Monday, March 10, 2008

House of cards

Bigger than Enron? Possibly.

Bigger than the Savings and Loan debacle? Probably?

Anyone going to jail? Probably not.

FBI Probes Countrywide in Possible Fraud, Person Says
By Robert Schmidt and David Mildenberg

March 8 (Bloomberg) -- Countrywide Financial Corp., the largest U.S. mortgage lender, is under investigation by the Federal Bureau of Investigation for possible securities fraud, said a person familiar with the probe.

Investigators are focusing on whether Countrywide officials misrepresented the company's financial position and the quality of its mortgage loans in securities filings, said the person, who declined to be identified because he wasn't authorized to speak about the probe. He described the inquiry, reported earlier today by the Wall Street Journal, as preliminary.

Countrywide is among at least 14 companies that the FBI is checking for possible accounting violations related to the subprime lending crisis, including mortgage lenders, housing developers and Wall Street firms that package loans as securities. The FBI announced the review in January without identifying any of the companies.

``There's a whole lot of excitement and hullabaloo, but proving criminal conduct is likely to be difficult,'' said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas consulting firm. ``A lot of people were caught up in the atmosphere when the housing market was booming.''

FBI spokesman Richard Kolko declined to comment today. Jumana Bauwens, a spokeswoman for Calabasas, California-based Countrywide, said the company is unaware of any FBI probe. Bank of America Corp., which is in the process of buying Countrywide, declined to comment, spokesman Scott Silvestri said.

Lenders are facing increased scrutiny from regulators as record foreclosures displace homeowners and depress property values. U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said this week.

Countrywide and San Francisco-based Wells Fargo & Co. were subpoenaed this week as part of an Illinois probe into whether minority borrowers were steered into higher-cost loans. Countrywide pledged to cooperate in any probe and said it analyzes its data to ensure that borrowers are treated fairly. Wells Fargo said race isn't a factor in lending.

Countrywide yesterday declined 13 cents, or 2.5 percent, to $5.07 a share, 20 percent lower than its closing price on Jan. 11 when Bank of America, the nation's second-biggest bank by assets, offered to buy the company for about $4 billion in stock. The stock has declined 86 percent in the past year in New York Stock Exchange trading.

Angelo Mozilo, Countrywide's chief executive, testified yesterday before the House Oversight and Government Reform committee, which questioned why CEOs received hundreds of millions of dollars in compensation while shareholders took the brunt of millions in writedowns from subprime mortgages.

``Countrywide is the focus of politicians and others who often are looking for people they can paint as villains,'' said Gary Townsend of Chevy Chase, Maryland-based Hill-Townsend Capital, which invests in financial-industry stocks. ``Congress could be the motivator if the FBI is taking this action.''

The mortgage lender's board ``adopted a compensation policy that aligns the interests of top executives with shareholders by making compensation largely performance-based,'' Mozilo told the panel.

The share of all home loans with payments more than 30 days late, both prime and fixed-rate loans, rose to a seasonally adjusted 5.82 percent, the highest since 1985, the Mortgage Bankers Association said in its report.

Forty-two percent of new foreclosures in the fourth quarter were people with adjustable-rate subprime mortgages, given to borrowers with limited or tainted credit records, according to the report. Those types of loans accounted for about 7 percent of all mortgages.