The Mortgage Meltdown
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|Michael Hudson||September 27th 2011|
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 related 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 says he doesn’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.
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 constructed at a furious pace by KB Home.
Soon after he started, Zachary began questioning Countrywide executives about inflated property appraisals and “other grave illegal issues,” according to a lawsuit he later filed in federal court in Texas. The bogus appraisals duped both the consumers, who ended up borrowing more than the homes were actually worth, as well as the investors who bought the loans on Wall Street, Zachary said.
In April 2007, his suit said, he sent an email to Countrywide’s employee relations unit, warning that selling people overpriced homes and putting them into loans they couldn’t afford was a “formula for disaster.”
His suit claimed that he also clashed with management over a requirement that the lending unit approve 10 percent of backlogged loan applications each day so the green light could be given to KB Home to start building the homes under contract. After he said he couldn’t meet that goal, he was “taken out of the loop” and “treated like a pariah by his supervisor.”
Instead, Zachary charged, Countrywide KB Home Loans began OKcing applications through a backdoor process in which loans were in essence “being approved without a review by an underwriter.”
These authorizations, he said, had a special name: “Shadow Approvals.”
And Zachary? A supervisor wrote him up for “performance issues,” he said, a stark turnaround from a glowing performance evaluation he’d received three months before. He was terminated two weeks after the written warning, his lawsuit said.
After Zachary sued, Countrywide said it had “investigated each of his claims and found no merit to his accusations.” It said Zachary had “received verbal counseling on his performance, as well as written feedback in the form of his evaluation, before he first made allegations of impropriety.”
Countrywide said its lending operations were “prudently and effectively managed” and that its ethical standards were “rigorously enforced.”
Zachary and Bank of America reached an out of court settlement in the case in 2009. As part of the settlement, Zachary agreed not to talk further about his experiences at Countrywide.
‘Everybody’s flipping out’
After the Boston investigation, Foster says, she continued to run into problems with Countrywide’s management
She says she urged the company’s internal audit unit to investigate the lack of accurate reporting of suspicious activity reports. An audit report about fraud across the company’s divisions was “edited down” and in the end “said almost nothing” about problems with reporting the suspicion activity reports, Foster says.
She also hit a roadblock, she says, when she started putting together a report listing all the questionable loans that had been sold to investors. A superior, she says, told her: “You need to pull it. Everybody’s flipping out.”
Management didn’t want the information put down on paper, she believed, because then it would have to buy back the bad loans. The company left it up to investors, she says, to find fraud-tainted loans themselves—a difficult task given the volume of loans pooled into mortgage-backed securities deals.
Foster also began clashing with Countrywide’s employee relations unit, which had a key role in disciplinary actions against employees. Employee Relations, she says, worked with sales managers to shield high-producing salespeople from scrutiny.
In one case, a branch manager hung on to his job despite fraud allegations that went back five years. Workers complained he was doing drugs and ranting and screaming in the office. After the manager swore he only took prescription drugs, Foster says, Employee Relations labeled the drug allegations unsubstantiated.
One witness claimed the manager had threatened to kill an employee’s family. Another supposed witness was too scared to speak, trembling uncontrollably, Foster says. But because it was the manager’s word against the word of a single witness, Foster says, Employee Relations also listed the murder-threat allegation as unsubstantiated.
These and other investigations convinced Foster that Employee Relations was doing more than excusing fraud, according to Labor Department records. It was, in her view, actively working to cover up fraud by discouraging employees from reporting wrongdoing to her team, violating the confidentiality of tipsters and using its influence over personnel decisions to retaliate against whistleblowers.
“Without ER, the sales people couldn’t have done what they did,” Foster said. Employee Relations had “the ultimate power to silence the whistleblower. They were the controlling factor. Without them, it wouldn’t work.”
‘A rare opportunity’
In January 2008, Bank of America announced that it had reached a deal to purchase Countrywide, which had lost $1.6 billion over the previous six months.
Countrywide’s CEO, Mozilo, said it was “the right decision for our shareholders, customers and employees.” Bank of America called it a “rare opportunity” for the company to add what it believed to be the best “mortgage platform” in the nation.
Foster continued her duties as fraud investigation chief, while applying for a chance to work for Bank of America once the merger was completed July 1.
In February 2008, Labor Department records indicate, she learned that over a period of two to three years, several workers had been transferred or fired after telling Employee Relations that Michael Eckhart, a high-producing loan officer at a Countrywide branch in Nashville, was committing fraud. Her team also uncovered evidence that a regional vice president had kept Eckhart apprised of the progress of investigations targeting him, according to Foster’s witness statement in Countrywide shareholders litigation.
