Where Are the Ethics Hearings into Countrywide’s VIP Loans?

Sweetheart mortgages given by Countrywide Financial, the nation's biggest mortgage lender, to elected officials and government bureaucrats seem tailor-made for an ethics inquiry by Congress, especially as the country is seeing a rising tide of voter anger in this presidential election year due to the massive $300 bn bailout of the housing industry at taxpayers' expense.

The mortgages at issue were allegedly given to Congressional members and staffers championing this record bailout, a bailout that now surpasses the taxpayer cost of the S&L crisis in the late ‘80s and early ‘90s.

But Rep. Darrell Issa (R-Calif.) and Rep. Mark Souder (R-Ind.) say Rep. Henry Waxman (D-Calif.), chairman of the House Committee on Oversight and Government Reform, is ignoring their demands for an investigation into cheap, VIP mortgages allegedly given by Countrywide Financial to House staff members and elected officials.

Countrywide allegedly gave cheap, sweetheart mortgages to Sen. Kent Conrad (D-ND) and Sen. Christopher Dodd (D-Conn.), chairman of the Senate Banking committee who reportedly saved $75,000 on his inside deals from Countrywide.

At issue are Countrywide's VIP mortgages, in which borrowers received lower interest rates and point shaves on their mortgages. Countrywide's controversial VIP mortgages were given under the "Friends of Angelo" program, nicknamed after Countrywide chief executive Angelo Mozilo, a story that first broke in Portfolio Magazine.

Both Senators have denied wrongdoing and both repotedly welcome a Senate ethics inquiry (to date, no Senate ethics hearings on the matter have been announced).

The Wall Street Journal has also reported that James Johnson, a former chief executive of Fannie Mae, resigned recently as an adviser to the presidential campaign of Sen. Barack Obama after it was disclosed that Johnson received sweetheart loans from Countrywide. Johnson's lawyer has said those loans were made on normal terms. Franklin Raines, a former head of Fannie Mae, also received sweetheart Countrywide loans, the Wall Street Journal reports.

Rep. Waxman's office did not return calls for comment.

Reps. Issa and Souder wrote to Rep. Waxman that, "given the fact that Congress is actively considering bailing out Fannie Mae, Freddie Mac, Countrywide, and other lenders, it is essential that Congress investigate to determine the extent that public officials and staff have been compromised by improper gifts," adding, "for all the hearings your committee has held on subjects other than waste, fraud, and abuse in the Federal government, it is an appalling lapse that the Committee is not investigating this matter."

House and Senate rules bar members from knowingly receiving gifts worth $100 or more annually from companies that use registered lobbyists. Countrywide's ethics code restricts executives, employees and board directors from improperly trying to influence government employees with money, gifts, loans, rewards, favors or anything of value.

The House committee on Oversight and Government Reform has already held hearings that attempted to link the housing bubble to outsized executive pay packages given to Countrywide's chief executive Angelo Mozilo, Merrill Lynch's former chief executive E. Stanley O'Neal and Citigroup's former head, Charles O. Prince.  

In their letter to Rep. Waxman, Representatives Issa and Souder demanded that Waxman use his "influence as chairman to stop any legislation bailing out mortgage lenders until all tainted individuals have recused themselves and the legislation has been examined and declared free of any undue influence."

The housing bailout bill would provide $300 bn worth of taxpayer funds to rescue borrowers who took tens of billions of dollars worth of mortgages from lenders like Countrywide, among other things. Bank of America (BAC), helped shape the legislation via two lobbying documents outlining how to construct the bailout, obtained by Fox Business, after it announced its $2.5 bn purchase of Countrywide last January (see blog "The Bank of America Housing Bailout Bill").

The housing bill would also provide rescue funding to Fannie Mae (FNM) and Freddie Mac (FRE), two publicly traded companies who critics say have gunned their lobbying engines on Capitol Hill in order to lighten regulatory oversight, including any increases in their capital cushions, now at perilously low levels.

