives say brokers and Countrywide employees eventually figured out that if they had borrowers who might have trouble qualifying for a desired loan on the basis of their income, Fast and Easy would allow them to inflate that income and ensure an approval.

John Sipes, a former loan officer at Countrywide in Los Angeles, said sales agents loved the loan. "In the good old days, that was the best loan we had at Countrywide," he says. Borrowers were required to sign a form allowing Countrywide to verify their incomes with the Internal Revenue Service, but "they never really checked," he says.

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