Friends of Angelo:

Countrywide’s Systematic

and Successful Effort to Buy

Influence and Block Reform

Staff Report

U.S. House of Representatives

111th Congress

Committee on Oversight and Government Reform

Darrell Issa, Ranking Member

March 19, 2009
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Table of Contents

I. EXECUTIVE SUMMARY...................................................................................................................- 4 -

II. FINDINGS ...........................................................................................................................................- 6 -

III. THE ROLE OF THE “FRIENDS OF ANGELO” IN THE FINANCIAL CRISIS .....................- 8 -

A. THE RISE OF FANNIE MAE ................................................................................................................. - 9 -

B. FANNIE MAE AND COUNTRYWIDE ................................................................................................... - 10 -

C. A NEW DIRECTION FOR FANNIE MAE .............................................................................................. - 11 -

D. COUNTRYWIDE FOCUSES ON SUBPRIME LOANS............................................................................... - 13 -

E. CALLS FOR REFORM OF FANNIE AND FREDDIE THREATEN COUNTRYWIDE ...................................... - 15 -

F.COUNTRYWIDE MOBILIZES ITS “FRIENDS”....................................................................................... - 16 -

G. CONGRESSRESPONDS ...................................................................................................................... - 19 -

H. THE AFTERMATH ............................................................................................................................. - 21 -

IV. THE VIP PROGRAM .....................................................................................................................- 22 -

A. PROGRAM ADMINISTRATION ........................................................................................................... - 22 -

B. PROGRAM INTENT ............................................................................................................................ - 23 -

1. Billings, Montana Mayor Chuck Tooley .....................................................................................- 24 -

2. Judge Richard Aldrich................................................................................................................- 26 -

3. Calabasas, California Official Robert Yalda..............................................................................- 27 -

4. Rebuilding Together, Inc.’s Patty Johnson .................................................................................- 28 -

V. JIMMIE WILLIAMS AND THE VIP PROGRAM REFERRAL PROCESS.............................- 29 -

A. THE REFERRAL OF HOUSE SUBCOMMITTEE CHIEFCOUNSEL CLINTONJONES................................. - 30 -

B. THE REFERRAL OF HUD SEC. ALPHONSO JACKSON’S DAUGHTER ANNETTE WATKINS .................. - 31 -

C. THE REFERRAL OF U.S. REP. MELWATT’S CHIEF OF STAFF JOYCE BRAYBOY ................................ - 32 -

D. THE REFERRAL OFMIKE GARVER, BROTHER-IN-LAW OF AN AIDE TO A MEMBER ON THE HOUSE

FINANCIAL SERVICES COMMITTEE ....................................................................................................... - 33 -

E. THE REFERRAL OF FORMERWHITEHOUSE STAFFER MINYON MOORE ........................................... - 34 -

VI. THE PERKS OF BEING A “FRIEND OF ANGELO”................................................................- 35 -

A. “ONE POINT OFF” ............................................................................................................................ - 35 -

B. NO JUNK FEES.................................................................................................................................. - 37 -

C. NO APPRAISAL FEE .......................................................................................................................... - 39 -

D. “POLICY” VS. “ACTUAL CHARGED”- COUNTRYWIDE POLICY OVERRIDES....................................... - 40 -

E. “DO WHATEVER IT TAKES” ............................................................................................................. - 42 -

F.FREE “FLOAT-DOWN” ...................................................................................................................... - 43 -

G. IGNORE THERULES.......................................................................................................................... - 44 -

VII. MOZILO’S HANDS-ON APPROACH........................................................................................ - 46 -
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A. “PER ANGELO” ................................................................................................................................ - 46 -

B. “SPEAK WITH [ANGELO] TO GET A BETTER DEAL”......................................................................... - 47 -

C. “SHE’S NO PROBLEM” ..................................................................................................................... - 48 -

D. “TREATING THIS AS AN A PAPER LOAN” ......................................................................................... - 48 -

VIII. BORROWER AWARENESS OF VIP STATUS .......................................................................- 49 -

A. “WHAT AMI GETTING BECAUSE I KNOW ANGELO?”...................................................................... - 50 -

B. MORTGAGE BANKERS ASSOCIATION DIR. OF LEGISLATIVE AFFAIRS BARBARA ALBRECHT............ - 52 -

C. CHAIRMAN OF K.B. HOME BRUCE KARATZ AND HIS SON MATTHEW ............................................. - 53 -

D. JIM LEHRER NEWSHOUR CORRESPONDENT MARGARET WARNER .................................................. - 54 -

IX. RELEVANT ETHICS CONSIDERATIONS ................................................................................- 56 -

A. LEGISLATIVE BRANCH ETHICS RULES ............................................................................................. - 56 -

1. Gift Rules....................................................................................................................................- 57 -

2. Rules Regarding Loans............................................................................................................... - 57 -

3. Disclosure Requirements............................................................................................................- 57 -

4. Possible Ethics Rules Violations Revealed by the Documents....................................................- 58 -

B. EXECUTIVEBRANCH ETHICSRULES ................................................................................................ - 60 -

C. GOVERNMENT-SPONSORED ENTERPRISES (GSES) ETHICS RULES ................................................... - 61 -

1. Fannie Mae Codes of Conduct....................................................................................................- 61 -

2. Freddie Mac Codes of Conduct ..................................................................................................- 62 -

X. CONCLUSION ..................................................................................................................................- 63 -

#
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I. Executive Summary

With Countrywide-originated loans serving as fuel and Government-Sponsored

Enterprises (“GSEs”) Fannie Mae and Freddie Mac acting as a furnace, the alliance of the

companies created an enormous fire that eventually consumed the American economy.

Many of the people in position to reform the GSEs and extinguish the flames before the

danger spread were receiving perquisites from a VIP loan program operated by

Countrywide under the supervision of Chairman and CEO Angelo Mozilo. These

included Fannie Mae Chief Executive Franklin D. Raines and two Senators with

legislative jurisdiction over the issues at the heart of the emerging financial crisis –

Christopher Dodd and Kent Conrad.

To augment its voice in the GSE-reform debate, Countrywide dispensed favors to

VIPs who it believed might be worthwhile to the company. This group of borrowers

included legislators, congressional staffers, lobbyists and other opinion leaders.

Countrywide also distributed benefits to business partners, local politicians,

homebuilders, entertainers and law enforcement officials.

