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Saturday, December 3, 2011

Foreclosure fraud whistleblower found dead

Activist PostSaturday, December 3, 2011

Foreclosure fraud whistleblower found dead

Madison Ruppert, Contributing Writer
Activist Post

Tracy Lawrence, a 43-year-old notary who blew the whistle on the immense robo-signing scandal was found dead in her home on Monday morning after failing to appear in court.

Lawrence had plead guilty to one count of notary fraud last Monday after coming forward earlier this month and confessing to notarizing roughly 25,000 documents in a fraudulent foreclosure scheme.

The Los Angeles Times reported that Lawrence admitted to notarizing the documents for a Florida-based company used by most major banks to process home repossessions called Lender Processing Services.

After Lawrence did not show up in court at 8:30 AM Monday for her sentencing hearing and her attorney did not speak to her for over an hour, the Senior Deputy Attorney General, Robert Giunta requested a bench warrant.

The judge denied Giunta’s request for a warrant for Lawrence’s arrest but after her lawyer voiced concern over Lawrence’s wellbeing, police were dispatched to Lawrence’s home.

Police then discovered Lawrence’s body in her home. Las Vegas Metro Homicide Detectives are now working the case.

According to local Las Vegas NBC affiliate KSNV MyNews3, it is currently unclear if Lawrence’s death was the result of a suicide or if it was due to natural causes.

Yesterday, Las Vegas Homicide Detectives said that they had ruled out homicide as a possible cause of death.

Gary Trafford and Geraldine Sheppard, title officers living in California, are allegedly responsible for the so-called robo-signing scheme which involved forging signatures on notices of default numbering in the tens of thousands between the years of 2005 and 2008.

Nevada’s Attorney General is negotiating the terms of surrender for Trafford and Shepard who are expected to surrender at some point in December.

A major red flag is raised in this case when one considers the fact that Lawrence’s charge of one count of notarizing the signature of a person not in her presence carries a sentence of up to one year of jail and a fine of up to $2,000.

Compare this with the indictments against Trafford and Sheppard which are 606 counts of offering false instruments for recording, false certification on certain instruments and notarization of the signature of a person not in the presence of a notary public.

Unless Lawrence was depressed or otherwise psychologically unstable, suicide seems like a highly unlikely explanation, although so few details have been released that it is impossible to tell and anything is pure speculation at this point.

Lender Processing Services acknowledged that the signing protocol on some of the documents was flawed and President and CEO Hugh Harris stated in an official press release dated November 17th, “I am deeply committed to ensuring that LPS meets rigorous standards of professional conduct and operating excellence.”

“I have full confidence in the ability of our leadership team and over 8,000 dedicated employees to deliver on that commitment,” Harris added.

Despite decreases in foreclosure rates, as of mid-September Nevada continued to lead the nation in foreclosures according to RealtyTrac’s U.S. Foreclosure Market Report.

In August, one in every 118 properties in Nevada was under foreclosure and August was the 56th straight month that Nevada has dominated the top of the national list.

While it would be overly speculative to think that Lawrence’s death could have involved foul play, especially given the fact that Homicide Detectives ruled it out, I don’t think one would be illogical in questioning the legitimacy of these reports.

We all know that police can find suicide and rule out homicide in some seemingly ridiculous situations, so nothing is truly off the table.

This article first appeared at End the Lie

Madison Ruppert is the Editor and Owner-Operator of the alternative news and analysis database End The Lie and has no affiliation with any NGO, political party, economic school, or other organization/cause. He is available for podcast and radio interviews. If you have questions, comments, or corrections feel free to contact him at admin@EndtheLie.com

Tuesday, November 8, 2011

Wealthy Qualifying for Loans Meant for Low-Income Borrowers

Bloomberg

Wealthy Qualifying for Loans Meant for Low-Income Borrowers

Colorado’s San Miguel County is known as a winter playground with world-class skiing and mountain vistas, a place where homes can sell for millions of dollars.

If you’d like to buy, the Federal Housing Administration -- the agency created to aid low-income and first-time homebuyers - - can help. Not far from the ski resorts of Telluride, an FHA- approved borrower can pick up a five-bedroom, four-bath house with stainless steel appliances and a two-car garage for about $600,000.

The agency, created during the Great Depression, has found itself insuring high-dollar loans in hundreds of counties across the country, from New Jersey to Florida to Arizona. Such loans are drawing renewed scrutiny as lawmakers debate whether to expand FHA lending to even wealthier borrowers.

“It’s not the intent of the FHA to facilitate people buying McMansions,” said Representative Scott Garrett, a New Jersey Republican opposed to higher loan limits. “The intent is to help the average American buy the average house.”

Congress is weighing a proposal to restore higher loan limits that expired on Oct. 1. The measure, already adopted by the Senate, would allow the FHA and government-controlled Fannie Mae and Freddie Mac to insure single-family mortgages for as much as $729,750, up from the current $625,500, in high-cost parts of the country.

Lawmakers who back the higher limits are concerned that any withdrawal of federal support could undermine the frail housing market. They are taking their case to House and Senate appropriators, who are meeting in private this week to hash out details of a $182 billion spending bill that includes the mortgage provision.

42 States

“We had hundreds of counties across 42 states that found themselves with lower loan limits,” said Senator Robert Menendez, a New Jersey Democrat who co-sponsored the amendment adopted in the Senate. “When you see Realtors, homebuilders and mortgage bankers all come together and say this is one of the most important things to do, it’s significant.”

Those groups have mounted an intense lobbying campaign in the past two weeks, boosted by discouraging housing indicators. Home prices fell 4.1 percent in September from a year earlier, according to data provider CoreLogic LLP, based in Santa Ana, California. The coalition includes the National Association of Realtors, the National League of Cities and the Mortgage Bankers Association headed by former FHA Commissioner David Stevens.

“We urge you to do no harm,” the coalition wrote in a Nov. 3 letter to lawmakers. “Do not precipitate more turmoil in local markets.”

Mission Compromised

Pushing back are mortgage insurers, the American Bankers Association and others who say it’s time for the government to step away from the mortgage business. Joining them is the National Community Reinvestment Coalition, housing advocates who fret that the FHA’s mission is being compromised at the expense of working-class Americans.

NCRC President John Taylor pointed to a Congressional Budget Office study that found that higher limits would benefit only the wealthiest 5 percent of U.S. households.

“I don’t see that they’re gaining anything from this other than reducing opportunity for working-class, blue-collar people,” Taylor said.

The proposal on the table would also raise the cost of high-value Fannie Mae and Freddie Mac loans, pushing even more borrowers to the less-expensive FHA program, Taylor said.

Subprime Roots

The loan limit debate has its origins in the 2008 credit crunch, when failing subprime loans led to millions of foreclosures and drove down home prices nationwide. As banks grew reluctant to lend, lawmakers sought to inject capital into the system by increasing the value of mortgages that the FHA, Fannie Mae and Freddie Mac could guarantee. Combined, the three currently back more than 90 percent of home mortgages.

Larger loans that don’t have government backing are known as jumbo or non-conforming mortgages. They can be difficult to get, tend to carry higher interest rates and sometimes require higher downpayments than conforming loans.

The National Association of Homebuilders has estimated that 5.3 million homes were caught in the Oct. 1 shift. Nearly 670 counties saw their conforming loan limits decline, according to the NAR.

“We have a convoluted policy in America where the most financially qualified individuals are being forced to pay higher rates because they’re outside the loan limits,” said Lawrence Yun, NAR’s chief economist.

