L.A. Times: Three mortgage lenders under federal investigation

Richard B. Schmitt
Los Angeles Times  —  7/25/2008 5:54 am

WASHINGTON -- A federal grand jury in Los Angeles has begun probing three of the nation's largest subprime mortgage lenders in the clearest sign yet that prosecutors are investigating whether fraud and other crimes contributed to the mortgage debacle.

Grand jury subpoenas have been issued in recent weeks and months to Countrywide Financial Corp., New Century Financial Corp. and IndyMac Federal Bank, seeking a wide range of information, according to sources with direct knowledge of the subpoenas.

People familiar with the situation told the Los Angeles Times that the subpoenas seek e-mails, phone bills and bank records, and they follow interviews that federal investigators have conducted with employees and others knowledgeable about lending operations of the three Southern California institutions, which all collapsed under the weight of bad loans.

In the case of Countrywide, the sources said, investigators also have begun looking into media reports that the company and its former chairman, Angelo Mozilo, lavished mortgage breaks on members of Congress and other influential "friends of Angelo," including Richard Aldrich, an associate justice of the California Court of Appeal.

The investigations are part of a coordinated Justice Department effort that until now has focused primarily on smaller operators who defrauded homeowners and mortgage lenders. The subpoenas, while indicating that the effort is still at an early stage, show that the government is starting to take aim at the largest lenders and their executives and whether they were complicit in the billions of dollars that have been lost in the mortgage crisis.

The sources familiar with the subpoenas spoke on the condition of anonymity because they were not allowed to speak publicly about them.

The mortgage losses have regulators and law-enforcement personnel gearing up in what experts say looms as possibly the biggest financial fraud since the S&L crisis of the 1980s. Officials have said that they are beginning to investigate whether securities investors were defrauded about the value of subprime mortgages they purchased and other possible crimes such as insider trading by corporate officials who sold stock knowing that their holdings were about to deflate in value.

A spokesman for the U.S. attorney's office in Los Angeles, Thom Mrozek, declined to acknowledge that any of the companies were being investigated or had been issued subpoenas.

That office, along with the FBI in Los Angeles, however, have been ratcheting up their scrutiny of mortgage companies. Last month, officials created a multi-agency task force to address mortgage crimes, including representatives of such agencies as the Internal Revenue Service, the U.S. Postal Inspection Service, the U.S. Housing and Urban Development Department and the Federal Deposit Insurance Corp.

In a recent interview, Thomas P. O'Brien, the U.S. attorney in Los Angeles, cautioned that fraud cases involved complex facts and circumstances and were difficult to pursue. But he also indicated that the office would move forward aggressively in appropriate circumstances.

"As with any white-collar case, these tend to be extremely complex and take years to investigate," O'Brien said. "But this is a very high priority for me in this office and the Department of Justice."

The FBI has said that it is examining 21 cases against corporate and other large entities related to the subprime market collapse -- a 50 percent increase in cases in the past six months alone.

Without specifying those under investigation, the bureau has said a wide array of companies could be targeted, including securities firms, hedge fund operators, credit rating agencies and mortgage brokers and lenders.

According to Sharon Ormsby, chief of the financial crimes section at FBI headquarters in Washington, the bureau is working closely with the Securities Exchange Commission to identify culprits.

"It is their regulatory oversight that allows them to see the problem first. They will notify us if they see something unusual or suspicious or something of interest," she said in an interview. "With the (Justice Department) fraud section, we will meet and determine whether a parallel criminal case should occur."

The subpoenas to the three big mortgage lenders, the sources said, have been issued over a period of time and have focused on a variety of issues.

Countrywide, which grew to be the nation's largest mortgage lender, was recently acquired by Charlotte, N.C.-based Bank of America after suffering steep losses from a disastrous foray into subprime lending.

The company is already being sued by the attorneys general of California and Illinois for allegedly pushing borrowers into unaffordable loans and using misleading practices. Mozilo is also facing questions from regulators about his exercise of stock options that allowed him to pocket millions of dollars while Countrywide's fortunes worsened.

New Century, an early poster child for the mortgage boom and bust, has been operating under federal bankruptcy-law protection since April 2007.

In a lengthy report in March, a court-appointed examiner concluded that the bank engaged in improper accounting that overstated its profit and allowed top executives to reap millions in inflated or undeserved bonuses.

The most recent subpoenas, the sources said, were served on IndyMac, the lender that was seized by federal regulators earlier this month. The bank specialized in what have been derisively called "liar loans" that were made to borrowers with little or no proof of income.

Its failure is expected to cost the federal deposit insurance fund an estimated $4 billion to $8 billion.

David Barr, a spokesman for the Federal Deposit Insurance Corp., which now runs IndyMac Bank, declined comment on the subpoenas. Shirley Norton, a Bank of America spokesman, said the company as a policy does not comment on subpoenas.

Lawyers for New Century could not be reached for comment.

Richard B. Schmitt
Los Angeles Times  —  7/25/2008 5:54 am