Pure greed, graft and fraud led to the collapse of Countrywide, the housing market and the loss of millions of jobs:
'If you had a pulse, we gave you a loan'
Inside the fiasco that led to the mortgage mess and Countrywide's collapse
In Miami, Fla. last fall, sheriff’s deputies showed up at Junior Alvarez’s house to evict him and his family. That was just one of 3.2 million foreclosure-related actions last year. “We tried to save the house,” a shaken Alvarez said, “but it was too much.”
A six-month Dateline NBC examination of the origins of the economic crisis found plenty of blame to go around, and few people willing to step up and acknowledge their culpability.
Understanding how we got here is simultaneously simple and complex. Simple, in that the root causes can be traced to excesses in the multi-trillion-dollar mortgage industry. Complex, because the greed that permeated the industry was driven by some of the most arcane financial instruments ever devised by Wall Street. Those instruments, mainly derivatives of mortgage-backed securities, became so convoluted that instead of lowering financial risk, as they ostensibly were intended to do, they actually expanded and obscured it.
In the old days, a mortgage was relatively straightforward. A bank agreed to lend you money to buy a house, and the property was collateral for the loan. Banks were conservative in their lending because they expected to be paid back with interest.
In order to qualify for a mortgage, until 1956, borrowers needed a 20 percent down payment. From the 1920s to the 1950s, the rate of home ownership in the U.S. hovered around 50 percent.
But then came a succession of laws that eased lending and eventually expanded home ownership dramatically. Among the key changes: Fannie Mae, created in the 1930s, was transformed in 1968 into a government-guaranteed agency buying mortgages from lenders and providing an enormous supply of funds. It was joined in 1973 by a similar agency, Freddie Mac.
The advent of the CDO
But some say the real fuel for the boom in home ownership came from Wall Street, which found innovative ways to invest in mortgages. In the 1980s, investment banks began marketing mortgage-backed securities, bonds built from thousands of loans bundled into one instrument that paid interest to investors. The money raised from selling those bonds added to the flow of funds to mortgage lenders, who in turn were able to make more loans.
Then, Wall Street came up with a new type of security called a collateralized debt obligation (CDO), which pooled the risks from mortgage-backed securities and other debt. The little-regulated securities brought hundreds of billions of dollars more into the system.
It was that infusion of money, plus provisions of the Community Reinvestment Act, passed in 1977 and amended in the 1990s, that ignited the housing boom. By 2004, home ownership reached nearly 70 percent. As Sen. Chris Dodd D-Conn., commented before his colleagues, “in no small measure… because of the work that's been done here.”
But the system became so lax that nearly anyone could qualify for a loan. And it reached the point where lenders did not ask for a down payment at all. They were willing to lend 100 percent of the purchase price, usually split into two loans: one for 80 percent of the value; the second for 20 percent.
Take the case of Paula Taylor, a personal trainer, who said she grew up poor near Boston and was one of the first in her family able to buy her own home. In 2006, she said she was virtually homeless, living out of a suitcase, sleeping on the sofas of family members and friends.
She was looking to rent an apartment, but then a realtor showed her a condominium for sale in a renovated house in Roxbury, Mass.
She was put in touch with a loan officer at Countrywide Financial who took her information. She knew she might have a hard time qualifying, but said she did not really understand a lot about the mortgage process. “I knew that you give them your information. And they run the numbers, and they tell you whether or not you can afford it.”
At the time, her income was somewhat erratic and amounted to less than $20,000 a year, she said. But somehow her loan application listed her income as $7,300 a month – $87,600 a year, more than four times her real income.
Countrywide issued her two mortgages to cover the full purchase price: $259,900. The first mortgage was for $194,925 with an initial interest rate of 8.625 percent, fixed for two years, then adjustable. The second mortgage, in the amount of $64,975, had a much higher interest rate: 11 percent.
The combined monthly payment for both loans was more than $2,100, well above her average monthly income of $1,600.
Pointing the finger
Pressed as to how the loan application could include inaccurate and inflated income information, Taylor acknowledged she didn’t really look closely at the loan documents and said she never noticed the amount until NBC News pointed it out to her. She denied knowingly submitting false information and pointed the finger at Countrywide: “It had to be them in order to finagle the numbers to say that I could afford this property.”
What she may not have realized is that she was issued so-called stated income loans, where the lender did not verify actual income. Borrowers liked them because they made it much easier to qualify, and lenders loved them because they could charge higher interest.
As a result, stated income mortgages became extremely popular during the height of the boom. In 2006, for instance, the year Taylor got her loans, subprime lenders issued an estimated $265 billion in stated income mortgages, according to data supplied by First American CoreLogic and the trade publication Inside Mortgage Finance.
To highlight just how simple it could be to borrow money, Countrywide marketed one of its stated-income products as the "Fast and Easy loan."
As manager of Countrywide’s office in Alaska, Kourosh Partow pushed Fast and Easy loans and became one of the company’s top producers.
He said the loans were “an invitation to lie” because there was so little scrutiny of lenders. “We told them the income that you are giving us will not be verified. The asset that you are stating will not be verified.”
He said they joked about it: “If you had a pulse, we gave you a loan. If you fog the mirror, give you a loan.”
But it turned out to be no laughing matter for Partow. Countrywide fired him for processing so-called “liar loans” and federal prosecutors charged him with crimes. On April 20, 2007, he pleaded guilty to two counts of wire fraud involving loans to a real estate speculator; he spent 18 months in prison.
In an interview shortly after he completed his sentence, Partow said that the practice of pushing through loans with false information was common and was known by top company officials. “It’s impossible they didn’t know.”
A rogue manager?
During the criminal proceedings in federal court, Countrywide executives portrayed Partow as a rogue who violated company standards.
But former senior account executive Bob Feinberg, who was with the company for 12 years, said the problem was not isolated. “I don’t buy the rogue. I think it was infested.”
He lamented the decline of what he saw as a great place to work, suggesting a push to be number one in the business led Countrywide astray. He blamed Angelo Mozilo, a man he long admired, for taking the company down the wrong path. It was not just the matter of stated income loans, said Feinberg.
Countrywide also became a purveyor of loans that many consumer experts contend were a bad deal for borrowers, with low introductory interest rates that later could skyrocket.
In many instances, Feinberg said, that meant borrowers were getting loans that were “guaranteed to fail.”
http://www.msnbc.msn.com/id/29827248/
Reply to topic