Premiums

He noted that FHA loan guarantees are financed with premiums the agency charges to borrowers. Although the agency’s capital reserves are at a historic low, it hasn’t required a government bailout, unlike Fannie Mae and Freddie Mac, which have drawn about $175 billion from the Treasury Department since they were taken under conservatorship in 2008.

“We understand the ideological fight. But right now we need to look at the practical situation,” Yun said. “The practical reality is we need to get housing to recover.”

Complicating the debate is a law that prohibits the FHA itself from lowering limits. Currently, most limits are calculated using 2008 home values, thanks to a provision in the economic stimulus law passed in the early months of the Obama administration. If home prices fall, the FHA formula can’t take that decline into account.

As a result, the agency currently insures loans above average home prices, particularly in high-cost areas that have seen steep declines. Some of those areas include resort communities.

Median Prices

In San Miguel County, the median home price is $416,000, according to the Department of Housing and Urban Development, down from $770,000 in 2008. That means the FHA guarantees loans in the area for 150 percent of the current median, and would grow to nearly 175 percent under higher limits.

President Barack Obama and many in Congress have called for government to shrink its role in supporting the mortgage market. HUD Secretary Shaun Donovan said in July that letting higher loan limits expire would have no “major impact” on the market.

Given the administration’s position, many housing lobbyists thought the push for higher limits had petered out. However, on Oct. 20, the Senate restored the higher cap in a late-night vote of 60-31, adding it to a spending bill for a batch of federal agencies.

The amendment from senators Menendez and Johnny Isakson, a Georgia Republican, restored the $729,750 maximum in high-cost areas and imposed a new fee on those high-value loans backed by Fannie Mae and Freddie Mac. The 15-basis-point fee would cover any additional risk to taxpayers, Menendez said.

As House and Senate lawmakers work to resolve their differences on the spending bill by a Nov. 18 deadline, loan limits have become a bargaining chip.

“After a 60-vote reality in the Senate I’d like to believe that puts us in a strong position,” Menendez said.

To contact the reporter on this story: Lorraine Woellert in Washington at lwoellert@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

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Saturday, October 29, 2011

Disgusting: New York's Largest Foreclosure Firm Mocked Downtrodden Homeowners at Halloween Party

AlterNet.org

Last year, the law firm of Steven J. Baum threw a Halloween party in which employees mocked the homeowners it foreclosed against, wearing horrific "squatter" and "homeless" costumes and setting up a fake foreclosure sale tent city. Steven J. Baum is the largest foreclosure mill firm in the state of New York, and represents Citigroup, JPMorgan Chase, Bank of America, and Wells Fargo, among other mortgage lenders. A former employee sent photos of the party to the New York Times' Joe Nocera:

These pictures are hardly the first piece of evidence that the Baum firm treats homeowners shabbily — or that it uses dubious legal practices to do so. It is under investigation by the New York attorney general, Eric Schneiderman. It recently agreed to pay $2 million to resolve an investigation by the Department of Justice into whether the firm had “filed misleading pleadings, affidavits, and mortgage assignments in the state and federal courts in New York.” (In the press release announcing the settlement, Baum acknowledged only that “it occasionally made inadvertent errors.”)

MFY Legal Services, which defends homeowners, and Harwood Feffer, a large class-action firm, have filed a class-action suit claiming that Steven J. Baum has consistently failed to file certain papers that are necessary to allow for a state-mandated settlement conference that can lead to a modification. Judge Arthur Schack of the State Supreme Court in Brooklyn once described Baum’s foreclosure filings as “operating in a parallel mortgage universe, unrelated to the real universe.” (My source told me that one Baum employee dressed up as Judge Schack at a previous Halloween party.)

The source told Nocera that not everyone in the employ of Baum treated their subjects with such callousness, but those that did exacted behavior that was "appalling." A response, from Baum's press officer:

“It has been suggested that some employees dress in ... attire that mocks or attempts to belittle the plight of those who have lost their homes,” the statement read. “Nothing could be further from the truth.” It described this column as “another attempt by The New York Times to attack our firm and our work.”

View the photos and read the entire column here.

By Julianne Escobedo Shepherd | Sourced from AlterNet

Posted at October 29, 2011, 10:05 am

10.4 Million American Families Slide Toward Losing Their Homes -- Is It Time for Debt Forgiveness?

AlterNet.org


ECONOMY
Wages are stagnant or falling. Foreclosures are tearing through communities, and falling home prices are destroying family equity. It's like a reverse New Deal.


The following article first appeared on the Web site of the Nation. For more great content from the Nation, sign up for its email newsletters.

The rebellious citizens occupying Wall Street shock some people and inspire others with their denunciations of bankers, but everyone seems to know what they are talking about: the barbaric and suffocating behavior of the nation’s largest banks (yes, the same ones the government rescued with public money). Right now, these trillion-dollar institutions are methodically harvesting the last possible pound of flesh from millions of homeowners before kicking these failing debtors out of their homes (the story known as the “foreclosure crisis”). This is a tragedy for the people who are dispossessed. For the country, it is a generational calamity.

“We are in the reverse New Deal,” Christopher Whalen, a savvy banking expert at Institutional Risk Analytics, told me. He meant that events are dismantling the ingenious engine that helped generate America’s broad middle-class. Homeownership was the main driver in accomplishing that great social change. For three generations, people of modest means could buy a house knowing it would secure their place in the middle-class and allow them to accumulate significant savings. If the family held the standard 30-year, fixed-rate mortgage, they were painlessly saving for the future every time they made a payment, acquiring greater equity in the home as they did so. With moderate inflation, the house would steadily increase in value even as their monthly mortgage payments stayed the same. So the cost of housing actually declined for the family, as a percentage of its income. Meanwhile, the accumulating equity became a nest egg for retirement or something to pass on to the kids.

That virtuous process, originated by New Deal reforms, is in peril and has already shut down for tens of millions, especially working-class families whose incomes are no longer rising. As described by the brokerage investment firm Amherst Securities, the housing picture is ugly. Among the 55 million families with mortgages, one in five is underwater—they owe more on their mortgage than their house is worth—or already delinquent. That’s 10.4 million families who are sliding toward failure and foreclosure. Virtually all of them will become renters, since no bank is likely to give them a new mortgage.

As a result, the housing market will remain depressed for years—too many houses for sale, too few buyers. Amherst estimates excess supply of 4 to 6 million in the next six years. Economic recovery may have to wait until that surplus is gone, because the housing sector has always led the way out of recession. The more housing supply exceeds demand, the more prices fall. The more prices fall, the more families get sucked into the deep muddy. The vicious cycle is known in the industry as the death spiral. So far, there’s no end in sight.

Laurie Goodman, a senior managing director and housing-finance expert at Amherst, warns Washington audiences, “There is a cost for doing nothing. You just kick the problem down the road; you don’t solve it. Then home prices deteriorate more and you re-create the death spiral in housing, as lower prices mean more borrowers are underwater.”

Conservatives preach patience and resignation: nothing to do except wait until the destruction ends. Liberals insist this is a solvable problem, if only government would act forcefully.

* * *

There is a solution, and it will appeal to the rebellious spirits occupying Wall Street because it combines a sense of social justice with old-fashioned common sense. It is forgiveness—forgive the debtors. Write down the principal they owe on their mortgage to match the current market value of their home, so they will no longer be underwater. Refinance the loan with a reduced interest rate, so the monthly payment is at a level that the struggling homeowner can handle. This keeps families in their homes, with a renewed stake in the future. It gives homeowners incentive to keep up their payments, because once again they have some equity and the opportunity to accumulate much more.

