I Am John Galt (16 page)

As if to cement this unholy alliance, in 1999 Fannie Mae reached a “strategic agreement” with Countrywide wherein Mozilo would sell certain Countrywide loans exclusively to Fannie. In exchange, Fannie agreed to lower its guarantee fee on Countrywide loans. The relationship tacitly amounted to a noncompete agreement, designed to lock Fannie's sister company Freddie Mac out of the market for Countrywide's production. But it was so much more. By striking a chummy deal with Countrywide, Johnson had bought himself a pit bull for his front yard. Feeding and sheltering the beast ensured fiercely loyal protection against any who might try to intrude on their conspiratorial collaborations. Put more tartly, Mozilo said that when Fannie catches a cold, “I catch the fucking flu.”
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To add a sweetener to the already saccharine deal, during the very time Countrywide was negotiating with its governmental benefactor, Mozilo offered and personally approved the first so-called VIP loans to employees of Fannie Mae. All told, Mozilo would make over 150 loans to Fannie employees granting below-market interest rates, reduced fees, or manual overrides to approve loans to buyers who would not have qualified under standard programs. Johnson alone would receive more than $10 million worth.
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The value to the borrower often represented hundreds of thousands of dollars over the life of the loan. If that kind of money had been handed to a politician in cash, there'd be just one word for it: bribe.

It's not like Johnson needed the money. Yes, government pay is typically limited at the top, even for officials who run enormous agencies. The postmaster general, for example, running an agency with more than 700,000 employees and more than $65 billion in revenue, was paid a flat $175,000 a year during the time Johnson presided at Fannie.
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But during 1998, the last full year of Johnson's tenure at Fannie Mae, he would receive $21 million in compensation.

That same year, Johnson also improperly deferred $200 million in corporate expenses to ensure that he and his subordinates received their full annual bonuses. Johnson himself received an additional $2 million in bonus money as a result. His successor, Franklin Raines, collected $1.1 million in undeserved compensation. Without Johnson cooking the books, bonuses that year would have been exactly zero.
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According to the
Washington Post
, Fannie Mae had become a place where former government officials and others with good political connections could go to make millions of dollars. Franklin Raines was about to get his share, and then some.
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Slide into Subprime

When David Loeb retired from Countrywide in 2000 and died a few years later in 2003, there was nobody left to hold back the scheming Mozilo. “With Countrywide, you could see there was a cultural change when it was David and Angelo to when it was just Angelo,” said Josh Rosner, a mortgage securities expert at independent research firm Graham Fisher in New York. “Before David died, he seemed to recognize the company's future was predicated on taking risks he wasn't comfortable with.”
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In the hypercompetitive mortgage brokerage market of the housing boom era, borrowers with solid credit and plenty of income were already saturated with plain-vanilla, low-interest loans. The only way to gain market share was to lower lending standards and tap the remaining higher-risk population. But once he'd originated them, how could Countrywide sell these riskier loans off in the vast volumes Mozilo sought? The free market would place a natural cap on the amount of risk investors were willing to take on at any given price, and that price wasn't cheap enough for him to realize the riches he dreamed of.

For businessmen like Mozilo or Taggart, if the free market won't play along, then it's time to get the government involved. The timing was perfect.

Franklin Raines, Johnson's successor at Fannie Mae, was seeking new ways of transforming the GSE from a boring but stable financial institution dedicated to making homes more affordable into a risky venture that exploited its special government status for Raines's personal profit. Improved earnings meant multimillion-dollar bonuses for executives, but Fannie was effectively locked out of the most lucrative loans for the very reason that they were too risky. Or were they? Like Taggart and his fellow parasites in
Atlas Shrugged
, Mozilo and Raines together would concoct a backroom scheme to corrupt the markets and trick the nation into backing the risks they took, all the while blathering about the noble-sounding virtue of social equality.

