We expected that the lead story of this week would be the Congressional testimony
of Countrywide Mortgage CEO Angelo Mozilo and other mortgage
company executives about their high levels of compensation which continue despite
the enormous loses their companies have suffered in the subprime mortgage collapse.
While we will report on that hearing before the House Committee on Government
and Oversight, other news over the weekend has served to overshadow that sideshow.
First, The Wall Street Journal reported that Countrywide Mortgage
and Wells Fargo and Company were under investigation by the
Attorney General of Illinois for having improperly steered minority
borrowers into high-cost or inappropriate loans
Attorney General Lisa Madigan subpoenaed units of the two investment giants
asking for detailed information about borrowers in Illinois including their
race or ethnicity, their credit scores and debt-to-income ratios, details of
the loans granted and other materials.
The Journal quoted a spokesman for the AGs office as saying "We
want to drill down into the underwriting and look at the credit characteristics
of these folks and see if [the lenders] are underwriting fairly."
Madigan had earlier investigated Countrywides origination of loans,
including subprime mortgages and option adjustable-rate mortgages.
Then the Journal reported that the FBI too has eyes for Countrywide.
They are supposedly also interested in Countrywide's origination policies and
how commonly fraud might have played a role in originations, but more ominously
they are focusing on securities fraud.
The newspaper said that the probe is looking into whether the companys
management misrepresented the quality of its portfolio of mortgages when making
routine securities filings. If such misrepresentation did occur it might have
led investors to overvalue the loans when they were securitized and sold to
investors during the years 2004 to 2007.
While any positive fraud findings in the probe could entail serious legal problems
for Countrywide and its officers, the real danger is that it could derail
a merger with Bank of America that was, at the time it was announced,
widely regarded as the only thing standing between Countrywide and bankruptcy.
The bank has agreed to purchase Countrywide for $4 billion in a deal that is
scheduled to be completed in the third quarter of this year. While Bank of America
has said that it based its bid for Countrywide taking into account potential
lawsuits and additional losses the company might incur, charges of
mortgage fraud and/or securities fraud in federal court would not only raise
the ante on legal costs, it would call into doubt the stated financials used
by Bank of America in conducting its due diligence.
Countrywide told the Journal it was not aware of any investigation being conducted
by the FBI.
The Illinois and FBI investigations are not the only legal problems faced by
Countrywide. Florida is looking into whether the company placed borrowers into
loans with rates that were different than those advertised. A class action lawsuit
filed by a consortium of government pension funds accuses Countrywide with inflating
the value of its portfolio and the Securities and Exchange Commission is looking
at Countrywides accounting practices.