Some people are morally offended by the idea, and not just bankers. Forgiveness sounds to them like old-fashioned bleeding-heart liberalism. Letting failed borrowers off the hook encourages bad habits, they say, the so-called “moral hazard” of inviting others to skip their debt payments too. Forgiveness does require a measure of sympathy—a sentiment in scarce supply among governing elites. Policy wonks and politicians have been taught by a generation of hard-boiled titans and their business-school apologists to brush aside fellow feeling and focus only on the bottom line. The common good, conservatives claim, is best served by adhering to the unsentimental economics of “me first, never mind the losers.” That pernicious doctrine still reigns in the political culture. It is what the people in the Occupy Wall Street movement are rebelling against.

Forgiving the debtors is the right thing to do, because the bankers have already been forgiven. The largest banks were in effect relieved of any guilt—for their crimes of systemic fraud or for causing the financial breakdown—when the government bailed them out, no questions asked. The Obama administration followed up with a very forgiving regulatory policy that basically looked the other way and ignored the fictional claims on bank balance sheets. Instead of forcing honest accounting and rigorous reform, the administration adopted a strategy of soft-hearted regulation that banking insiders call “extend and pretend”: extend the failed loans and pretend that the loans will be paid off, even when you know many of them won’t. The phrase originated during the third world debt crisis in the 1980s, when the Federal Reserve rescued the same big banks from insolvency, the result of their reckless lending in Latin America.

This time, the government’s rationale for rescuing bankers first was that the economy cannot recover until the financial system is healed. The premise did not prove out—banks revived, at least partially, but not the economy. The same rationale applies, more logically, to failing homeowners. A heavy blanket of bad debt is smothering economic activity. Until the debt is lifted from the housing market and financial balance sheets, the economy is unlikely to regain its normal energies. So debt forgiveness is not just a moral imperative; it’s also an economic necessity.

The largest and most powerful banks are standing in the way of this solution. The Obama administration is standing with them, because bankers and other creditors would have to take a big hit if they were forced to write down the debt owed by borrowers. The banks would have to report reduced capital and their revenue would decline if homeowners were allowed to make smaller monthly payments. This could threaten the solvency of some very large banks—those that have been exaggerating their financial condition, as many market analysts and shareholders suspect. That risk presumably explains why the Treasury Department and various housing agencies try to dodge the growing demands for debt forgiveness. Fannie Mae and Freddie Mac, which guarantee roughly 70 percent of all mortgages and are now virtually owned by the government, have flatly rejected the idea, and so have the Federal Housing Administration and the Veterans Administration.

“It’s sinful, is the word I would use, that they won’t do this,” says John Taylor, president of the National Community Reinvestment Coalition and a longtime advocate for housing.

President Obama seems to be playing a sly double game—protecting banks from sharing the pain while proclaiming sympathy for embattled homeowners. The government, in effect, has been sheltering banks from facing the hard truth about their condition. They may be valuing mortgages or mortgage bonds at, say, 85 cents on the dollar when the true market value, industry experts say, is closer to 25 or 30 cents. That strengthens the case for a general and orderly write-down now: if many of these loans aren’t ever going to be repaid, then the assets now claimed by the banks are imaginary. Plus the banks hold nearly all the secondary mortgages (often equity lines) on the same houses. They are sure to fail too if the prime mortgages are busted.

* * *

The issue of forgiveness has little traction in mainstream debate, but prospects for action are far more promising than cynics assume. I am convinced that the debt-forgiveness question will eventually move to center stage, if not with this president then maybe the next one. If it is not dealt with, the problem will become larger and more destructive. The politics will change when the public realizes that the economy will remain stagnant until banks are forced to a reckoning and the huge overhang of bad debt is eliminated.

My evidence for optimism is a sampling of authorities from the financial system—banking and housing experts, financial economists, even a few investment bankers—who are already calling for debt reduction. Moral sentiment aside, people who know how the financial system works understand the ugly consequences of doing nothing. The industry advocates of dramatic write-downs are not radicals, but the logic of their position has so far been largely ignored by the major media. Active citizens are spreading the word, however. While Lower Manhattan was being occupied, the New Bottom Line, a coalition of community groups, church folks and other networks, was staging daily clashes with big banks around the country. George Goehl of National People’s Action sees the level of direct action and nonviolent civil disobedience rising rapidly among frustrated people of conscience.

Stephen Roach, a Morgan Stanley economist and lecturer at the Yale University School of Management, more or less agrees. “Some form of debt forgiveness would be a clear positive,” Roach told me. “Debt forgiveness is a big deal when so many Americans are underwater and unable to keep up with their payments. Writing off debts would help them build up their savings. The saving rate is up, but not nearly enough. With debt reduction, people would feel less reluctant to spend money on new things. If you can do that, then companies will feel more confident about future demand, less reluctant about hiring more workers.”

Roach thinks the executive branch can engineer dramatic debt reduction with or without the approval of Congress. Fannie and Freddie together hold something like $1.5 trillion in housing loans or mortgage-backed securities. The Federal Reserve has nearly another trillion on its balance sheet. As owners, they could unilaterally grant new, more realistic terms to stressed borrowers. “Government can do this by simply telling Fannie Mae and Freddie Mac to take a write-down on their outstanding loans,” Roach explains. “Then the government can put pressure on the banks to do the same thing. The banks will resist, but they have to go along if the government is forceful enough.”

The Fed can likewise become a major influence for debt reduction, Roach says. Conservative traditionalists would naturally be appalled if the Fed directly aided the real economy of consumers and producers, but that objection was nullified by the financial crisis, when the central bank pumped hundreds of billions into nonbank corporations like AIG and General Electric.

If the Federal Reserve is reluctant to modify mortgages, says Roach, it can easily fund the process indirectly by creating new money and buying bonds issued by Fannie and Freddie, just as the Fed purchases Treasury bonds. “The Fed can assist by buying Fannie and Freddie bonds with the emphasis on reducing principal for the borrowers,” Roach explains. “It would be like ‘quantitative easing’ aimed at debt reduction,” a reference to the Fed’s purchases of mortgage-backed securities, Treasury notes and other assets to stimulate recovery.

Laurie Goodman, the Amherst Securities housing-finance expert, assured the Senate Banking Committee in September that debt reduction is readily doable in the financial and real estate industries. “We actually know exactly what it takes to create a successful modification: reduce principal, give the borrower substantial payment relief and modify the borrower in the early stages of delinquency,” she said.

To illustrate, Goodman suggests that a bank or mortgage servicer could reduce an underwater mortgage from $150,000 to $115,000 with a “shared appreciation” agreement. The homeowner would no longer be underwater and would gain some positive equity. If the property is sold in the future, any appreciation in its market value must be shared with the lender. She pointed out that a major mortgage servicer, Ocwen Financial, is already doing such deals. The creditor will get
25 percent of any future market gain. In many cases, that sounds like a better deal for the lender than holding on to the bad mortgage and eventually getting nothing.

“I would like to think principal reduction would be a mandatory part of the government’s modification program,” Goodman said. “The Treasury has not let it happen.” Meanwhile, she complained, the government is making it harder for homeowners to get new mortgages despite the sagging housing market. “Almost every single proposed government action has been aimed at further tightening credit availability,” she told the senators.

