C O V E R S T O R Y JUSTICE UNSERVED The federal government ramps up its renewed effort to hold Angelo Mozilo personally responsible for the fall of Countrywide.

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Angelo Mozilo is tanned and ready for his close-up. But the man once referred to Fannie, Freddie, HUD, and private investors as “Mr. Subprime” himself is long past his Hollywood-star turn as CEO of the now by selling them junk mortgages, but it is much harder to prove in the securities context. defunct subprime lender Countrywide. This paradigm alone makes the possible

With reports of a possible Department of Justice lawsuit pending against Mozilo pending lawsuit against Mozilo a contentious INDUSTRY INSIGHT for his role in the subprime lending crisis, the former CEO’s face is one many would topic in the banking industry. If the DOJ has prefer to forget. found a way to put Mozilo in the hot seat, how are they doing it, and how are they meeting what seemed to be a difficult standard of proof? A sense of reticence even emerges when his affected by a crime, the greater the personal “As applied to the financial crisis, it is name is brought up in certain circles. When accountability has to be on the part of those difficult to prove what a particular executive asked about Mozilo and the possibility of a who enriched themselves and hurt others.” knew about the excessive risks in subprime federal case against the executive for fraud, “[C]ertainly many people have lamented mortgages. Multiple layers of management, industry professionals and former government the lack of criminal charges against high-level organization, and risk management can make housing officials shut down. Their reluctance executives involved in the financial crisis,” said it difficult to demonstrate actual knowledge,” pales in comparison to the many calls to see David Kwok, assistant professor of law at the Kwok added. Mozilo’s head roll in the wake of the crisis. University of Houston Law Center and noted “Moreover, because so many parties were “In looking at the intervening years, expert in the areas of white collar crime and allegedly involved in these mortgages, there I’ve seen a dismal record on the part of the public policy. is more room to argue that counter-parties in government in taking an appropriately punitive “The challenge in bringing criminal fraud transactions were aware of these excessive risks stance against those who were principally charges against executives is two-fold. First, and thus were not defrauded.” responsible,” said two-time presidential to satisfy criminal charges, courts typically In other words, Mozilo may be a good candidate and former member of the House require that prosecutors prove beyond a reason- person to blame. He was the notorious Committee on Government Oversight and able doubt that the defendant executive knew Countrywide CEO and a mortgage banking Reform, Dennis Kucinich. “Big fines to big they were committing fraud. It is generally in- star for years; but when the idea of prosecution companies without the individuals who were sufficient to show that an executive was aware sets in, everyone gets tongue-tied. in charge of those companies having to be of a risk of fraud, unless the executive delib- And remembering Mozilo is to contemplate accountable under the law doesn’t cut it. erately avoided learning about the fraud (os- the fall of a subprime lending superstar, who “The trillions of dollars of wealth that just tensibly to avoid prosecution). Second, courts captured everyone’s attention until allegations disappeared overnight dealt a blow to Main require that the counter-party be deceived. A of fraud began surfacing left and right. Street that people still haven’t recovered from common defense to fraud allegations is that the Enough whistle-blower lawsuits have stood and some never will never recover from.” counter-party was aware of the true nature of the test of time to suggest Countrywide was “Some poor soul who shoplifts a candy bar the transaction and thus was not deceived.” possibly hiding critical facts about its home could end up spending more time in jail than And therein lies the rub, professor Kwok loans while defrauding the government. In someone who helped destroy the economy notes. In an environment ripe with confusion many cases, Bank of America, who acquired through fraud. When you put it in perspective over who fed the subprime crisis, someone Countrywide in 2008, has been the one left to you would think that the more people like Mozilo may have stacked the deck against pick up the pieces.