Countrywide’s voice was heard in the debate on Capitol Hill about reforming the

GSEs. When reform was considered by the 108th Congress, Members publicly expressed

faith in Fannie and Freddie. Congressman Barney Frank (D-MA), for example, described

them as “not facing any kind of financial crisis.”1 He was wrong.

Countrywide’s VIP loan program was a tool with which the company built its

relationships with Members of Congress and Congressional staff. It was also a tool it

used to protect its relationship with Fannie Mae. Senior Countrywide officials as well as

the company’s lobbyists openly and explicitly weighed the value of relationships with

potentially influential borrowers against the cost to Countrywide in terms of forfeited fees

and payments. Preferential treatment for these potentially influential borrowers, the most

important of whom were referred to internally as “Friends of Angelo,” was part of an

expansive effort by Countrywide to “ingratiate [Countrywide] with people in Washington

who might be able to help the company down the road.”2

Countrywide loan officers waived fees and knocked off points for VIP borrowers

at no cost, amounting to thousands of dollars in savings. For VIPs, Countrywide fast

tracked the loan process and ignored their own documentation policies. Countrywide

customers ordinarily paid hundreds of dollars in upfront fees. Not the VIPs. Regular

customers paid one percent of the total amount of the loan to reduce the interest rate by

one point. But not the VIPs.

1

Stephen Labaton, New Agency Proposed to Oversee Freddie Mac and Fannie Mae, N.Y. TIMES, Sept. 11,

2003.

2 Daniel Golden, Angelo Mozilo,Former CEO of Mortgage Lender Gave Special Deals to the Wellconnected, Including Senators, NBC NEWS, Transcripts, Oct. 30, 2008.
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When Congress considered reform of the GSEs, the company hoped their

“Friends of Angelo” would respond. Fannie and Freddie reform legislation was never

passed, let alone voted on by Congress.

Borrowers whose loans were processed by Countrywide’s VIP loan unit were

aware they received preferential treatment. Countrywide VIP account executive Robert

Feinberg testified VIP loan officers explicitly communicated to “Friends of Angelo” they

were receiving special pricing and preferential treatment. Documents obtained by the

Committee confirm this. VIP borrowers were informed Angelo Mozilo priced their loans

personally and they relied on their status as “Friends of Angelo” to guarantee preferential

treatment for themselves and others. In case borrowers had any doubt about which

department was processing a loan, Countrywide loan officers attached business cards to

loan documents clearly indicating the officers processing the loan worked in the VIP unit.

Accepting the discounts made exclusively available to “Friends of Angelo”

violated applicable ethical rules for certain VIP borrowers. Senate rules prohibit

acceptance of loans at discounted rates not available to the general public. The Fannie

Mae Code of Conduct applicable to directors and executives bars any gift made in order to

influence behavior, especially when accepting such a gift appears to create a conflict of

interest.

Involvement in the VIP loan program casts a cloud of suspicion over the actions –

or in many instances non-actions – of those charged with policy-making, legislative, or

oversight responsibility for the mortgage industry and the GSEs. The scope and intent of

the “Friends of Angelo” and other VIP programs at Countrywide Financial Corporation

represent a systematic attempt by the mortgage giant to gain favor from those entrusted to

protect the public’s interests through oversight and regulation of the home mortgage

industry.
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II. Findings

 In 1999, Fannie Mae CEO Jim Johnson and Countrywide CEO Angelo

Mozilo reached a strategic agreement giving Fannie Mae exclusive access

to many of the loans originated by Countrywide in exchange for a discount

on fees Fannie charged when buying loans. The agreement linked the

growth and success of Countrywide to Fannie Mae’s continued desire to

acquire a large volume of loans.

 Fannie Mae’s strategy to acquire and hold a large volume of mortgages

betrayed its congressionally-mandated mission to increase access to home

ownership. This strategy, which relied on the GSEs’ borrowing

advantages and may have been motivated by a desire to reach earnings

levels to trigger executive bonuses, exposed Fannie Mae to increased risk.

Fannie Mae’s new direction fundamentally changed the home lending

industry, encouraging originators like Countrywide to aggressively market

subprime loans.

 Because the growth and success of Countrywide was tied directly to

Fannie Mae’s continued hunger for acquiring and holding loans and Wall

Street’s continued investment in mortgage-backed securities composed of

subprime mortgages, Countrywide CEO Angelo Mozilo offered a key

group of VIPs preferential treatment through a special loan division.

Countrywide gave preferential treatment to legislators, Congressional

staff, cabinet members, Fannie Mae executives, lobbyists, and others wellconnected in Washington. Countrywide also gave preferential treatment

to business partners, local politicians, homebuilders, entertainers and law

enforcement officials.

 At the same time the “Friends of Angelo” VIP loan program was affording

preferential treatment to Members of Congress, Congressional staff, and

lobbyists, Congress was considering legislation to reform the GSEs. The

most notable reform effort died in the Senate Banking Committee, where

Senator Christopher Dodd was a member. Reform legislation was never

passed, let alone voted on by Congress.

 Countrywide’s VIP loan program was a tool with which Countrywide built

its relationship with Congress and protected its relationship with Fannie

Mae. Senior Countrywide officials and lobbyists openly and explicitly

weighed the value of relationships with potentially influential borrowers

against the cost to Countrywide in terms of forfeited fees and payments.

 Countrywide’s Washington lobbyist Jimmie Williams identified

influential borrowers for VIP treatment. Williams justified his referrals to
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the director of the VIP program by explaining the borrower’s position and

how he or she could be valuable. Among others, Williams referred the

Chief Counsel to the House Financial Services Housing and Community

Opportunity Subcommittee Clinton Jones, HUD Secretary Alphonso

Jackson’s daughter Annette Watkins, U.S. Rep. Melvin Watt’s Chief of

Staff Joyce Brayboy, and former Democratic National Committee official

and Director of White House Political Affairs under President Clinton

Minyon Moore.

 Countrywide loan officers waived fees and knocked off points for VIP

borrowers at no cost, amounting to thousands of dollars in savings.

Countrywide charged non-VIP borrowers hundreds of dollars in upfront

fees. Non-VIP borrowers paid one percent of the total amount of the loan

for an interest rate reduction of one point. In many cases, Countrywide

facilitated and expedited the loan process for VIPs by ignoring company

policies.