* * *

Why would the government discourage mortgage lending in the midst of the Great Recession? Christopher Whalen, the banking expert, offers an explanation: if homeowners are allowed to refinance and get a much lower interest rate with a new mortgage, both the banks and government agencies like Fannie and Freddie may lose their best debtors—people who are paying reliably on older mortgages with much higher interest rates. Fannie and Freddie boosted their fees, he noted, in order to make refinancing harder and more costly for homeowners.

“It’s propping up profitability for the banks and propping up profitability inside Fannie and Freddie,” Whalen says. “Without that cash flow, their losses would be higher and the yield on their assets would be lower.” This is subtle exploitation, Whalen suggests, aimed particularly at minorities and lower-income people, who paid a higher interest rate in the first place because they live in “a not quite as nice part of town.” The big banks, he says, “don’t want these high-spread middle- to lower-income borrowers to pay off their mortgages earlier because they represent relatively high cash flow.” Whalen endorses a modest proposal from a mortgage consultant and two Columbia University economists, including former Bush adviser Glenn Hubbard, to encourage refinancing at lower rates by removing some impediments to refinancing adopted by the federal agencies or private banking. President Obama may be considering the idea; he gave it one vague sentence in his September jobs speech.

The trouble with the Hubbard proposal is that it helps only “responsible” homeowners, as the president called them. It does nothing for the 10 million or more who have missed payments and are heading for delinquency, then foreclosure. What’s worse, the Hubbard plan essentially tries to bribe the banks by offering them liability against a mountain of damage claims. That could be worth tens of billions to the bankers.

“The ticking time bomb here is the municipalities,” says Whalen. “When people expect to lose their homes, they stop paying their taxes. So you want to get people out of those homes right now; you want to get someone in that house who will pay the bills. But there’s a couple of years’ backlog on processing foreclosures in New York. If we don’t deal with this, we’re going to have big swaths of the economy where the banks basically are paying the property taxes. You don’t want that to go on too long.”

Rob Johnson, a former banker and former investment partner with George Soros, now heads the Institute for New Economic Thinking (INET). He endorses debt reduction because social destruction is the great uncalculated cost of doing nothing. “There are so many communities that are being unnecessarily destroyed right now,” Johnson says, “not to mention pension funds and insurance companies holding mortgage securities that are trading at lower value because the destruction is damaging the property. We are in a really weird place where the whole economy—the reallocation of resources, the quality of communities, the funding of municipalities, all of it—is blocked by the banks doing ‘extend and pretend.’ ”

* * *

The American financial system seems ultramodern in its complexity, but it is actually ancient in the brutal ways wealth asserts power over others. The earliest societies were torn by conflicts between lenders and borrowers, the rich versus the poor. They were compelled to fashion hard rules and put restraints on lending to curb the cruelties and promote a moral minimum for social justice. Nearly every country and culture embedded these values in religious tenets that governments enforced. Anthropologist David Graeber asserts provocatively in his book Debt: The First 5,000 Years that the power struggles over debt were probably the starting point for developing civilization’s moral codes.

The arguments typically began when kings or landowners lent some of their surplus wealth to peasant farmers, then took away the debtors’ property if they failed to repay the loans. In olden days, the creditor would seize the debtor’s livestock and vineyard, perhaps even his children to be enslaved as household servants, until the debts were repaid. If the failure of borrowers persisted, the wealthy lenders would wind up owning all the property, with the peasants reduced to tenant farmers on the land they had once owned. The negative cycle stopped when the peasants could no longer borrow because they had nothing left for lenders to claim in default.

Economic life at that point was frozen or depressed, no longer functioning. In a rough sense, this resembles what happened to our economy in the financial crisis. Debtors were tapped out, up to their eyes in debt, and creditors recognized that they could not lend to them anymore without losing their money. In modern economies, no one takes away their children, but they do seize homes and cars and other assets.

The ancient Hebrew society worked out a solution for recurring debt crises—you can find it in the Bible. Every seven years (in some interpretations, every fifty) the cycle of debt accumulation was erased by a declaration of general forgiveness. This was called the year of jubilee, and Christianity embraced the same moral principles (“forgive us our debts, as we forgive our debtors”). Property was returned to the original owners, and children and slaves were freed. Everyone was redeemed. The economy was freed to start over again.

Graeber thinks Judaism’s reform laws were probably influenced by the Babylonians, who issued “clean slate” edicts when excessive debt accumulation threatened social crisis. Graeber notes that nearly every society, ancient and modern, shares moral confusion about debt, with contradictory attitudes. On the one hand, “Paying back money one has borrowed is a simple matter of morality.” On the other hand, “Anyone in the habit of lending money is evil.” Americans share this ambivalence.

Here is what Americans can learn from the ancients: severe inequality of wealth and income is not just a question of morality. Inequality is the fundamental source of the disorder that leads to financial crisis and chokes off the economy. Ancient religious principles like the limits on interest rates were a practical way of maintaining balance in economic life. Taking away those rules—as US politicians did when they repealed prudent regulations of banking and finance—in effect authorized the growing inequality that eventually leads to chaos.

Modern economists and their supposed “science” generally ignore the ancient wisdom. Most would probably dismiss the connection as folklore. Some economists study inequality and what drives it. Others study financial fragility and macroeconomic volatility. But the two subjects are seldom addressed as underlying cause and effect. Gross concentrations of money at the top help explain why the system eventually stalls out. This is a basic insight that ought to inform the agenda for recovery. Inequality matters.

Economists Michael Kumhof and Romain Rancière wrote a breakthrough paper for the IMF that made the connection between inequality and financial crisis. “The crisis,” they wrote, “is the ultimate result, after a period of decades, of a shock to…two groups of households, investors who account for 5% of the population, and whose bargaining power increases, and workers who account for 95% of the population.” The 5 percent, broadly speaking, lend to the 95 percent, and in so doing gain still greater wealth and power. The shock comes when the creditor class suddenly realizes that the borrowers are drowning in debt and cannot possibly absorb any more. At that point, financial assets connected to consumer debt are dumped and prices crash, much as they did in 2007. The authors add, “To our knowledge, our framework is the first to provide an internally consistent mechanism linking the empirically observed rise in income inequality…and the risk of a financial crisis.”

It took three decades of lopsided borrowing to produce the breakdown, Kumhof and Rancière explain, but the ominous trend was evident for years. In the early 1980s the 95 percent had debts equal to about 65 percent of their income. By 2006 that figure had risen to 140 percent. They were devoting so much of their paychecks to making payments on old debt—credit cards, equity lines and mortgages—there was nothing left to make the payments on new debt. Defaults and bankruptcies were already swelling. The collapse came when creditors grasped the danger and started selling off their mortgage bonds and loans to consumers.

It seems odd that the financial interests, with their brilliant analysts and high-speed computers, didn’t see the nature of the crisis until it was breaking over their heads. They may have been blinded by the fabulous wealth they were harvesting. Kumhof and Rancière point out that the same ominous combination—a run-up of debt accompanied by gaping inequality—preceded the crash of 1929. Greed may inspire optimism.

But why did ordinary debtors fall into this trap? The standard line is that they, too, were blinded by greed, eager for consumer pleasures they couldn’t afford. This is true for some, but the explanation libels most working people. Wage stagnation started in the 1970s and spread widely in the Reagan era. Typically, as incomes faltered, families faced two bad choices—either go deeper into debt or surrender their middle-class standard of living. Naturally, most people tried to hang on to what they had.