“Everybody wins if we can increase minority homeownership, so together we're taking on the challenge of getting more people into homes,”
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Mozilo stated in living color on a full page in Fannie Mae's 2003 annual report, pictured wearing a flamboyant black chalk-striped suit and a garish yellow tie that made him look more like a Prohibition-era rumrunner than a mortgage banker. The report continued,

Fannie Mae shares this vision, and together we're working harder than ever before to make homeownership accessible to more Americans. . . . Right now only 50 percent of minority families own homes. The task for companies like Countrywide is moving it from 50 percent to 80 percent. . . . As Mozilo notes, “You can't quantify the emotional impact of home ownership in people's lives.” So as long as there is a gap in minority and non-minority homeownership rates, Fannie Mae and Countrywide will continue to make sure all Americans have the chance to realize the dream of homeownership.

These are absolutely ludicrous statements. Never mind minorities—achieving Mozilo's goal of 80 percent home ownership meant that a household earning $15,000 per year
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(that's just $288 a week, regardless of the color of your skin) would own a home with all of the financial responsibilities for mortgage payments, insurance, property taxes, and upkeep. But astonishingly, no one in a position of power called Mozilo or Fannie Mae out. No member of Congress, no shareholder, and no member of the respective boards of directors challenged the premise of this socially noble-sounding rhetoric.

Mozilo had devised a deviously brilliant formula. Under the cultural creep of hypersensitive political correctness, who could possibly question a statement with the word
minority
in it without coming across as racist? Who could question home ownership for all without seeming elitist? But home ownership was not Mozilo's or Raines's real goal; it was a mere smokescreen to shroud the ill-gotten gains of a few perpetrating a grand fraud on the American people. In rich irony, the worst of the fraud would be perpetuated on the most vulnerable: the low-income minorities that Countrywide and Fannie claimed were the beneficiaries of their noble policies and programs.

“Act now to make every month National Homeownership Month,”
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Mozilo urged in
Mortgage Banking
magazine. Washington politicians, many already in the pocket of Countrywide as part of his VIP lending program, heeded the call.

Under pressure that Mozilo and Raines helped create, the Clinton administration ordered Fannie Mae to increase home ownership rates among low-income borrowers. To comply with the mandate, Raines lowered his company's lending standards to include “individuals whose credit is generally not good enough to qualify for conventional loans.”
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Fannie Mae starting buying up risky subprime and Alt-A loans at an accelerating pace to meet its ever-increasing government goals. Down payment requirements fell to 3 percent, then to zero. Fannie took risky loans and bundled them together with gilt-edged ones. Wall Street was glad to buy up these mortgage cocktails without even questioning the ingredients, because Fannie Mae was deemed a government-insured behemoth “too big to fail.”
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Countrywide, for its part, had a field day. With a combination of high interest and big fees on shaky loans funded by cheap money from Fannie, Mozilo was driving a government-subsidized profit machine unwittingly backed by the American taxpayer. Whereas the profitability of a high-quality prime loan was less than one percentage point of the mortgage's value, subprime loans produced nearly quadruple the profit.
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On some subprime loans that carried high prepayment penalties, Countrywide's profit margins could reach 15 percent of the loan value—$75,000 on a $500,000 mortgage.

To Beg or to Bribe?

Mozilo was also working every political angle he could find to corrupt the markets in his favor and protect his personal cash cow, Fannie Mae. Referrals of VIPs with the potential to influence legislation affecting Countrywide often came from Mozilo's man in Washington, Jimmie Williams, Countrywide's chief lobbyist. According to a former Countrywide managing director, Sydney Lenz, Williams and Countrywide's Washington guys routinely identified potential customers on Capitol Hill to “keep their edge,” then actively offered to buy their influence with special Friends of Angelo loan deals.
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One beneficiary was Franklin Raines himself. According to a congressional investigation, when Raines refinanced his mortgage in June 2003, his assistant telephoned Countrywide on his behalf. According to the phone message, she stated that “per Angelo, Frank needs to refi.” Countrywide gave him a full percentage point off of a million-dollar loan and waived other fees that, according to the
Wall Street Journal
, would have ordinarily cost Raines at least $10,000 at closing.
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The loan also represented a $215,000 reduction in cost over the life of the loan—an outright kickback not available to regular customers such as, say, a butcher like Mozilo's father.