 Countrywide’s internal software calculated rates for borrowers based on

established industry criteria, including loan-to-value ratio, debt-to-income

ratio, and credit history. If the terms of a loan violated company policy,

the software would instruct the loan officer to “correct and resubmit.”

Countrywide loan officers performed manual overrides to apply the

reduced rates specified by Angelo Mozilo. Manual overrides were also

necessary to breach company policy in order to accommodate VIP

borrowers.

 Angelo Mozilo personally specified rates and fees for VIP borrowers.

When the terms of a VIP loan violated Countrywide policy, Mozilo was

notified and would personally authorize overrides. Mozilo substituted his

familiarity with and the reputation of VIP borrowers for credit checks and

reviews of debt and assets. According to the documents, no VIP borrower

was ever given anything less than an “A-paper” loan.

 Countrywide VIP account executive Robert Feinberg testified it was the

practice of VIP loan officers to communicate to “Friends of Angelo” they

were receiving special pricing and preferential treatment. Documents

obtained by the Committee confirm this. VIP borrowers were informed

Angelo Mozilo personally priced their loans and they relied on their status

as “Friends of Angelo” to guarantee preferential treatment for themselves

and others. Borrowers previously processed through the VIP department

expected discounts on subsequent refinances. In case a borrower had any

doubt about which department was processing a loan, Countrywide loan

officers attached business cards to loan documents clearly indicating the

officers processing the loan worked in the VIP unit.
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 Senators Christopher Dodd and Kent Conrad received discounted loans

from Countrywide. By waiving fees and reducing rates, Countrywide

saved each Senator thousands of dollars. The loans made to the Senators

were processed by the Countrywide’s VIP loan program and they were

identified as “Friends of Angelo.”

III. The Role of the “Friends of Angelo” in the Financial

Crisis

In response to the Great Depression, Congress created the Federal National

Mortgage Association (“Fannie Mae”) to provide local banks with federal money to

finance home mortgages in an attempt to raise levels of home ownership and the

availability of affordable housing. By purchasing mortgages originated with local banks,

Fannie Mae enabled these banks to increase their lending volume. With the backing of

the federal government, Fannie Mae was able to borrow money from international

investors at a rate usually reserved for the federal government itself. Fannie Mae’s

capacity to buy and sell mortgages created a secondary mortgage market in which it was

the only participant.

In 1968, Fannie Mae was partially privatized by President Johnson to relieve

budget constraints created by the Vietnam War. Fannie Mae was placed under the

direction and supervision of a board of directors and shareholders. Because newlyprivatized Fannie Mae continued to enjoy the benefits of its federal charter, which

included an exemption from taxation and Securities and Exchange Commission (SEC)

oversight as well as implied government backing of debt, it was operated as a

Government-Sponsored Enterprise (“GSE”). As a GSE, it is not subject to SEC

securities registration and reporting requirements applying to public companies. 3In

1970, a second GSE, the Federal Home Loan Mortgage Corporation (“Freddie Mac”) was

created to provide competition for Fannie Mae.

The GSEs now had to simultaneously serve the mission of fostering access to

home ownership set forth in their charters and the mandate from shareholders to make a

profit. In pursuit of both goals, the GSEs used their borrowing power to buy and hold

mortgages. The GSEs profited from their mortgage portfolios through the difference

between the rate they borrowed to buy mortgages and the interest rate paid on the

mortgage by the homeowner. This strategy required buying loans in volume.

The relationship between Fannie Mae and Countrywide was mutually beneficial.

Fannie was eager to buy loans originated by Countrywide to develop a portfolio of

mortgage-backed securities. Countrywide racked up fees and payments selling loans,

aggressively marketing its products to all types of borrowers. The relationship between

3

12 U.S.C. § 1723(c)(2) - Exemption From Certain Taxes; 12 U.S.C. § 1719(d) - SEC Exemption.
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the two companies led to “record earnings” for Fannie Mae and status for Countrywide as

“the nation’s leading mortgage lender.”4

With Countrywide-originated loans serving as fuel and the GSEs acting as a

furnace, the alliance of the companies created an enormous fire that eventually consumed

the American economy. Many of the people in position to reform the GSEs and

extinguish the flames before the danger spread were receiving perquisites from a VIP

loan program operated by Countrywide under the supervision of Chairman and CEO

Angelo Mozilo. These included Fannie Mae Chief Executive Franklin D. Raines and two

Senators with legislative jurisdiction over the issues at the heart of the emerging financial

crisis – Christopher Dodd and Kent Conrad.

Involvement in the VIP loan program casts a cloud of suspicion over the interests

of those borrowers charged with policy-making, legislative or oversight responsibility for

the GSEs. Some of the Countrywide VIPs – the most exclusive of which were deemed

“Friends of Angelo” – identified in this report had legislative or policy-making

responsibility for the GSEs during a crucial time period when careful oversight and

reform proved necessary. Reform never happened. These influential people – including

legislators, business leaders, and opinion leaders – may have looked the other way

because of the preferential treatment afforded them by the mortgage giant.

A. The Rise of Fannie Mae

Fannie Mae has its roots in the New Deal, when it was established to increase the

amount of money available for mortgages.5 Over the years, its main business has been to

issue debt and then use the proceeds to buy mortgages from lenders, allowing those

lenders to give out new mortgages. Originally a government agency, Fannie Mae was

privatized in 1968 with the goal of “increasing the availability and affordability of

homeownership for low-, moderate-, and middle-income Americans.”6

As a GSE, Fannie Mae is not required to pay state and local income taxes. Only

the federal government can borrow money at a lower rate than Fannie Mae.7 With the

implied backing of the federal government, a favorable perception among investors of

Fannie developed. “There is an implied guarantee,” said Sen. John Sununu, a member of

the Senate Banking, Housing, and Urban Affairs Committee who sponsored legislation to

reform Fannie Mae. “Investors think they are the next best thing to Treasuries.”8

4 Business Editors, Fannie Mae Reports Record Earnings, BUSINESSWIRE, Jan. 11, 2001 (quoting Franklin

D. Raines touting Fannie Mae’s 14th consecutive year of record earnings); Associated Press, Countrywide

Has Long Road Back To Stability, Sept. 14, 2007.

5 Krishna Guha, Saskia Scholtes, and James Politi, Saviours of the suburbs, FINANCIAL TIMES, June 4,

2008.