The responses to this crisis are well-known. People worked more—women and teenagers entered the workforce, family members took two or three jobs. And they borrowed more, paying the bills with credit cards. In these terms, average families were making heroic efforts to maintain their standard of living. They were doomed to fail unless dramatic economic reforms improved their lot. University of California economist Clair Brown predicted nearly two decades ago in her landmark study of American consumption that sooner or later working people would have to retreat to lower levels of consuming. Working harder and borrowing more had sustained them for twenty years, but neither of these remedies was repeatable. At some point the merry-go-round would have to stop.

The retreat is now in full flight. Homeownership has declined by 1.1 percent over the past decade. Wages are stagnant or falling. Foreclosures are tearing through communities, and falling home prices are destroying family equity. Americans, as Whalen says, are experiencing the reverse New Deal.

* * *

The president is losing the policy bet he made at the outset of his administration. Government regulators, he decided, would give leading banks a pass on stern cleanup and rigorous reforms. With blanket forbearance and enormous lending supplied by the Federal Reserve, the assumption was that the largest financial institutions could earn their way back to solvency, gradually shedding all those “toxic assets” left over from the collapse of the housing bubble. Recovery of the broad economy was supposed to follow.

Obama’s bet looked very much like the one Japan made in the 1990s, after its spectacular housing bubble burst. Obama’s failed just as Japan’s did, and for some of the same reasons. Neither nation wished to take on the biggest banks or do something about the mountain of bad debts suppressing new economic activity. If Japan is the yardstick, the United States is in for a long, slow drag of ten to fifteen years. Japan spent a fortune on stimulus in the form of infrastructure spending, which probably helped, since unemployment never got above 6 percent. But its federal debt has risen to more than 200 percent of GDP, and the country is still demoralized by a soggy economy.

“Let me tell you the basic parallels,” says economist David Weinstein of Columbia University. “The United States and Japan both have big debt overhangs as the economies slowed. Both tried fiscal policies, which were probably held back by fiscal conservatives. At least in the Japanese case, that stimulus really was working. The mess in the banking sector fed into manufacturing and many other sectors. Instead of lending, the bankers were trying to reserve that money to cover their losses, trying to hide their losses. All of that was going on.” Like other experts, Weinstein believes there will be a second banking crisis in the United States.

Obama hasn’t changed his failed strategy or relieved the advisers who sold it to him. But the original plan has come back to haunt him. If he tries to act now, he will face a new dilemma: can government act aggressively to force reform and restructuring on the biggest banks without triggering insolvency for some of them? The alternative is to keep bumping along with stagnation or to foster inflation as a way to reduce the value of old debts and ease the pressures on debtors. Either promises bitter controversy. Rob Johnson, the former banker now at INET, thinks government will eventually have to intervene decisively to clear away the rubble and restart the economy.

The country needs a bank holiday somewhat like the one FDR ordered in 1933. “We basically have four banks and two investment banks that now call themselves banks [JPMorgan Chase, Bank of America, Wells Fargo, CitiGroup, Goldman Sachs and Morgan Stanley],” Johnson explains. “These institutions are so intertwined they are a system. You can’t deal with one bank alone; you have to deal with the system. You call a monthlong bank holiday for the twenty largest banks, and that holds everything in place while the regulators mark down the assets and see how everybody’s losses will affect everyone else.

“Then you wipe out stockholders, wipe out management, possibly some of the unsecured debt. Mortgages would be refinanced based on real value. Once everybody has taken their hit and you’ve wiped out existing stockholders, then the government comes in and properly, transparently recapitalizes all of them. As these new institutions gain a footing, eventually they can be sold back to the private market.” This is rough stuff, but the nation could get a fresh start and a new banking system out of the hard knocks. Think Jubilee, American style.

William Greider is the author of, most recently, "Come Home, America: The Rise and Fall (and Redeeming Promise) of Our Country (Rodale Books, 2009)."

Sunday, September 25, 2011

Mortgage industry tanks, fraud continues at Countrywide


Mortgage industry tanks, fraud continues at Countrywide


Bank of America, their N.C. headquarters are shown above, acquired Countrywide Financial in Jan. 2008. Chuck Burton/AP File


iWatch News investigative series reveals legacy of corruption that still plagues Bank of America

By


The mortgage market was struggling in March 2007 when Countrywide promoted Eileen Foster to executive vice president and tapped her to take over the company’s mortgage fraud unit.

Home prices were sputtering, borrower defaults were climbing, and the industry leader, Countywide, would soon be forced to ask Bank of America for an infusion of capital to help it keep afloat.

The fraud investigation unit was also struggling. The company had laid off several experienced investigators, according to Foster. Those who remained were faced with an ever-growing number of fraud complaints.

Foster had roughly two dozen investigators working for her, but only four or five had real investigative chops, Foster says. Many of the rest had been brought over to the unit from clerical jobs, she says.

The other problem was that the company’s fraud investigation resources were balkanized. In addition to the company-wide fraud unit that Foster had taken over, many of the operating divisions, such as Countrywide’s subprime unit, had their own smaller investigative teams.

This didn’t make sense to Foster. It meant the smaller investigative teams reported to divisional sales executives who might be tempted to discourage aggressive fraud investigations in order to protect the flow of loans into the company’s production pipeline.

One of her first tasks was to oversee a fraud mitigation “reengineering” that would consolidate all fraud investigation within her unit. In June 2007, she presented the plan in a series of meetings with divisional presidents.

A few weeks later, she learned that the plan had been shelved. There was no explanation why, she says, only that it wasn’t the right time for a reorganization.

She didn’t have time to dwell on the setback. In July, her unit had fielded a call from an ex-employee who claimed he’d been fired because he’d objected to fraud at one of Countrywide’s subprime loan offices in the Boston area.

Foster arranged to have the contractor that handled the Boston branches’ shredding set aside the paperwork they hauled off site and hold it in a secure location. Then a team made up of her investigators and other company representatives headed to Boston to go through the piles of paper.

After finding evidence of “cut and paste” document forgery, the team did a full sweep of the offices in question. On top of workers’ desks, Foster says, they found an unusual number of Wite-Out dispensers. And inside their desk drawers, she says, they found folders holding blank templates for account statements from various banks and brokerage firms, such as Bank of America and Washington Mutual.

In some of the offices, investigators found more than one fax machine. During interviews with investigators, workers admitted that the extra fax machine was used to simulate faked documents being sent in by borrowers, Foster says. To eliminate a paper trail, she says, branch staffers had programmed the sending fax machine so there was no banner identifying the fax number from which the transmission originated.

The fraud seemed routine and the investigation showed “that the phony activities of these employees were known … and tolerated by management,” Foster later said in a witness statement in a Countrywide shareholders lawsuit in federal court in Los Angeles.

After the company had closed one branch and was preparing to shut five more, Lumsden, the company’s subprime lending chief, called Foster and angrily accused her of running a witch hunt, Foster claims.

Foster told iWatch News that, during a later conference call, Lumsden argued that the tactics that workers were using in the branches weren’t designed to take advantage of customers, but rather were a way of cutting red tape and speeding deals through the company’s loan-approval system.

“This is jaywalking,” Foster recalls him saying. “Not murder.”

Lumsden told iWatch News he didn’t recall the phone calls Foster describes. “I’m not able to really comment on anything she has to say,” he says. “I don’t remember Foster, and I don’t remember the conversation.”

As for the Boston investigation, Lumsden says the company handled things the way it should have. “I don’t know what else to say,” he says. “People who did things wrong were terminated.”

Roughly 44 employees in the Boston area lost their jobs.

Foster says, though, that she was blocked from establishing what responsibility upper level executives might have had for the problems in those branches.