47 lawmakers took cheap mortgage credit from Countrywide in side room deals as part of the now infamous “Friends of Angelo” program. For housing experts like Ed Pinto, resident fellow and codirector of the American Enterprise Institute’s International Center on Housing Risk and a former chief credit officer for , Mozilo and Countrywide would not have existed without the government. The fact that the Justice Department is possibly working on a lawsuit against Mozilo doesn’t change that, he says. Former Countrywide employee Kyle He had friends in both business and in THE RISE OF MOZILO AND COUNTRYWIDE Lagow filed suit under the False Claims Act government. Even grateful homeowners To say that Mozilo’s angry e-mail slip-up in after the subprime dust-up. Lagow brought were in his pocket, with Countrywide’s keen 2008 defines his personality is to forget at one forth damaging allegations, informing the ability to turn home lending into a nationwide point Countrywide was promoted across the government that Countrywide defrauded enterprise that served formerly underserved country as the borrower’s best friend. the Federal Housing Administration (and markets. Booker says Mozilo’s platform was the HUD) by falsely inflating home appraisal “Countrywide absolutely did pursue first to break free of how mortgage markets values associated with loans the government bringing the ability to own a home to anyone operated in the Reagan-era and in the decades insured. The end result, according to Lagow’s who walked in a branch office,” explained E. preceding the 1990s. “If you look at the way 2009 complaint, was a surge in defaults among Thomas Booker, managing director with The the mortgage markets worked in the 1980s, government-backed mortgages that the FHA Collingwood Group and a former CoreLogic you had an aggregation of local markets,” he eventually became accountable for. executive with expertise in working with the explained. Lagow claimed Countrywide did this GSEs. “The real question is over time you “You might have had challenges getting by rewarding appraisers who offered higher have to understand the real premise for the attractive rates in one region, while the same home valuations. The subprime lending borrower being able to repay the loan and how house a hundred miles away came in with a giant allegedly hid this conflict of interest you convey those sets of facts to the buyers of difference that was 100-basis points.” the loan.” through LandSafe, an appraisal firm owned by Countrywide’s strategy, says Booker, was to Countrywide—and the place at which Lagow For some, the entire market was taken by “focus on a segment of a population everywhere worked during his four-year tenure. surprise when a tight economy and falling in America and base the sale on competitive Lagow’s attorneys at Hagens Berman noted home prices ended a nearly two-decade pricing in every community across America. publicly that his whistle blowing led to a $1 housing boom. This version of the story is in They were the first to do that in a broad-scale billion settlement between the DOJ and Bank line with Mozilo’s own expressed beliefs. way,” he says of Countrywide. of America. Of that amount, Lagow received For others, executives like Mozilo Booker also remembers Countrywide being $14.5 million. functioned in the role of classic movie villain, one of the first to use innovative data and During Lagow’s time under Mozilo’s with Mozilo hiding menacingly behind a technologies to create origination platforms umbrella from 2004 through 2008, he desk, waiting to originate a faulty loan for the that allowed for faster loan originations. Yet, all discovered the lender created these easily express purpose of selling it off to unsuspecting of the innovation and aggressive efforts failed hidden appraisal conflicts by working directly secondary-market players. to thwart other risk factors. with its LandSafe unit and builder KB Home Mozilo, himself, perpetuated this view “One of the challenges is they became very to boost appraisal values. when an email slip-up in 2008 allowed the dependent on being able to sell to the GSEs This event and events like it—or the root of media to see what he was really thinking as and other investors,” explained Booker. these events—occurred under Mozilo’s watch. homeowners pounded Countrywide with The firm also created a riskier footprint But despite the infamy the subprime requests for loan modifications. Mozilo, when it expanded beyond originations. “They CEO acquired after the dust-up, housing and angered by homeowners using template became a servicer, and it put a much heavier mortgage finance experts remember the former emails designed to help borrowers with burden on them to manage the risk,” Booker Countrywide CEO spending two decades on a loan mods, accidentally “replied all” to a pointed out. housing high before the 2008 crash. borrower’s email. But Mozilo, at one point, had the market It’s a high, they contend, that would not His words would haunt him for days: “This cornered nevertheless. From lending to have occurred without the help of shifting is unbelievable. Most of these letters now have servicing—all the way to securitizations— government housing policies in the form of the same wording,” Mozilo exclaimed in his Countrywide was a major player. Fannie Mae and Freddie Mac expanding their email. “Obviously they are being counseled But the happy times for Countrywide risk appetites for mortgages and aggressive by some other person or by the internet. would continue as long as they had a market Federal Housing Administration policies. Disgusting.” in which they could sell those loans. Shifting These converging interests would give But the disgusting part for Mozilo may be GSE guidelines in the early 1990s would Mozilo the sandbox he needed to create a the sudden fall he experienced after becoming help create the very marketplace that Mozilo “subprime-lending sand castle” that would defy the godfather of subprime lending. needed to go extreme with subprime, Pinto the odds until the tide turned against him. Gone are the days when Washington remembers.

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His past research on the GSEs turned figure in a sad tale of unexpected home price helped Mozilo increase his own company’s up a 2003 press release in which Fannie declines and changing consumer trends. profits while dumping the risk of bad loans on Mae applauded major lenders, including Mozilo’s name is still in the papers today, taxpayers,” Issa concluded. Countrywide for helping Fannie execute with it evident that federal prosecutors The VIPs linked to Mozilo’s sweet- its own $2 trillion affordable housing would like to take down “Mr. Subprime” deals program included former Senate commitment. himself. Some of the eagerness to investigate Banking Committee Chairman “Together, America’s top lenders and Mozilo may stem from a desire to silence (D-Conn.), also known as a drafter of the Fannie Mae have made terrific progress criticism that the government let individual Dodd-Frank financial reform bill; former PULSE MARKET in bringing the nation’s housing boom to CEOs off too easily during the housing Senator and Budget Committee Chairman overlooked Americans and addressing the meltdown. (D-N.D.); and key Senate staff gaps in housing,” then Fannie CEO Franklin “I think there is still a view that the members. Issa’s report also associated a few Raines is quoted as saying. perpetrators haven’t been punished,” Pinto congressmen as Friends of Angelo: Howard Just a few years later, pointed out when asked about Mozilo “Buck” McKeon (R-Calif.); would step down from his role after the potentially facing renewed government (R-Texas); Edolphus Towns (D-N.Y); and Securities and Exchange Commission issued a scrutiny. former Rep. Elton Gallegly (R-Calif.). harsh report on Fannie’s accounting standards THE FALL OF MOZILO “You had a government that was essentially in the years stretching from 2001 to 2004. If incapable of enforcing the law because of its