The two mortgage finance giants have a total $54 bn in net worth, upon which sits a pyramid of debt, including $1.6 tn in borrowings to run their business. Fannie and Freddie operate a $5.3 tn book of business in which it buys and guarantees mortgages, with another $3.3 tn in hedges sitting off balance sheet, according to Lehman Bros. (LEH).

The two publicly traded companies have had a history of accounting misdeeds and have reported a total of $11.1 bn in losses over the last few quarters. Freddie and Fannie combined have on their balance sheets $260 bn in subprime and Alt-A (just a notch above subprime) securitizations, backed by potentially shoddy loans.

Freddie also has disclosed it has $156.8 bn in level three assets nobody wants and for which it can't get pricetags on since the market for them is frozen; Fannie has $56.1 bn.

So far, any money given to Fannie and Freddie has not been conditioned on capping executive pay or receivership, which would include breaking up the companies and cleaning out their richly paid management and boards that concocted these two potential economic sinkholes.

A growing number of economists and analysts belive the two are insolvent, as home foreclosures rise to record levels and borrowers fall underwater on their mortgages. Senate majority Leader Harry Reid (D-Nev.) is now blocking a vote on an amendment proposed by South Carolina Republican Jim DeMint to bar the two from lobbying in the future.

In their letter to Rep. Waxman, Representatives Issa and Souder refer to fresh details on Countrywide's sweetheart loan deals given to government officials via its VIP mortgage program.

Specifically, the two cite an August 2008 article in Conde Nast's Portfolio Magazine, which reports new allegations that House of Representatives staffers, a California state appeals court judge, and other current and former federal officials received special treatment in their mortgages from Countrywide due to their positions.  

Portfolio has reported that former Clinton cabinet member Donna Shalala, former Bush Cabinet member Alphonso Jackson, as well as former United Nations Ambassador Richard Holbrooke also received VIP mortgages from Countrywide.

And Portfolio says that VIP Countrywide loans were given to former Countrywide director Henry Cisneros, who served as secretary of Housing and Urban Development in the Clinton administration; former White House staffer Paul Begala, now a commentator on CNN; and Postmaster General John Potter. Countrywide also offered special discounts to Congressional staffers involved in housing issues, the magazine says (http://www.portfolio.com/news-markets/national-news/portfolio/2008/07/16/Countrywide-Deals-Exposed?print=true).

The Portfolio article reported that former Countrywide Financial loan officer Robert Feinberg stated that he personally spoke with Senator Dodd and Senator Conrad about their special mortgage deals.  It also noted the existence of e-mail traffic between Mr. Feinberg and former Countrywide CEO Angelo Mozilo on the subject of VIP loans and notes that Mr. Feinberg is in possession of "stacks of documents about the VIP operation."

On the subject of Countrywide's federal lobbying efforts, the Portfolio article provides quotes from retired Countrywide managing director Sidney Lenz, who oversaw government relations for the lender. Lenz reportedly says the company's lobbyists identified potential customers on Capitol Hill and in federal agencies and directed them to Countrywide's VIP program.  

The company's lobbyists were "incredibly receptive" to loan requests  from officials, Portfolio quotes Lenz as saying, adding, "Countrywide had an incredibly good relationship with Congress. It was not unusual for us to get a call saying, 'A bill's being introduced. It's a little technical, and there are parts we don't understand. Can you help educate us on this?'"

Similarly, Rep. Jeb Hensarling (R-Texas) has also called for hearings to determine whether members received "preferential treatment" with their mortgages from Countrywide, "while millions of hardworking Americans struggle to repay their mortgage debts and cope with $4 [per] gallon gasoline and soaring foods prices," he noted in an open letter to Congressional colleagues.

I will let the letter from Representatives Issa and Souder to Rep. Waxman speak for itself:

"As members of the House Committee on Oversight and Government Reform, we are troubled by your lack of response to our previous request and would like to know why the Committee is hiding from its duty to investigate this matter. Both documents and witnesses are clearly ready and available for an investigation and we would note that the Committee has investigated other improprieties committed by lobbyists."

The letter adds: "The Committee's failure to act when presented with rapidly growing evidence of wrongdoing makes a mockery of Speaker Pelosi's election promise to improve House Ethics."