She says her unit wasn’t allowed to interview Markopoulos, the former loan officer who had risen to executive vice president of the subprime division with supervisory authority over the Boston region. Instead, she says, Employee Relations conducted the interview, asking Markopolous a series of “tepid” questions and then allowing his boss, Lumsden, to review the transcript before it was turned over to Foster’s unit.

‘Shadow approvals’

While Foster was fighting battles within Countrywide’s corporate offices, some employees in the field were getting first-hand lessons, they say, in how far the company’s go-go sales culture was willing to go.

Lupe Manegdeg, a loan specialist at a Countrywide office in Glendale, Calif., claimed that, in early 2007, she discovered that loan officers in her branch were defrauding borrowers in a variety of ways — including forging their signatures on documents and lying to them about the type of loans they were getting.

She reported this, she said, to her supervisors, to Countrywide human-resources officials and to the company’s fraud hotline. The company responded, her lawsuit in state court in Los Angeles said, by firing her.

The case was settled last year before Countrywide had a chance to respond to Manegdeg’s allegations.

One of the highest-level employees to complain about fraud inside Countrywide was Mark Zachary.

Zachary took a job in August 2006 as a vice president in the Houston, Texas, division of Countrywide KB Home Loans. The lender was owned by Countrywide as part of a joint venture between Countrywide and KB Home, one of the nation’s largest home builders. Countrywide KB Home Loans provided the credit that allowed home buyers to purchase houses being

constructed at a furious pace by KB Home.

Soon after he started, Zachary began questioning Countrywide executives about inflated property appraisals and “other grave illegal issues,” according to a lawsuit he later filed in federal court in Texas. The bogus appraisals duped both the consumers, who ended up borrowing more than the homes were actually worth, as well as the investors who bought the loans on Wall Street, Zachary said.

In April 2007, his suit said, he sent an email to Countrywide’s employee relations unit, warning that selling people overpriced homes and putting them into loans they couldn’t afford was a “formula for disaster.”

His suit claimed that he also clashed with management over a requirement that the lending unit approve 10 percent of backlogged loan applications each day so the green light could be given to KB Home to start building the homes under contract. After he said he couldn’t meet that goal, he was “taken out of the loop” and “treated like a pariah by his supervisor.”

Instead, Zachary charged, Countrywide KB Home Loans began OK’ing applications through a backdoor process in which loans were in essence “being approved without a review by an underwriter.”

These authorizations, he said, had a special name: “Shadow Approvals.”

And Zachary? A supervisor wrote him up for “performance issues,” he said, a stark turnaround from a glowing performance evaluation he’d received three months before. He was terminated two weeks after the written warning, his lawsuit said.

After Zachary sued, Countrywide said it had “investigated each of his claims and found no merit to his accusations.” It said Zachary had “received verbal counseling on his performance, as well as written feedback in the form of his evaluation, before he first made allegations of impropriety.”

Countrywide said its lending operations were “prudently and effectively managed” and that its ethical standards were “rigorously enforced.”

Zachary and Bank of America reached an out of court settlement in the case in 2009. As part of the settlement, Zachary agreed not to talk further about his experiences at Countrywide.

‘Everybody’s flipping out’

After the Boston investigation, Foster says, she continued to run into problems with Countrywide’s management

She says she urged the company’s internal audit unit to investigate the lack of accurate reporting of suspicious activity reports. An audit report about fraud across the company’s divisions was “edited down” and in the end “said almost nothing” about problems with reporting the suspicion activity reports, Foster says.

She also hit a roadblock, she says, when she started putting together a report listing all the questionable loans that had been sold to investors. A superior, she says, told her: “You need to pull it. Everybody’s flipping out.”

Management didn’t want the information put down on paper, she believed, because then it would have to buy back the bad loans. The company left it up to investors, she says, to find fraud-tainted loans themselves — a difficult task given the volume of loans pooled into mortgage-backed securities deals.

Foster also began clashing with Countrywide’s employee relations unit, which had a key role in disciplinary actions against employees. Employee Relations, she says, worked with sales managers to shield high-producing salespeople from scrutiny.

In one case, a branch manager hung on to his job despite fraud allegations that went back five years. Workers complained he was doing drugs and ranting and screaming in the office. After the manager swore he only took prescription drugs, Foster says, Employee Relations labeled the drug allegations unsubstantiated.

One witness claimed the manager had threatened to kill an employee’s family. Another supposed witness was too scared to speak, trembling uncontrollably, Foster says. But because it was the manager’s word against the word of a single witness, Foster says, Employee Relations also listed the murder-threat allegation as unsubstantiated.

These and other investigations convinced Foster that Employee Relations was doing more than excusing fraud, according to Labor Department records. It was, in her view, actively working to cover up fraud by discouraging employees from reporting wrongdoing to her team, violating the confidentiality of tipsters and using its influence over personnel decisions to retaliate against whistleblowers.

“Without ER, the sales people couldn’t have done what they did,” Foster told iWatch News . Employee Relations had “the ultimate power to silence the whistleblower. They were the controlling factor. Without them, it wouldn’t work.”

‘A rare opportunity’

In January 2008, Bank of America announced that it had reached a deal to purchase Countrywide, which had lost $1.6 billion over the previous six months.

Countrywide’s CEO, Mozilo, said it was “the right decision for our shareholders, customers and employees.” Bank of America called it a “rare opportunity” for the company to add what it believed to be the best “mortgage platform” in the nation.

Foster continued her duties as fraud investigation chief, while applying for a chance to work for Bank of America once the merger was completed July 1.

In February 2008, Labor Department records indicate , she learned that over a period of two to three years, several workers had been transferred or fired after telling Employee Relations that Michael Eckhart, a high-producing loan officer at a Countrywide branch in Nashville, was committing fraud. Her team also uncovered evidence that a regional vice president had kept Eckhart apprised of the progress of investigations targeting him, according to Foster’s witness statement in Countrywide shareholders litigation.

Eckhart’s attorney says that Eckhart died last year. The attorney declined to comment about the fraud allegations raised against him.

In late February, Foster began voicing open criticism of Employee Relations’ actions, pressing the issue with senior executives in emails and meetings, according to the Labor Department. In May, she informed Employee Relations that she intended to refer her allegations about its treatment of whistleblowers to Countrywide’s internal audit unit.

As Foster was reporting her concerns about Employee Relations’ conduct, Labor Department records say , Employee Relations launched an investigation — not of Foster’s allegations, but of Foster herself.

A senior vice president from Employee Relations began questioning

members of Foster’s team about her management style, according to the Labor Department. One of Foster’s fraud investigators later complained, agency records show, that Employee Relations reps grilled him for almost three hours, asking leading questions and trying to get him to say damaging things about her. He said he worried that many employees might simply cave to the pressure.

Foster remained unaware of the investigation against her for several weeks. In early July, with the merger complete, she got some good news: Bank of America named her senior vice president in charge of its new combined mortgage fraud unit.

Foster says she learned about Employee Relations’ investigation later in July. She was questioned by Employee Relations in August.

By early September she thought the investigation was dead, she says. Bank of America had stripped Countrywide’s employee relations unit of power to conduct investigations, she says, and she believed the new owners weren’t going to put stock in anything Employee Relations had to say about her.

On Sept. 8, 2008, a Monday, Foster reported to work with a busy week ahead of her. She was supposed to meet the following week, she says, with officials from the bank’s federal regulator, the Office of the Comptroller of the Currency. The subject: questions about Countrywide’s reporting of suspicious activity reports. She had a spreadsheet showing the Countrywide’s subprime division was grossly underreporting these reports, she says.