Raines faced trouble in 2004, it was a mere blip By the mid-nineties, the government- closeness to Wall Street with the rise of hedge INDUSTRY INSIGHT on the radar screen compared to the challenges sponsored enterprises had loosened their funds and the enormous amounts of money Mozilo and Countrywide faced in 2008. credit box, and the goal of extending credit that they put into the political process,” to underserved areas and creating national “NO, NO, NO, WE DIDN’T DO ANYTHING WRONG.” Kucinich opined. “It created a seamless lending initiatives seeped into every nook and transition from the policies George Bush to But despite persistent rumors and cranny of the White House and Congressional Barack Obama.” market reports suggesting the government policymaking. Eventually, the sweet deals Mozilo offered is still investigating Mozilo’s past deals and The shift was coming, and Mozilo to lawmakers soured when the company faced contemplating going after the millions of was about to benefit profitably from the severe headwinds during the financial crisis. dollars he made while running Countrywide government’s new interest in everything And while Countrywide is no longer aground, he is not hanging his head in shame. housing. In the years to come, aggressive INDUSTRY INSIGHT in existence, its legacy still haunts Bank of When asked about his inquiries into policies aimed at expanding credit formed, America, which acquired the lender several the compensation level of Mozilo and including one of Mozilo’s favorites: The Best years ago. other executives, Kucinich was not shy. “It’s Practices Initiative from HUD. In August of 2014, Bank of America outrageous! I complained at the time about the Countrywide was viewed as the star player agreed to pay $16 billion in cash and level of compensation that Mozilo and others in the Best Practices Initiative, which encour- consumer relief to settle mortgage-related were receiving, despite the fact that there were aged banks to not only ensure compliance with millions of people losing their homes. the Community Reinvestment Act, but to push issues raised by the Department of Justice, “If you look at the transactions at that time the envelope further by ensuring even more ac- other federal agencies, and six states. The as being fraudulent, when people have gains cess to credit in underrepresented markets. settlement included $9.65 billion in cash and that are ill-gotten and can be traced to fraud, With these best practices came loose $7 billion in consumer relief. they are supposed to lose those gains. We know underwriting guidelines. Lower down payment Bank of America executives were quick that didn’t happen. Across the board there were loans and slower amortizing mortgages began to point out that the deal resolved legacy people running big companies who were able to to take root. mortgage issues stemming from the bank’s have their companies pay fines. They were able to When Mozilo wasn’t busy serving as acquisitions of Countrywide and Merrill capitalize for themselves on the conditions and HUD’s affordable lending star, he was rubbing Lynch. the shareholders were the ones who took the hit.” elbows with lawmakers. Yet, as the mortgage industry continues Legacy mortgage issues may still plague Bank In July 2012, Rep. Darrell Issa (R-Calif.), to fight back, hoping for a new generation of of America from its acquisition of Countrywide released a report from the House Oversight customers to emerge, it is clear Angelo Mozilo during the subprime lender’s tragic fall, but and Government Reform Committee. The has moved on. The former executive told Mozilo is playing innocent and defending what report detailed how Countrywide used its Bloomberg he is staying busy these days–even Countrywide became under his reign. VIP Program, otherwise known as “Friends investing money in an Arizona building that The former subprime lender went as far as of Angelo”, to offer sweet loan deals to 12 houses a Taco Bell. making the rounds on cable television recently members of Congress. It may not seem as profitable as mortgages, to defend his reputation. In a September “Other than Countrywide, no other entity’s but neither were loans catering to underserved interview with Bloomberg, the former CEO employees received more VIP loans than populations in the 1980s. Mozilo, with a bit of defended his firm and his own reputation. “No, Fannie Mae,” Issa stated at the time. help, changed all that. After he found success, no, no, we didn’t do anything wrong,” Mozilo “Even as Countrywide’s CEO Mozilo he hit the escape button, leaving others to said. “Countrywide or Mozilo didn’t cause any mocked Fannie Mae and top executives shoulder the blame, his critics contend. of that.” for its crony capitalism business model, he But even if Angelo Mozilo is perceived Instead, Mozilo pointed to a shifting would nonetheless personally intercede to as the mortgage industry’s face of greed, real estate market, portraying himself as an ensure executives had access to discounted corruption, and failure, he himself is not innovative lender who merely became a tragic Countrywide loans. These relationships buying that story.

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