6

Federal National Mortgage Association Charter Act (Title III of National Housing Act), 12 U.S.C. § 1716

et seq.

7 Byron York, Politics and the Fannie Mae Piggy Bank, NAT’L REVIEW, Sep. 9, 2008 [hereinafter York].

8

Id.
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In 1981, Fannie Mae and Freddie Mac began to bundle and sell mortgages as a

new security product for sale to investors as mortgage-backed securities (“MBSs”).9 By

clearing conforming loans off the books of lenders, the creation of MBSs made more

money available for new mortgages. Eventually, one out of every seven home mortgages

made in the U.S. was channeled through Fannie Mae.10 The sale of MBSs returned

Fannie Mae to profitability in 1985 after high interest rates in the early 1980’s caused

massive losses for the company.11 In 1988, Fannie Mae shares were added to the

Standard and Poor’s 500 stock index.12

B. Fannie Mae and Countrywide

FINDING: In 1999, Fannie Mae CEO Jim Johnson and Countrywide CEO

Angelo Mozilo reached a strategic agreement giving Fannie Mae

exclusive access to many of the loans originated by Countrywide

in exchange for a discount on fees Fannie charged when buying

loans. The agreement linked the growth and success of

Countrywide to Fannie Mae’s continued desire to acquire a large

volume of loans.

James “Jim” Johnson was named chairman and CEO of Fannie Mae in 1991. He

had been initially recruited to the company by David Maxwell, former general counsel

for the Department of Housing and Urban Development (“HUD”).13 Shortly after

assuming the top position at Fannie, Johnson went on tour to meet with top executives at

the mortgage banking firms with which Fannie had business.14 In California, Johnson

met Angelo Mozilo, whose company Countrywide was already selling conforming loans

to Fannie Mae.15 Fannie’s business with Countrywide was handled by their west coast

office, “conveniently located right across the street from Countrywide’s headquarters.”16

Johnson and Fannie Mae accountants in charge of tracking the sources of the

loans purchased by the GSE noticed Countrywide’s rapid growth.17 Johnson realized

Fannie Mae would be buying the majority of its loans in the future from non-bank

mortgage companies like Countrywide, so Johnson made an effort to court Mozilo.18 At

the time, Countrywide was originating billions in loans and was on its way to becoming

9 Fred Moseley, The Bailout of Fannie Mae and Freddie Mac, DOLLARS & SENSE, Sept. 2008.

10 Paul A. Argenti, Fannie Mae, prepared for Goldman Sachs and The Executive Leadership Council &

Foundation, 2003, available at http://mba.tuck.dartmouth.edu/pdf/2003-1-0070.pdf (last visited Mar. 10,

2009) [hereinafter Paul Argenti Report].

11 Fannie Mae Company History, http://www.fundinguniverse.com/company-histories/Fannie-MaeCompany-History.html (last visited Mar. 10, 2009).

12 Paul Argenti Report.

13 Muolo and Padilla at 111.

14 Id.

15 Id.

16 Id.

17 Id. at 112.

18 Id.
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“the largest residential lender in the United States.”19 “When Jim realized how much

volume Countrywide was taking down, especially in California, he made it his mission to

get to know Angelo,” said a Johnson aide.20

Johnson forged a relationship with Mozilo because he realized acquiring a

portfolio of mortgages and mortgage-backed securities would generate profit for Fannie.

With its inherent advantages, Fannie Mae used its borrowing power to purchase and hold

mortgages, profiting from the difference between the low price it paid to borrow the

money and the higher interest rate it received on the mortgage.21

In 1999, Fannie Mae reached an agreement with Countrywide Financial

Corporation (“Countrywide”) making billions of dollars worth of loans available to

Fannie Mae in exchange for a volume discount.22 This was an exclusive arrangement

between Fannie Mae and Countrywide designed by Fannie Mae to lock competitor

Freddie Mac out of the market for Countrywide’s loans.23

Johnson wanted Fannie Mae to buy as many Countrywide loans as possible to

force competitor Freddie Mac to shop elsewhere.24 Mozilo agreed to sell Countrywide’s

loans to Fannie Mae, and in exchange Fannie agreed to lower the “guarantee” fees the

GSE charged originators when it bought their loans.25 The relationship amounted to a

volume discount, linking Fannie Mae and Countrywide “at the hip.”26

C. A New Direction for Fannie Mae

Under Johnson and his successor, Franklin D. Raines, Fannie moved away from

the goal stated in its charter to provide access to home ownership for low- and middleincome Americans and adopted a strategy to maximize profit by acquiring and holding

mortgages and MBSs. Critics argued acquiring this portfolio was not worth the risk to

taxpayers because it did nothing to put people in homes and existed only to make money

for the companies' executives and shareholders.27 The move did not seem to correlate to

Fannie’s stated goals, and the new strategy drew the attention of Congress. “It doesn’t do

anything to support their core mission,” said Senator Sununu, “and it increases their

exposure to interest-rate risks.”28

Under pressure from the Clinton Administration to increase home ownership rates

among low- and moderate-income borrowers, Fannie Mae CEO Franklin D. Raines

19 Id.

20 Id. at 112-113.

21 York.

22 Glenn R. Simpson, Countrywide Made Home Loans to Gorelick, Mudd, WALL ST. J., Sept. 25, 2008.

23 Paul Muolo and Matthew Padilla, “Chain of Blame,” published by John Wiley & Sons, July 2008, at 112

[hereinafter Muolo and Padilla].

24 Muolo and Padilla at 112.

25 Id. at 113.

26 Id.

27 Bethany Mclean, Fannie Mae’s Last Stand, VANITY FAIR, February 2009 [hereinafter McLean].

28 York.
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lowered his company’s lending standards to include “individuals whose credit is

generally not good enough to qualify for conventional loans.”29 At the time of this move

by Fannie Mae into the non-conventional market, a record number of Americans owned

their own homes.30

To meet the Administration’s goals, Fannie and Freddie bought “subprime” and

“Alt-A” loans. Subprime loans are given to borrowers perceived to be higher default

risks because of low credit ratings. Alt-A loans are given to borrowers with solid credit

but have a combination of higher-risk characteristics such as high loan-to-value or debtto-income ratios or allow for reduced documentation of income and assets. By 1997,

Fannie Mae was offering to buy 97% loan-to-value mortgages (3% down payment), and

by 2001 was offering to buy zero-down payment loans.31

Raines also announced a new goal to double Fannie Mae’s earnings-per-share in

five years, from $3.23 to $6.46.32 This ambitious – or perhaps reckless – goal became

part of the culture at Fannie. According to a report by the Office of Federal Housing

Enterprise Oversight (“OFHEO”), “$6.46, the EPS goal, became the corporate mantra —

everything else was secondary to hitting that target.”33

The OFHEO report quoted a speech given in 2000 by Sampath Rajappa, head of

Fannie Mae’s Office of Auditing, to his accounting team:

By now every one of you must have 6.46 branded in your brains.