These weren't just one-off deals, either. Mozilo and his team took a systematic and analytic approach to buying political power, weighing the financial cost of the favor against the potential benefit of influence on legislation or regulation. In one case during 2002, the mayor of Billings, Montana, approached Jimmie Williams about canceling the mortgage insurance he was legally obligated to pay on his home loan. During an ensuing internal e-mail discussion, Lenz blatantly laid out the cost-benefit analysis for Williams.

I'm usually in favor of settling on the side of the borrower with political influence. However, in this case, I think the MI [mortgage insurance] payment for the life of the loan has the potential of being a greater number than the Mayor of Billings Montana['s] influence. Jimmie, since you work with the mayors, what's your opinion?
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Williams responded by reciting the mayor's credentials, mentioning his wife's role at the Democratic-leaning
New Republic
magazine and noting he “sits on the Advisory Board of the U.S. Conference of Mayors” and he “is also very likely to hit the speaking circuit.” Ultimately the decision was made and issued via another e-mail.

Due to the Mayor's (and his wife's) potential influence and accessibility to media outlets and publications, offer him a refi and either give him a .25 credit toward the discount or a $500.00 credit toward closing costs. Either way, we're showing our good faith.
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Mozilo often priced the VIP loans himself and proudly made the specialized treatment known to the recipients through notes or business cards attached to their lending documents. While hundreds of potential benefactors were members of the Friends of Angelo club, particularly troubling were those with primary responsibility to determine how Fannie and Freddie would be administered. In addition to Raines and Johnson, recipients of these buy-offs included:

• Senator Kent Conrad (D-ND)
  , chairman of the Budget Committee and a member of the Finance Committee, arranged a $1.07 million refinance in 2004 for a mortgage on a vacation home in Bethany Beach, Delaware. Mozilo ordered “take off 1 point,” noting, “make an exception due to the fact that the borrower is a senator,”
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  saving Conrad $10,700 up front, or $240,096 over 30 years.
  
• Senator Christopher Dodd (D-CT)
  , member of the Committee on Banking, Housing and Urban Affairs (elevated to Committee chairman in 2007), who saved approximately $75,000 by refinancing his home at a reduced rate.
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• Senator John Edwards (D-NC)
  , member of the Judiciary Committee, who was referred to the Friends of Angelo program when trying to finance the purchase of a $3.8 million home in Georgetown.
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  “Edwards will probably be either the vice pres or pres candidate for the Democrats for 2004,” Mozilo informed his VIP loan staff via e-mail. “Do whatever it takes to get it closed by the 23rd and call me for the pricing.”
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• Alphonso Jackson
  ,
  secretary of Housing and Urban Development
  , who received two loans through the VIP program, and whose daughter was referred to the VIP program by a Countrywide lobbyist. Jackson's second loan was for a $308,000 vacation home on a golf course in Hilton Head Island, South Carolina. Both of Jackson's loans included undisclosed discounts.
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• Clinton Jones III
  ,
  senior counsel of the House Financial Services Subcommittee on Housing and Community Opportunity
  , who was referred for “specialized handling” to the Friends of Angelo program by a Countrywide lobbyist, resulting in “.5 off and no garbage fees.” Countrywide's normal lending policies were manually overridden for Jones, who would not have ordinarily qualified for the loan he was given.
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• Daniel H. Mudd, Fannie Mae CEO
  , who succeeded Raines, received two mortgage loans for about $3 million each, with undisclosed discounts.
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At the same time Mozilo was personally granting generous preferential treatment to members of Congress, congressional staff, lobbyists, regulators, and assorted influential bureaucrats, Congress was considering legislation to reform the GSEs. The most notable reform effort died in the Senate Banking Committee, where Senator Christopher Dodd—a Friend of Angelo whose sweetheart deal saved him $75,000—was a member. Reform legislation never passed out of Dodd's committee, let alone get voted on by Congress.
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