Eckhart’s attorney says that Eckhart died last year. The attorney declined to comment about the fraud allegations raised against him.
In late February, Foster began voicing open criticism of Employee Relations’ actions, pressing the issue with senior executives in emails and meetings, according to the Labor Department. In May, she informed Employee Relations that she intended to refer her allegations about its treatment of whistleblowers to Countrywide’s internal audit unit.
As Foster was reporting her concerns about Employee Relations’ conduct, Labor Department records say, Employee Relations launched an investigation—not of Foster’s allegations, but of Foster herself.
A senior vice president from Employee Relations began questioning members of Foster’s team about her management style, according to the Labor Department. One of Foster’s fraud investigators later complained, agency records show, that Employee Relations reps grilled him for almost three hours, asking leading questions and trying to get him to say damaging things about her. He said he worried that many employees might simply cave to the pressure.
Foster remained unaware of the investigation against her for several weeks. In early July, with the merger complete, she got some good news: Bank of America named her senior vice president in charge of its new combined mortgage fraud unit.
Foster says she learned about Employee Relations’ investigation later in July. She was questioned by Employee Relations in August.
By early September she thought the investigation was dead, she says. Bank of America had stripped Countrywide’s employee relations unit of power to conduct investigations, she says, and she believed the new owners weren’t going to put stock in anything Employee Relations had to say about her.
On Sept. 8, 2008, a Monday, Foster reported to work with a busy week ahead of her. She was supposed to meet the following week, she says, with officials from the bank’s federal regulator, the Office of the Comptroller of the Currency. The subject: questions about Countrywide’s reporting of suspicious activity reports. She had a spreadsheet showing the Countrywide’s subprime division was grossly underreporting these reports, she says.
The phone rang at 8 a.m. It was a call she’d been expecting from a Bank of America human-resources official. She thought they would be discussing salary structure for her team members.
Instead, with the Bank of America official on the phone, two Countrywide officials walked into her office, turning it into a conference call. They presented her with a 16-page severance agreement.
Bank of America offered her a buyout totaling almost one year’s salary, nearly $230,000. The catch was that, to get the money, she had to agree to a gag order that would prevent her from talking about what she knew about the company’s practices. “I was just furious,” she says. When she refused to sign, she says, the buyout offer turned into a straight-up firing.
They asked for her ID badge and keys. Then Bank of America security operatives escorted her out of the building.
It was her 51st birthday.
Later, in an email exchange, the employee relations official who’d led the investigation told Foster that her firing was due to her “inappropriate and unprofessional behavior” and “poor judgement as a leader.” Within her unit, the official said, there was a perception that Foster would retaliate against underlings who crossed her. As a result, the official said, Bank of America’s senior managers had “lost confidence” in her ability to lead the team.
The Labor Department later notedthat the bank never consulted or interviewed Foster’s direct supervisor during the investigation, and that it violated its own progressive disciplinary policy: She’d never been written up, suspended, or disciplined previously, and in fact was “a high-performing employee with no history of poor performance or conduct issues.”
Four former coworkers said that the picture of Foster’s management style painted by Bank of America doesn’t square with their recollections of Foster as a colleague and boss. Among them is Larry Goebel, a former captain in the Los Angeles Police Department’s internal affairs unit who worked with Foster at Countrywide and Bank of America. “She had a lot of integrity,” he says. Any suggestion she was unprofessional is “total b---s---, to be honest with you.”
After it fired Foster, Bank of America named Goebel to replace her as head of its mortgage fraud investigation unit.
The former police detective was surprised, he says, to find that many sales-department holdovers from the Countrywide era continued using fraudulent tactics to try to maintain their production and commissions as the mortgage market fell in on itself. “It was a culture that wouldn’t die,” he says.
Management didn’t block him from investigating fraud cases, Goebel says, but it never gave him enough trained investigators to keep up with the huge volume of fraud. Bank of America didn’t show much interest, he says, in rooting out the culture of corruption or getting a reading on just how much misconduct had gone on inside Countrywide. “It wasn’t really like: ‘We need to take a look back, we need to clean house.’”
Nine months after taking over the fraud unit, Goebel says, he quit, fed up with the “sleaze factor” that had overtaken the mortgage industry. He now works as head of security for the Performing Arts Center of Los Angeles County.
Bank of America declined to answer questions about Goebel’s account of his time in charge of the fraud unit.
Since the merger, Countrywide has produced little but headaches for Bank of America.