You must be able to say it in your sleep, you must be able to recite

it forwards and backwards, you must have a raging fire in your

belly that burns away all doubts, you must live, breathe and dream

6.46, you must be obsessed on 6.46. . . . After all, thanks to Frank,

we all have a lot of money riding on it. . . . We must do this with a

fiery determination, not on some days, not on most days but day in

and day out, give it your best, not 50%, not 75%, not 100%, but

150%. Remember, Frank has given us an opportunity to earn not

just our salaries, benefits, raises . . . but substantially over and

above if we make 6.46. So it is our moral obligation to give well

above our 100% and if we do this, we would have made tangible

contributions to Frank’s goals.34

29 Steven A. Holmes, Fannie Mae Eases Credit to Aid Mortgage Lending, N.Y. TIMES, Sept. 30, 1999.

30 Dept. of Housing and Urban Development (“HUD”) website,

http://www.hud.gov/library/bookshelf12/hudhistory.cfm (last visited Mar. 10, 2009) (According to the

HUD, in 2000, home ownership rates in the United States reached 67.7%. 71.6 million American families

own their own home).

31 Peter J. Wallison, Cause and Effect: Government Policies and the Financial Crisis, Amer. Enterprise

Institute, Nov. 2008, at 5.

32 Office of Federal Housing Enterprise Oversight Report, Report of the Special Examination of Fannie

Mae, May 23, 2006 [hereinafter OFHEO Report].

33 Id.

34 Id.
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Fannie’s new strategy changed the home lending industry. By the end of the 1990s, the

industry was transformed:

Huge national lenders like Countrywide could set up shop in any

state by obtaining a low-cost license, originate mortgages (through

either non-deposit-gathering branches or loan brokers), and sell

them to Fannie Mae or Freddie Mac, receiving cash for their loans.

The cash would be used to make more loans. Wall Street firms

would sell the Fannie/Freddie-guaranteed MBSs to institutional

investors, which meant pension funds, life insurers, commercial

banks, or even S&Ls.”35

D. Countrywide Focuses on Subprime Loans

FINDING: Fannie Mae’s strategy to acquire and hold a large volume of

mortgages betrayed its congressionally-mandated mission to

increase access to home ownership. This strategy, which relied

on the GSEs’ borrowing advantages and may have been

motivated by a desire to reach earnings levels to trigger executive

bonuses, exposed Fannie Mae to increased risk. Fannie Mae’s

new direction fundamentally changed the home lending industry,

encouraging originators like Countrywide to aggressively market

subprime loans.

In September 1999, the New York Times reported the move into the subprime

market to reach earnings goals meant Fannie Mae was “taking on significantly more risk,

which may not pose any difficulties during flush economic times. But the governmentsubsidized corporation may run into trouble in an economic downturn, prompting a

government rescue similar to the one needed for the savings and loan industry in the

1980s.”36

With Fannie able to buy non-conforming mortgages from lenders, Mozilo saw an

opportunity. Countrywide had reason to prefer selling loans to individuals with low

credit ratings and low- or moderate-income (“subprime” loans). Profit on these loans was

higher than standard prime mortgages. Citing regulatory filings, the New York Times

explained how much more profitable subprime loans were for Countrywide compared to

higher-quality prime loans; in 2004, “subprime loans produced gains of 3.64 percent,

versus 0.93 percent for prime loans.”37

Fannie’s appetite for subprime loans originated by Countrywide and others was

motivated by a desire to achieve earnings targets. Improved earnings meant multi35 Muolo and Padilla at 115.

36 Steven A. Holmes, Fannie Mae Eases Credit to Aid Mortgage Lending, N.Y. TIMES, Sept. 30, 1999.

37 Gretchen Morgenson, Inside the Countrywide Lending Spree, N.Y. TIMES, Aug. 26, 2007 [hereinafter

Morgenson].
- 14 -

million dollar bonuses for executives. The 2006 OFHEO concluded Fannie's executives

“deliberately and systematically” created earnings “illusions” to hit Fannie's earningsper-share targets from 1998 through 2004.38 Raines was ousted as CEO of Fannie in the

wake of the accounting scandal.39 Fannie agreed to pay a $400 million fine to settle the

matter with the SEC.40

The access GSEs had to borrowed money at lower rates than those available to

private firms meant Wall Street was no longer able to compete with Fannie and Freddie

for “A” paper loans, so they instead went after non-conforming loans. 41 The increased

demand for subprime mortgages was noticed by Countrywide.

With the knowledge it could sell the riskiest loans to Wall Street and the GSEs,

Countrywide offered a variety of loan products to borrowers with questionable

creditworthiness. Countrywide’s product list showed the company offered loans of

$500,000 to borrowers rated C-minus, the second-riskiest grade.42 Countrywide made

loans to borrowers with credit scores as low as 500.43 Countrywide also offered loans to

borrowers that were 90 days late on a current mortgage payment twice in the last 12

months, borrowers that had filed for personal bankruptcy protection, and borrowers that

had faced foreclosure or default notices.44

With incentive to sell more mortgages in order to collect payments and fees, and

with the risk of lending to borrowers that were unlikely to pay back a loan backed by

Fannie and Freddie and other securitizers, Countrywide began using aggressive tactics to

attract customers. Countrywide’s incentive to push subprime loans arose from investor

preference for pools of subprime mortgages because these loans often included

prepayment penalties and interest rates that would reset at a higher level at a fixed date,

generating a larger cash flow.45

To increase its portfolio of subprime mortgages, Countrywide incentivized its

brokers with commission rates based on the value of the mortgage. “The whole

commission structure in both prime and subprime was designed to reward salespeople for

pushing whatever programs Countrywide made the most money on in the secondary

market,” an unnamed Countrywide sales executive told the New York Times.