The phone rang at 8 a.m. It was a call she’d been expecting from a Bank of America human-resources official. She thought they would be discussing salary structure for her team members.

Instead, with the Bank of America official on the phone, two Countrywide officials walked into her office, turning it into a conference call. They presented her with a 16-page severance agreement.

Bank of America offered her a buyout totaling almost one year’s salary, nearly $230,000. The catch was that, to get the money, she had to agree to a gag order that would prevent her from talking about what she knew about the company’s practices. “I was just furious,” she says. When she refused to sign, she says, the buyout offer turned into a straight-up firing.

They asked for her ID badge and keys. Then Bank of America security operatives escorted her out of the building.

It was her 51st birthday.

Later, in an email exchange, the employee relations official who’d led the investigation told Foster that her firing was due to her “inappropriate and unprofessional behavior” and “poor judgement as a leader.” Within her unit, the official said, there was a perception that Foster would retaliate against underlings who crossed her. As a result, the official said, Bank of America’s senior managers had “lost confidence” in her ability to lead the team.

The Labor Department later noted that the bank never consulted or interviewed Foster’s direct supervisor during the investigation, and that it violated its own progressive disciplinary policy: She’d never been written up, suspended or disciplined previously, and in fact was “a high-performing employee with no history of poor performance or conduct issues.”

Four former coworkers told iWatch News that the picture of Foster’s management style painted by Bank of America doesn’t square with their recollections of Foster as a colleague and boss. Among them is Larry Goebel, a former captain in the Los Angeles Police Department’s internal affairs unit who worked with Foster at Countrywide and Bank of America. “She had a lot of integrity,” he says. Any suggestion she was unprofessional is “total b---s---, to be honest with you.”

‘Sleaze factor’

After it fired Foster, Bank of America named Goebel to replace her as head of its mortgage fraud investigation unit.

The former police detective was surprised, he says, to find that many sales-department holdovers from the Countrywide era continued using fraudulent tactics to try to maintain their production and commissions as the mortgage market fell in on itself. “It was a culture that wouldn’t die,” he says.

Management didn’t block him from investigating fraud cases, Goebel says, but it never gave him enough trained investigators to keep up with the huge volume of fraud. Bank of America didn’t show much interest, he says, in rooting out the culture of corruption or getting a reading on just how much misconduct had gone on inside Countrywide. “It wasn’t really like: ‘We need to take a look back, we need to clean house.’”

Nine months after taking over the fraud unit, Goebel says, he quit, fed up with the “sleaze factor” that had overtaken the mortgage industry. He now works as head of security for the Performing Arts Center of Los Angeles County.

Bank of America declined to answer questions about Goebel’s account of his time in charge of the fraud unit.

Since the merger, Countrywide has produced little but headaches for Bank of America.

The bank agreed to an $8.5 billion settlement with a group of 22 big mortgage investors. It also helped Countrywide’s founder, Angelo Mozilo, settle charges that he’d added $141.7 million to his personal fortune through fraud and insider trading. (Mozilo’s attorney called the charges “baseless.” ) The final settlement was for $67.5 million, with Bank of America and Countrywide’s insurers chipping in $45 million and Mozilo paying $22.5 million — or about 16 cents out of his own pocket for every dollar authorities claimed he’d taken in ill-gotten personal gains.

The bank also agree to pay $108 million to settle fraud charges against Countrywide Home Loans Servicing, the same unit Foster says forced her to stop highlighting its complaint data in her reports. The Federal Trade Commission alleged that the servicing unit gouged homeowners with illegal fees and misled them about how much they owed on their mortgages.

Countrywide Home Loans Servicing now operates as BAC Home Loans Servicing, but it continues to draw the ire of regulators for its conduct under the Bank of America banner. A coalition of state attorneys general and federal authorities are pressing Bank of America and other big banks to pay $20 billion or

more to settle claims that they used so-called “robosigners” to falsify foreclosure documents and push homeowners out of their homes.

The Federal Housing Finance Agency, which oversees mortgage investing giants Fannie Mae and Freddie Mac, has filed massive lawsuits charging that Countrywide, Bank of America and other lenders misled Fannie and Freddie about the quality of the loans they pooled into mortgage-backed securities.

A lawsuit by Nevada’s attorney general, meanwhile, charges that Bank of America’s servicing unit has engaged in a pattern of misconduct in the way it handles homeowners’ requests for loan modifications. The practices, the suit says, include falsely promising that their homes wouldn’t be foreclosed on while their applications were pending, promising them one set of terms but then delivering agreements with different terms, and providing “inaccurate and deceptive reasons” for denying their requests.

One former employee told the attorney general’s office the company gave instructions to mislead borrowers about their modifications. “One time I complained to my supervisor that I felt I was lying to borrowers,” the ex-employee said. “Her instructions … were just to give the borrowers their status and tell them that they are ‘in the process,’ in spite of the fact that the computer showed that nothing was happening.”

In response to the Nevada action, Bank of America said it was disappointed that the state had sued, because it had been “a cooperative partner” with attorneys general around the country in working out solutions for distressed homeowners. “We are already underway with further improvements to our processes and programs for Bank of America customers,” the bank said.

Holding the line

Eileen Foster says she didn’t set out to be yet another of Bank of America’s legal adversaries.

“In the beginning, I just wanted my job back,” Foster says. “I thought as soon as Bank of America looked into it, they would bring me back.”

It didn’t happen. Instead, she and the bank’s lawyers spent almost three years locked in a punishing fight inside the Labor Department’s whistleblower protection division.

Since last week, when the labor agency ordered that Bank of America rehire her, Foster has declined to comment on the bank’s role in her case, noting that she may end up going back to work there.

In interviews with iWatch News before the ruling, she expressed mixed feelings about the bank. She said she thought that the bank may have been misled by Countrywide holdovers, and wondered whether the bank’s lawyers had prevented it from realizing she’d been done wrong.

At other times, she expressed stronger feelings about the bank. “They had multiple opportunities to fix things,” Foster said in an interview earlier this year. “They chose not to do the right thing.”

Foster was unemployed for more than two years after Bank of America fired her.

“I applied for 145 jobs before I got one,” she says.

She’s now vice president of security at Lockheed Federal Credit Union in Burbank, a job that pays about half what she would have been making at Bank of America. But she says it’s a good place to work and the credit union’s CEO is a model of openness and straight-shooting.

What her next step will be is unclear. Although the Labor Department ordered Bank of America to rehire her, the bank has vowed to appeal the order to an administrative law judge. That could set up a lengthy round of litigation.

Foster says she remains a reluctant whistleblower. She’s turned down interview requests from many media outlets, and agreed to go on the record with iWatch News only for publication after the Labor Department issued its final ruling.

It was important, she says, to tell her story — and the story of other employees who tried to blow the whistle on fraud.

“I don’t want this to be about me,” Foster says. “The only reason I have a voice is because of my position. It’s not the same for somebody who’s an underwriter or production staff assistant. Management can call them disgruntled or whatever.”

Fraud flourishes, she says, when companies are allowed to intimidate and abuse employees. Without protections for whistleblowers, it’s easy for big companies to “beat people down” and silence them.

“It’s very difficult to hold the line and do what you believe,” she says.