The bank agreed to an $8.5 billion settlement with a group of 22 big mortgage investors. It also helped Countrywide’s founder, Angelo Mozilo, settle charges that he’d added $141.7 million to his personal fortune through fraud and insider trading. (Mozilo’s attorney called the charges “baseless.” ) The final settlement was for $67.5 million, with Bank of America and Countrywide’s insurers chipping in $45 million and Mozilo paying $22.5 million—or about 16 cents out of his own pocket for every dollar authorities claimed he’d taken in ill-gotten personal gains.
The bank also agree to pay $108 million to settle fraud charges against Countrywide Home Loans Servicing, the same unit Foster says forced her to stop highlighting its complaint data in her reports. The Federal Trade Commission alleged that the servicing unit gouged homeowners with illegal fees and misled them about how much they owed on their mortgages.
Countrywide Home Loans Servicing now operates as BAC Home Loans Servicing, but it continues to draw the ire of regulators for its conduct under the Bank of America banner. A coalition of state attorneys general and federal authorities are pressing Bank of America and other big banks to pay $20 billion or more to settle claims that they used so-called “robosigners” to falsify foreclosure documents and push homeowners out of their homes.
The Federal Housing Finance Agency, which oversees mortgage investing giants Fannie Mae and Freddie Mac, has filed massive lawsuits charging that Countrywide, Bank of America and other lenders misled Fannie and Freddie about the quality of the loans they pooled into mortgage-backed securities.
A lawsuit by Nevada’s attorney general, meanwhile, charges that Bank of America’s servicing unit has engaged in a pattern of misconduct in the way it handles homeowners’ requests for loan modifications. The practices, the suit says, include falsely promising that their homes wouldn’t be foreclosed on while their applications were pending, promising them one set of terms but then delivering agreements with different terms, and providing “inaccurate and deceptive reasons” for denying their requests.
One former employee told the attorney general’s office the company gave instructions to mislead borrowers about their modifications. “One time I complained to my supervisor that I felt I was lying to borrowers,” the ex-employee said. “Her instructions … were just to give the borrowers their status and tell them that they are ‘in the process,’ in spite of the fact that the computer showed that nothing was happening.”
In response to the Nevada action, Bank of America said it was disappointed that the state had sued, because it had been “a cooperative partner” with attorneys general around the country in working out solutions for distressed homeowners. “We are already underway with further improvements to our processes and programs for Bank of America customers,” the bank said.
Holding the line
Eileen Foster says she didn’t set out to be yet another of Bank of America’s legal adversaries.
“In the beginning, I just wanted my job back,” Foster says. “I thought as soon as Bank of America looked into it, they would bring me back.”
It didn’t happen. Instead, she and the bank’s lawyers spent almost three years locked in a punishing fight inside the Labor Department’s whistleblower protection division.
Since last week, when the labor agency ordered that Bank of America rehire her, Foster has declined to comment on the bank’s role in her case, noting that she may end up going back to work there.
In interviews before the ruling, she expressed mixed feelings about the bank. She said she thought that the bank may have been misled by Countrywide holdovers, and wondered whether the bank’s lawyers had prevented it from realizing she’d been done wrong.
At other times, she expressed stronger feelings about the bank. “They had multiple opportunities to fix things,” Foster said in an interview earlier this year. “They chose not to do the right thing.”
Foster was unemployed for more than two years after Bank of America fired her.
“I applied for 145 jobs before I got one,” she says.
She’s now vice president of security at Lockheed Federal Credit Union in Burbank, a job that pays about half what she would have been making at Bank of America. But she says it’s a good place to work and the credit union’s CEO is a model of openness and straight-shooting.
What her next step will be is unclear. Although the Labor Department ordered Bank of America to rehire her, the bank has vowed to appeal the order to an administrative law judge. That could set up a lengthy round of litigation.
Foster says she remains a reluctant whistleblower. She’s turned down interview requests from many media outlets, and agreed to go on the record with iWatch News only for publication after the Labor Department issued its final ruling.
It was important, she says, to tell her story—and the story of other employees who tried to blow the whistle on fraud.
“I don’t want this to be about me,” Foster says. “The only reason I have a voice is because of my position. It’s not the same for somebody who’s an underwriter or production staff assistant. Management can call them disgruntled or whatever.”
Fraud flourishes, she says, when companies are allowed to intimidate and abuse employees. Without protections for whistleblowers, it’s easy for big companies to “beat people down” and silence them.
“It’s very difficult to hold the line and do what you believe,” she says.