46

Countrywide resisted efforts by states to curtail their sales tactics and loan

programs. “Anytime states tried to pass responsible lending laws, Countrywide was

fighting it tooth and nail,” said Ira Rheingold, executive director of the National

Association of Consumer Advocates, according to the New York Times.

47

38 OFHEO Report.

39 Matt Krantz, Ousted Fannie executives could still collect millions, USA TODAY, Dec. 28, 2004.

40 McLean.

41 Muolo and Padilla at 115.

42 McLean.

43 Id.

44 Id.

45 Id.

46 Morgenson.

47 Id.
- 15 -

The company’s aggressive sales tactics led to a lawsuit filed by 11 state attorneys

general, alleging predatory lending violations. In 2008, Countrywide settled with the

states, marking “the largest predatory lending settlement in history.”48 According to

California Attorney General Edmund Brown, Jr., “Countrywide's lending practices turned

the American dream into a nightmare for tens of thousands of families by putting them

into loans they couldn't understand and ultimately couldn't afford.”49

E. Calls for Reform of Fannie and Freddie Threaten

Countrywide

In 2003, with interest rates at their lowest since the 1960’s, banks and individuals

had incentive to borrow as much as possible, and the GSEs increased their mortgage

holdings as more loans were issued to homeowners.50 President Bush called for reform

of Fannie and Freddie in the form of increased capital-reserve requirements to protect the

lending institutions and, in turn, the housing market, in case of financial trouble.51

Simultaneously, other groups called for full privatization of the GSEs, meaning

they would no longer be able to borrow money at reduced rates because of the implied

backing of the federal government of their debt.52 If the capacity of the GSEs to purchase

subprime loans were constricted by Congress, Countrywide stood to suffer. The lender

would be more susceptible to the inherent risk of issuing subprime loans, and its ability to

issue loans and collect the associated payments and fees would be diminished.

The health of Countrywide was so closely tied to the continued hunger of

government-sponsored mortgage buyers for subprime loans that Mozilo and Countrywide

operatives in Washington had to take action. Mozilo described what was at stake for

Countrywide:

“If Fannie and Freddie catch a cold, I catch the fucking flu.”53

48 Consumer Affairs, Countrywide Settles Predatory Lending Charges for $8.68 Billion, Oct. 6, 2008.

49 Associated Press, Bank of America settles lawsuit over bad mortgages, Oct. 6, 2008.

50 “Interest Rates: 2003,” Federal Energy Regulatory Commission Legal Resources, available at

<http://www.ferc.gov/legal/acct-matts/interest-rates/2003.asp>.

51 Steven Labaton, New Agency Proposed to Oversee Freddie Mac and Fannie Mae, N.Y. TIMES, Sept. 11,

2003.

52 See generally, Peter J. Wallison, Fannie and Freddie Should Be Privatized, FINANCIAL TIMES op-ed,

Sept. 2004 (arguing that mere tightening of the regulation of Fannie and Freddie is inadequate); Alex J.

Pollock, The Housing GSEs: Through Competition to Privatization, American Enterprise Institute’s

FINANCIAL SERVICES OUTLOOK, Aug. 2004 (arguing the special privileges of the GSEs implicitly subsidize

profits and risk).

53 Muolo and Padilla at 114.
- 16 -

F. Countrywide Mobilizes Its “Friends”

FINDING: Because the growth and success of Countrywide was tied directly

to Fannie Mae’s continued hunger for acquiring and holding

loans and Wall Street’s continued investment in mortgagebacked securities composed of subprime mortgages, Countrywide

CEO Angelo Mozilo offered a key group of VIPs preferential

treatment through a special loan division. Countrywide gave

preferential treatment to legislators, Congressional staff, cabinet

members, Fannie Mae executives, lobbyists, and others wellconnected in Washington. Countrywide also gave preferential

treatment to business partners, local politicians, homebuilders,

entertainers and law enforcement officials.

As the White House and Congress took increased interest in oversight and reform

of Fannie and Freddie, Countrywide invited several key players in the debate to finance

or refinance mortgages through the company’s VIP loan division.

During the course of the Committee’s investigation into numerous aspects of the

financial crisis, it obtained thousands of internal documents relating to Countrywide’s

VIP programs including its “Friends of Angelo” program.

According to the documents, a key group of VIPs were offered preferential

treatment through a special division. Among the VIPs were an exclusive group of

borrowers singled out by Countrywide Chief Executive Angelo Mozilo himself. These

VIPs, known as “Friends of Angelo,” were afforded preferential and personalized

treatment. The loans for the “Friends of Angelo” were sometimes specially priced by

Mozilo himself.54 Preferential treatment for these potentially influential borrowers was

part of a broad effort by Countrywide to “ingratiate [Countrywide] with people in

Washington who might be able to help the company down the road.”55 Listed below are

individuals with primary responsibility to determine how Fannie and Freddie would be

administered who also received or were offered benefits through the VIP program:

 Senator Kent Conrad, Chairman of the Budget Committee and a

Member of the Finance Committee, for whom Mozilo instructed the VIP

loan department to “Take off 1 point”; 56

 Senator Christopher Dodd, Member of the Committee on Banking,

Housing and Urban Affairs (elevated to Committee Chairman in 2007),

54 Id.

55 Daniel Golden, Angelo Mozilo, former CEO of mortgage lender gave special deals to the well-connected,

including senators, NBC NEWS, Transcripts, Oct. 30, 2008.

56 E-mail from Angelo Mozilo to Robert Feinberg (Mar. 17, 2004) (Countrywide_000021).
- 17 -

who saved approximately $75,000 by refinancing his home at a reduced

rate;57

 Senator John Edwards, 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;58

 Alphonso Jackson, Secretary of Housing and Urban Development, who

received two loans through the VIP program,59 and whose daughter was

referred to the VIP program by a Countrywide lobbyist;60

 James “Jim” Johnson, former Fannie Mae CEO and adviser to the

presidential campaigns of John Kerry and Barack Obama, whose loans

were priced personally by Mozilo at discounted rates.61

 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”;62 and,

 Franklin D. Raines, CEO of Fannie Mae, for whom Countrywide’s VIP

loan division applied a discount of “1 point off, no junk”63 to a $1 million

refinance in response to a phone call from his secretary stating “per

Angelo, Frank needs to refi.”64

This group, members of which were able to directly influence the debate about

how to reform the GSEs and the mortgage originators, represents the most flagrant

attempt by Countrywide to buy a voice in the debate.