Countrywide protected fraudsters by silencing whistleblowers, say former employees



Countrywide protected fraudsters by silencing whistleblowers, say former employees


Eileen Foster was mortgage fraud investigations chief for Countrywide Financial Corp., which eventually became Bank of America. Todd Wawrychuk/Image Group LA
iWatch News investigative series reveals legacy of corruption that still plagues Bank of America

By

iWatch News tells the story of a pattern of fraud at Countrywide Financial Corp., once the nation’s largest mortgage lender, and a high-ranking executive who blew the whistle and, she claims, was fired for her trouble. The story is the product of a 10-month investigation that included review of thousands of pages of court documents and interviews with former company insiders.

Part 1: iWatch News staff writer Michael Hudson details the story of Eileen Foster, Countrywide Financial Corp. fraud investigation chief, who uncovered massive fraud within the company and, federal officials say, paid a price for doing so.
Part 2: The story continues, as the investigations overseen by Foster lead to conflict with senior Countrywide executives, her eventual firing by Bank of America—Countrywide’s new owner—and vindication from the U.S. Department of Labor.

A California branch of Countrywide Financial Corp., which was once the nation's largest home mortgage lender. Damian Dovarganes/AP

Michael Hudson covers business and finance for iWatch News. He has worked as a staff writer at the Roanoke (Va.) Times and the Wall Street Journal. The Columbia Journalism Review called him the reporter who “beat the world on subprime abuses.” His book, “THE MONSTER: How a Gang of Predatory Lenders and Wall Street Bankers Fleeced America—and Spawned a Global Crisis,” was named “Book of the Year” by Baltimore City Paper and called “essential reading for anyone concerned with the mortgage crisis” by Library Journal.
Countrywide Financial Corp. former CEO Angelo Mozilo is sworn in during a House Oversight and Government Reform Committee hearing in 2008. Susan Walsh/AP

In the summer of 2007, a team of corporate investigators sifted through mounds of paper pulled from shred bins at Countrywide Financial Corp. mortgage shops in and around Boston.

By intercepting the documents before they were sliced by the shredder, the investigators were able to uncover what they believed was evidence that branch employees had used scissors, tape and Wite-Out to create fake bank statements, inflated property appraisals and other phony paperwork. Inside the heaps of paper, for example, they found mock-ups that indicated to investigators that workers had, as a matter of routine, literally cut and pasted the address for one home onto an appraisal for a completely different piece of property.

Eileen Foster, the company’s new fraud investigations chief, had seen a lot of slippery behavior in her two-plus decades in the banking business. But she’d never seen anything like this.

“You’re looking at it and you’re going, Oh my God, how did it get to this point?” Foster recalls. “How do you get people to go to work every day and do these things and think it’s okay?”

More surprises followed. She began to get pushback, she claims, from company officials who were unhappy with the investigation.

One executive, Foster says, sent an email to dozens of workers in the Boston region, warning them the fraud unit was on the case and not to put anything in their emails or instant messages that might be used against them. Another, she says, called her and growled into the phone: “I’m g--d---ed sick and tired of these witch hunts.”

Her team was not allowed to interview a senior manager who oversaw the branches. Instead, she says, Countrywide’s Employee Relations Department did the interview and then let the manager’s boss vet the transcript before it was provided to Foster and the fraud unit.

In the end, dozens of employees were let go and six branches were shut down. But Foster worried some of the worst actors had escaped unscathed. She suspected, she says, that something wasn’t right with Countrywide’s culture — and that it was going to be rough going for her as she and her team dug into the methods used by Countrywide’s sales machine.

By early 2008, she claims, she’d concluded that many in Countrywide’s chain of command were working to cover up massive fraud within the company — outing and then firing whistleblowers who tried to report forgery and other misconduct. People who spoke up, she says, were “taken out.”

By the fall of 2008, she was out of a job too. Countrywide’s new owner, Bank of America Corp., told her it was firing her for “unprofessional conduct.”

Foster began a three-year battle to clear her name and establish that she and other employees had been punished for doing the right thing. Last week, the U.S. Department of Labor ruled that Bank of America had illegally fired her as payback for exposing fraud and retaliation against whistleblowers. It ordered the bank to reinstate her and pay her some $930,000.

Bank of America denies Foster’s allegations and stands behind its decision to fire her. Foster sees the ruling as a vindication of her decision to keep fighting.

“I don’t let people bully me, intimidate me and coerce me,” Foster told iWatch News during a series of interviews. “And it’s just not right that people don’t know what happened here and how it happened.”

‘Greedy people’

This is the story of Eileen Foster’s fight against the nation’s largest bank and what was once the nation’s largest mortgage lender. It is also the story of other former Countrywide workers who claim they, too, fought against a culture of corruption that protected fraudsters, abused borrowers and helped land Bank of America in a quagmire of legal and financial woes.

In government records and in interviews with iWatch News , 30 former employees charge that Countrywide executives encouraged or condoned fraud. The misconduct, they say, included falsified income documentation and other tactics that helped steer borrowers into bad mortgages.

Eighteen of these ex-employees, including Foster, claim they were demoted or fired for questioning fraud. They say sales managers, personnel executives and other company officials used intimidation and firings to silence whistleblowers.

A former loan-underwriting manager in northern California, for example, claimed Countrywide retaliated against her after she sent an email to the company’s founder and chief executive, Angelo Mozilo, about questionable lending practices. The ex-manager, Enid Thompson, warned Mozilo in March 2007 that “greedy unethical people” were pressuring workers to approve loans without regard for borrowers’ ability to pay, according to a lawsuit in Contra Costa Superior Court.

Within 12 hours, Thompson claimed, Countrywide executives began a campaign of reprisal, reducing her duties and transferring staffers off her team. Corporate minions, she charged, ransacked her desk, broke her computer and removed her printer and personal things.

Soon after, she said, she was fired. Her lawsuit was resolved last year. The terms were not disclosed.

Bank of America officials deny Countrywide or Bank of America retaliated against Foster, Thompson or others who reported fraud. The bank says Foster’s firing was based only on her “management style.” It says it takes fraud seriously and never punishes workers who report wrongdoing up the corporate ladder.

When fraud happens, Bank of America spokesman Rick Simon says, “the lender is almost always a victim, even if the fraud is perpetrated by individual employees. Fraud is costly, so lenders necessarily invest heavily in both preventing and investigating it.”

When it uncovers fraud, Simon says, the bank takes “appropriate actions,” including firing the employees involved and cooperating with law-enforcement authorities in criminal investigations.

Mozilo’s attorney, David Siegel, told iWatch News it was “unlikely that Mr. Mozilo either would have had a direct role with, or would recall, specific employee grievances, and it would be inappropriate for him to comment on individual employment issues in any event.” Siegel added that “any implication that he ever would have tolerated much less condoned to any extent misconduct or fraudulent activity in loan production and underwriting … is utterly baseless.”


iWatch News tells the story of a pattern of fraud at Countrywide Financial Corp., once the nation’s largest mortgage lender, and a high-ranking executive who blew the whistle and, she claims, was fired for her trouble. The story is the product of a 10-month investigation that included review of thousands of pages of court documents and interviews with former company insiders.

Part 1: iWatch News staff writer Michael Hudson details the story of Eileen Foster, Countrywide Financial Corp. fraud investigation chief, who uncovered massive fraud within the company and, federal officials say, paid a price for doing so.
Part 2: The story continues, as the investigations overseen by Foster lead to conflict with senior Countrywide executives, her eventual firing by Bank of America—Countrywide’s new owner—and vindication from the U.S. Department of Labor.

Do you have experience working with the mortgage industry? Reporter Michael Hudson would like to hear from you. Click the "Insight" button below to share your insights.