the house or face foreclosure. 21
Despite the sharp deterioration in loan quality, compensation plans stayed firmly focused on volume. In the end, it was sheer sloppiness that pushed New Century into bankruptcy,
well before the full extent of itsloan defaults and fraudulent behaviour became clear. When an auditor discovered that accounting for loan repurchases required restating, it
wiped out profits for 2006. The committee of Wall Street banks that financed New Century (chaired by Morgan Stanley) stopped providing money, and the company was effectively out of
business. 22
Countrywide Financial Corporation
Countrywide, at first glance, was not the typical subprime lender. Founded in 1969 by David Loeb and Angelo Mozilo, it grew to become the nation’s largest and most
profitable mortgage lender. Mozilo was famous for being obsessively hands-on as well as a terrifying boss. For many years the company had a reputation for conservative lending and excellent cost
controls. In 2003 Fortune extolled it as one of the most successful American companies, with 23,000 percent stock appreciation since 1982. 23
Mozilo was ambivalent towards the subprime strategy, and sometimes internally warned of its dangers. But in the end some combination of ego, greed, laziness, and perhaps fatigue (he underwent
spinal surgery several times during the bubble) won out over both ethics and caution. As Mozilo approached retirement age in the midst of the bubble, he announced an absurdly ambitious goal for
Countrywide: a 30 percent share of the whole US mortgage market. This required aggressive expansion into the whole spectrum of toxic loan products, which Mozilo pressured Fannie Mae to buy. The
rest he sold to Wall Street, which didn’t have to be pressured at all.
Countrywide also lobbied intensively and used techniques verging on bribery. Mozilo created a special “Friends of Angelo” VIP unit to provide vastly improved customer service and
favourable mortgage terms to dozens of Fannie Mae executives, elected members of the US Congress, congressional staff members, and various prominent people (one recipient was Tonight Show host Ed McMahon, who defaulted on his $4.8 million loan). 24 Recipients included House Speaker Nancy Pelosiand Senator Chris Dodd,
chairman of the Senate Banking Committee, both Democrats, as well as three successive CEOs of Fannie Mae.
By 2006 Countrywide and its practices had become pervasively fraudulent. In September 2005, Countrywide hired a woman named Eileen Foster as First Vice President, Customer Care, in
Countrywide’s Office of the President. In mid-2006 she was promoted to Senior Vice President. Then, on 7 March 2007, she was promoted again—to Senior Vice President for Fraud Risk
Management. In this position she was supposedly in charge of Countrywide’s fraud reduction policies and she also directly managed several dozen fraud investigators.
Naively, she began to investigate fraud, and to do something about it. She rapidly uncovered massive frauds, in multiple regional loan offices, perpetrated by loan officers and managers. As
usual in the industry, loan officers were being compensated based on “production” volume regardless of quality, and indeed, as was also common, they were incentivized to produce loans
with the highest possible interest rates and fees. They could only do this at high volume through fraud.
Nearly immediately, Foster and her organization identified a massive organized fraud operation run by Countrywide personnel in the Boston area, including a regional and division
manager. 25 Foster and her unit developed evidence that forced Countrywide to close six of its eight branch offices in Boston and to terminate over forty
employees. Foster and her unit were told about, and developed evidence regarding, a number of other organized frauds and senior loan personnel involved in fraud. In December 2007 Foster started to
warn her management that there was systematic,
Despite the sharp deterioration in loan quality, compensation plans stayed firmly focused on volume. In the end, it was sheer sloppiness that pushed New Century into bankruptcy,
well before the full extent of itsloan defaults and fraudulent behaviour became clear. When an auditor discovered that accounting for loan repurchases required restating, it
wiped out profits for 2006. The committee of Wall Street banks that financed New Century (chaired by Morgan Stanley) stopped providing money, and the company was effectively out of
business. 22
Countrywide Financial Corporation
Countrywide, at first glance, was not the typical subprime lender. Founded in 1969 by David Loeb and Angelo Mozilo, it grew to become the nation’s largest and most
profitable mortgage lender. Mozilo was famous for being obsessively hands-on as well as a terrifying boss. For many years the company had a reputation for conservative lending and excellent cost
controls. In 2003 Fortune extolled it as one of the most successful American companies, with 23,000 percent stock appreciation since 1982. 23
Mozilo was ambivalent towards the subprime strategy, and sometimes internally warned of its dangers. But in the end some combination of ego, greed, laziness, and perhaps fatigue (he underwent
spinal surgery several times during the bubble) won out over both ethics and caution. As Mozilo approached retirement age in the midst of the bubble, he announced an absurdly ambitious goal for
Countrywide: a 30 percent share of the whole US mortgage market. This required aggressive expansion into the whole spectrum of toxic loan products, which Mozilo pressured Fannie Mae to buy. The
rest he sold to Wall Street, which didn’t have to be pressured at all.
Countrywide also lobbied intensively and used techniques verging on bribery. Mozilo created a special “Friends of Angelo” VIP unit to provide vastly improved customer service and
favourable mortgage terms to dozens of Fannie Mae executives, elected members of the US Congress, congressional staff members, and various prominent people (one recipient was Tonight Show host Ed McMahon, who defaulted on his $4.8 million loan). 24 Recipients included House Speaker Nancy Pelosiand Senator Chris Dodd,
chairman of the Senate Banking Committee, both Democrats, as well as three successive CEOs of Fannie Mae.
By 2006 Countrywide and its practices had become pervasively fraudulent. In September 2005, Countrywide hired a woman named Eileen Foster as First Vice President, Customer Care, in
Countrywide’s Office of the President. In mid-2006 she was promoted to Senior Vice President. Then, on 7 March 2007, she was promoted again—to Senior Vice President for Fraud Risk
Management. In this position she was supposedly in charge of Countrywide’s fraud reduction policies and she also directly managed several dozen fraud investigators.
Naively, she began to investigate fraud, and to do something about it. She rapidly uncovered massive frauds, in multiple regional loan offices, perpetrated by loan officers and managers. As
usual in the industry, loan officers were being compensated based on “production” volume regardless of quality, and indeed, as was also common, they were incentivized to produce loans
with the highest possible interest rates and fees. They could only do this at high volume through fraud.
Nearly immediately, Foster and her organization identified a massive organized fraud operation run by Countrywide personnel in the Boston area, including a regional and division
manager. 25 Foster and her unit developed evidence that forced Countrywide to close six of its eight branch offices in Boston and to terminate over forty
employees. Foster and her unit were told about, and developed evidence regarding, a number of other organized frauds and senior loan personnel involved in fraud. In December 2007 Foster started to
warn her management that there was systematic,
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