Countrywide’s VIP program also made sure to offer preferential treatment to

people with secondary access to potential legislation affecting the relationship between

the GSEs and the mortgage originator. Mozilo’s “friends” also included:

57 Daniel Golden, Countrywide’s Many Friends, CONDE NAST PORTFOLIO, Jun. 12, 2008.

58 E-mail from Peter Segal, PGFM, to Angelo Mozilo (Dec. 11, 2002) (Countrywide_000024).

59 Countrywide Contact Management Software for Borrower Alphonso Jackson (Alexandria City, VA

property) (Countrywide_001750); Countrywide Contact Management Software for Borrower Alphonso

Jackson (Beaufort, FL property) (Countrywide_001750); Julia Ramey, The Countrywide Lineup, CONDE

NAST PORTFOLIO, Jul. 16, 2008.

60 E-mail from Jimmie Williams to Doug Perry (Dec. 19, 2003) (Countrywide_001655).

61 E-mail from Angelo Mozilo to Stephen Brandt (Mar. 13, 2003) (Countrywide_000829); Countrywide

Loan Policy Analysis for Borrower James Johnson (Mar. 7, 2003) (Countrywide_000085).

62 E-mail from Jimmie Williams to Doug Perry (Nov. 14, 2002) (Countrywide_000020); E-mail from Doug

Perry to Robert Feinberg (Nov. 27, 2002) (Countrywide_000020).

63 E-mail from Doug Perry to Robert Feinberg (Jun. 9, 2003) (Countrywide_000010).

64 E-mail from Claudia Velazquez to Doug Perry (Jun. 9, 2003) (Countrywide_000010).
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 Barbara Albrecht, Director of Legislative Affairs for the Mortgage

Bankers Association;65

 Martha Belcher, counsel for Fannie Mae;66

 Joyce Brayboy, Chief of Staff for Congressman Mel Watt;67

 Charles Campion, lobbyist for Fannie Mae and Countrywide;68

 Mike Garver, brother-in-law of an aide to a “senior Member...on the

House Financial Services Committee;”69

 Patty Johnson, CEO, Rebuilding Together, Inc.;70

 Jan Owen, Government and Industry Relations, Washington Mutual,

former Executive Director of the California Mortgage Bankers

Association;71

 Robert Sanborn, former Vice President, Fannie Mae;72

 Robert O’Toole, Senior Staff Vice President for the Mortgage Brokers

Association;73

 John Potter, Postmaster General;74

 Annette Watkins, daughter of Alphonso Jackson;75 and

 Catherine Willis, Director of Government Affairs, National Association

of Independent Insurers.76

Through the VIP program, Countrywide also gave preferential treatment to

strategic allies outside Washington. This group of friends included home builders,

developers, business partners, and city planners. Several Countrywide business partners

were processed as VIPs; their ability to refer borrowers to Countrywide was the apparent

65 E-mail from Barbara Albrecht, Mortgage Bankers Assoc., to Robert Feinberg (Dec. 31, 2002)

(Countrywide_000187).

66 E-mail from Sandy Samuels to Doug Perry (Jan. 23, 2003) (Countrywide_001140).

67 E-mail from Jimmie Williams to Doug Perry (Mar. 17, 2004) (Countrywide_001574).

68 E-mail from Angelo Mozilo to Robert Feinberg (Feb. 17, 2003) (Countrywide_000041).

69 E-mail from Pete Mills to Joseph Reed (Mar. 17, 2003) (Countrywide_000931).

70 E-mail from Andy Bielanski to Rick Simon (June 19, 2003) (Countrywide_001681).

71 E-mail from Pete Mills to Doug Perry (Apr. 11, 2003) (Countrywide_001666).

72 Countrywide Loan Documents for Borrower Robert Sanborn (Countrywide_000051-54).

73 E-mail from Angelo Mozilo to Kay Gerfen (May 9, 2003) (Countrywide_000904).

74 E-mail from Kay Gerfen to Doug Perry (May 21, 2003) (Countrywide_000008-09).

75 E-mail from Jimmie Williams to Doug Perry (Dec. 19, 2003) (Countrywide_001655).

76 E-mail from Robert Feinberg to Robert Barbarowicz (Dec. 2, 2003) (Countrywide_000913).
- 19 -

motivation for enrollment. Business partners who received special treatment included

William Esrey,77 former CEO of Sprint, which teamed up with Countrywide to provide

property information to homebuyers on their cell phones, and Bruce Karatz,78 CEO of

K.B. Home, a leading homebuilder that partnered with Countrywide to provide mortgage

services for K.B. homebuyers.

Countrywide extended courtesies through the VIP program for public relations

purposes, giving preferential treatment to entertainers and law enforcement officials.

Loans for entertainers Uma Thurman,79 Stanley Tucci,80 Ed McMahon,81 Roy Scheider,82

and Mort Sahl83 were processed in Countrywide’s VIP loan unit. Shawn Brownell, a

Deputy in the Malibu Sheriff’s Department, received discounts through the program.84

Andrew Bunnin, Manager of the Los Angeles Times, received preferential treatment from

Countrywide,85 as did Jeffrey Young, the National Advertising Director. 86 The Los

Angeles Times is the most widely-circulated paper in Countrywide’s home state of

California, and the fourth-most widely circulated newspaper in the United States.87

G. Congress Responds

FINDING: At the same time the “Friends of Angelo” VIP loan program was

affording preferential treatment to Members of Congress,

Congressional staff, and lobbyists, Congress was considering

legislation to reform the GSEs. The most notable reform effort

died in the Senate Banking Committee, where Senator

Christopher Dodd was a member. Reform legislation was never

passed, let alone voted on by Congress.

With Countrywide exerting influence on the debate about reform of the GSEs in

Congress through the VIP program and Fannie Mae and Freddie Mac committing

millions in lobbying and campaign contributions, the considerations of those with a

77 E-mail from Doug Perry to Robert Feinberg (June 27, 2002) (Countrywide_000027).

78 E-mail from Mike Casey to Maritza Cruz (Dec. 18, 2002) (Countrywide_000174).

79See, E-mail exchange between Robert Feinberg and Angelo Mozilo (Jan. 22, 2004)

(Countrywide_000415).

