Mortgage industry tanks, fraud continues at Countrywide
iWatch News investigative series reveals legacy of corruption that still plagues Bank of America
By Michael Hudson
Updated:
Read the first half of this story here.
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
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