By Zachary A. Goldfarb
Washington Post Staff Writer
Friday, June 5, 2009
The Securities and Exchange Commission yesterday charged former Countrywide chief Angelo R. Mozilo, who ran the nation's largest subprime mortgage lender, with fraud, making him the most prominent executive accused of illegality in connection with the financial crisis.
Mozilo was one of the masters of the housing boom, steering Countrywide as it moved into new, perilous markets in pursuit of profit, making risky loans to borrowers with checkered credit histories or without proof of income or employment. By the first half of 2007, the company funded about one of every five home loans, and mortgage industry observers say its reach in the Washington region was deep.
As Countrywide made loans, then bundled and sold them to Wall Street, the firm helped saddle the books of banks and other firms with ill-fated mortgage investments, sowing the seeds of today's crisis. The onset of the credit meltdown in the summer of 2007 brought Countrywide itself to the brink of collapse, before it was bought by Bank of America last year.
The SEC charged that the company's riskier behavior veered into deception and fraud as the housing bubble inflated. The agency charged that Mozilo and two other executives told Countrywide's shareholders that the firm wasn't partaking in the risky mortgage lending practices of competitors, when in fact it was radically reducing the standards it used to make loans. While touting the firm's financial health to investors, Mozilo in private e-mails referred to loans the company were making as "toxic" and acknowledged the firm was "flying blind," the SEC alleged.
"This is the tale of two companies," SEC director of enforcement Robert Khuzami said at a news conference yesterday. "Countrywide portrayed itself as underwriting mainly prime quality mortgages using high underwriting standards. But concealed from shareholders was the true Countrywide, an increasingly risky lender assuming greater and greater risk."
The SEC, in filing civil charges, also accused Mozilo of trading Countrywide's stock based on insider information for nearly $140 million in profit. The SEC is trying to reclaim that money as well as penalties and ill-gotten gains. The agency would not comment on whether the Justice Department plans criminal charges.
Mozilo is a controversial figure who earned hundreds of millions of dollars in compensation for stewarding Countrywide through the boom. Through a special "VIP" program, he offered below-market loans to the rich and powerful, including a number of senators.
Lawyers for Mozilo and the other executives who were charged -- former president David Sambol and chief financial officer Eric Sieracki -- denied the allegations.
"The SEC's allegations are baseless," said David Siegal, Mozilo's attorney. "The mix and risks of Countrywide's loan portfolio and its underwriting standards were well disclosed to and understood by the marketplace."
The SEC complaint opens a window on what Countrywide called its "supermarket" strategy of offering every type of loan it could make from 2005 to 2007. The company was the top originator of all types of loans, from the safest to the riskiest.
At the core of the SEC's case is a series of e-mails Mozilo allegedly wrote about loans the company was offering.
In an April 17, 2006, e-mail to Sambol about subprime loans that didn't require a down payment, Mozilo wrote, "In all my years in the business I have never seen a more toxic product."
In a Sept. 26, 2006 e-mail, addressing a particularly risky type of adjustable-rate mortgage, Mozilo said, "We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet."
The SEC complaint, filed in federal district court in Los Angeles, alleges that Countrywide didn't disclose these dangers to investors in periodic financial disclosures, as required by law. The SEC alleged the company's annual reports in 2005 and 2006 falsely claimed that Countrywide ensured it could continue to sell loans it made to Wall Street "by consistently producing quality mortgages."
Regarding the insider-trading allegations, the SEC said that Mozilo exercised 5.1 million stock options and sold the underlying shares in 2006 while aware of private information about Countrywide's deteriorating condition. Mozilo's lawyer said the trades "were entirely lawful."
Guy Cecala, publisher of Inside Mortgage Finance, said Mozilo made an easy target.
"The Obama administration is getting a reputation for picking up and going after some of the abuses that the Bush administration ignored or danced around, and this is a good example of that," Cecala said. "He was the poster boy for the mortgage market during the boom times; and if you want to put him on a Wanted poster now and blame him for the problems, it's very convenient to do so."
Staff writer Dina ElBoghdady contributed to this report.