In the first two posts in this series, I explained how a sixth year added to the statute of limitations by the Dodd-Frank Act, along with a new prosecutorial zeal at the Justice Department, might result in reopening long-closed cases against senior bank executives, including Countrywide Financial Corp. founder Angelo Mozilo.
To bring such a case, it wouldn't be necessary to explain complex instruments such as collateralized debt obligations to a jury. No, all it would take is connecting the Countrywide underwriting practices a jury last month found fraudulent with what Mozilo knew at the time.
Stay with me as I digress for a moment to the scene of a Countrywide meeting in Richardson, Texas, on March 8, 2008. According to depositions, mortgage bankers meeting there had confronted their boss, Rebecca Mairone, the same banker the Countrywide jury found liable for fraud. (Her lawyer, Marc Mukasey, told Bloomberg News that Mairone has done nothing wrong and will appeal).
The mortgage bankers were concerned about the deteriorating quality of loans coming out of what the company called the HSSL program. HSSL stood for high-speed swim lane (pronounced "hustle" internally). Mairone installed HSSL in 2007 to speed up mortgage approvals from 60 days to as little as a single day.
Using the HSSL protocols, underwriting checks and balances were eliminated. Bonuses were paid to loan specialists who reduced their turnaround times rather than on the quality of loans. By early 2008, defect rates reached 70 percent for stated-income loans, or those in which a borrower's income isn't verified.
Also on the mortgage bankers' minds that day was congressional testimony given the day before by Mozilo. "Our core commitment is to put people in homes and to keep them there," Mozilo told a House panel. "It just never serves our company to make a bad loan."
The incredulous Countrywide bankers demanded to know from Mairone: How could Mozilo justify saying that? According to a deposition, Mairone said to one loan specialist: "You need to get with the program. We need to keep funding these loans to keep the lights on."
Mozilo, of course, wasn't telling the whole truth. What best served Countrywide was a steady stream of borrowers whose mortgages it could sell to Fannie Mae and Freddie Mac. When Countrywide ran out of borrowers with half-decent credit, it found customers with subprime credit, and then borrowers with outright poor credit, the jury concluded.
Was Mozilo misleading Congress and shareholders about the scrubbing his specialists gave potential borrowers? Was he aware of the loan deterioration in the "hustle" program? Internal e-mails uncovered through civil litigation seem to indicate that he did. Would that be enough for an indictment? Unclear. But if the Justice Department isn't looking at this possibility, their newfound resolve is questionable.
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