80 See, E-mail exchange between Robert Feinberg and Larry Bolder, Starr & Co., LLC, (Jul. 16, 2003)

(Countrywide_000157-159).

81 See, E-mail from Robert Feinberg to Angelo Mozilo (Apr. 22, 2003) (Countrywide_000353).

82 See, E-mail exchange between Robert Feinberg and Larry Bolder, Starr & Co., LLC, (Feb. 3, 2005)

(Countrywide_000481).

83 See, E-mail exchange between Andy Bielanski and Doug Perry (Apr. 10, 2003) (Countrywide_001057).

84 E-mail from Anne Banducci to Doug Perry (Apr. 22, 2004) (Countrywide_000733).

85 E-mail from Andrew Bunnin, L.A. Times, to Robert Feinberg (Jan. 2, 2004) (Countrywide_000429).

86 E-mail from Jeffrey Young, L.A. Times, to Robert Feinberg (June 30, 2004) (Countrywide_000275).

87 BurrellesLuce, 2007 Top 100 Daily Newspapers in the U.S. by Circulation, Mar. 31, 2007.
- 20 -

financial stake in the outcome of reform efforts were well-represented.88 Fannie and

Freddie reform legislation was never passed, let alone voted on by Congress.

During the 108th Congress (2003-04) six bills were introduced as efforts to reform

Fannie Mae.89 None made it out of committee. In the Senate, S. 1656, a reform bill

introduced by Senator John Corzine (D-NJ) died in the Senate Banking, Housing, and

Urban Affairs Committee.90 Members of the 108th Congress expressed faith in the

solvency of Fannie and Freddie. Congressman Barney Frank (D-MA) for example,

described them as “not facing any kind of financial crisis.”91 He was wrong.

In 2005, the “Federal Housing Enterprise Regulatory Reform Act,” sponsored by

Senator Chuck Hagel (R-NE) and co-sponsored by Senators Elizabeth Dole (R-NC), John

McCain (R-AZ), and John Sununu (R-NH) proposed an increase in government oversight

of Fannie Mae and Freddie Mac loans. Unlike the 2003 reform efforts, this bill made it

out of the Senate Banking, Housing, and Urban Affairs Committee. A letter to Senate

Majority Leader Bill Frist (R-TN) signed by 26 Republican Senators requested a full

Senate vote, warning “If effective regulatory reform legislation . . . is not enacted this

year, American taxpayers will continue to be exposed to the enormous risk Fannie Mae

and Freddie Mac pose to the housing market, the overall financial system and the

economy as a whole.”92 A full Senate vote was not called.93

88 Open Secrets “Capital Eye,” http://www.opensecrets.org/news/2008/09/update-fannie-mae-andfreddie.html (last visited Mar. 10, 2009) (According to Open Secrets, during the 2004 election cycle,

Fannie Mae and Freddie Mac’s lobbying and campaign contributions exceeded $51 million. Also

according to Open Secrets, Members of the 110th Congress received a total of $4.8 million from Fannie

Mae and Freddie Mac in political contributions).

89 H.R.2117, “To amend the Federal National Mortgage Association Charter Act and the Federal Home

Loan Mortgage Corporation Act to remove certain competitive advantages granted to the housing-related

government-sponsored enterprises relative to other secondary mortgage market enterprises, and for other

purposes,” introduced May 23, 2003 by Rep. Pete Stark (D-CA) (Referred to the Subcommittee on Capital

Markets, Insurance and Government Sponsored Enterprises); H.R.2575, “To reform the regulation of

certain housing-related Government-sponsored enterprises, and for other purposes,” introduced on June 24,

2003 by Rep. Richard H Baker (R-LA) (Committee Hearings Held); H.R.2803, “To establish the Office of

Housing Finance Oversight in the Department of the Treasury to ensure the financial safety and soundness

of Fannie Mae, Freddie Mac, and the Federal home loan banks,” introduced on Jul. 21, 2003 by Rep.

Edward R Royce (R-CA) (Referred to the Subcommittee on Capital Markets, Insurance and Government

Sponsored Enterprises); S.1508, “A bill to address regulation of secondary mortgage market enterprises,

and for other purposes,” introduced Jul. 31, 2003 by Sen. Chuck Hagel (R-NE) (Ordered to be reported

with an amendment in the nature of a substitute favorably); S.1656, “A bill to address regulation of

secondary mortgage market enterprises, and for other purposes,” introduced Sept. 23, 2003 by Sen. Jon S.

Corzine (D-NJ) (Read twice and referred to the Committee on Banking, Housing, and Urban Affairs); and,

H.R.3507, “To expand homeownership opportunities in States having high housing costs,” introduced Nov.

18, 2003 by Rep. Brad Sherman (D-CA) (Referred to the Subcommittee on Capital Markets, Insurance and

Government Sponsored Enterprises).

90 S.1656, “A bill to address regulation of secondary mortgage market enterprises, and for other purposes,”

introduced Sept. 23, 2003 by Sen. Jon S. Corzine (D-NJ) (Read twice and referred to the Committee on

Banking, Housing, and Urban Affairs).

91 Stephen Labaton, New Agency Proposed to Oversee Freddie Mac and Fannie Mae, N.Y.TIMES, Sept.

11, 2003.

92 Associated Press, Freddie Mac arranged stealth campaign, Oct. 20, 2008.

93 Id.
- 21 -

Hagel's chief of staff, Mike Buttry, said the legislation “was the last best chance

to bring greater oversight and tighter regulation to Freddie and Fannie, and [the GSEs]

used every means they could to defeat Sen. Hagel's legislation every step of the way.”94

H. The Aftermath

Having averted Congressional reform efforts, Countrywide and Fannie Mae

continued their cozy relationship. As of 2007, Countrywide alone originated 23 percent

of Fannie Mae and Freddie Mac’s total volume of mortgages.95 As the market changed,

foreclosures rose and home mortgage loan originations declined. This caused house price

appreciation to slow and lenders tightened underwriting standards. More than 30

subprime lenders left the industry or went bankrupt in the 12 months prior to April

2007.96

Going against the industry trend in 2007, Countrywide increased their number of

mortgage loans by more than eight percent compared to the same period in 2006.97

During the first quarter of 2007, its mortgage lending increased nine percent to $115

billion.

98 Countrywide rationalized this strategy by explaining the volatility in the market

was short-term and they stood to benefit longer-term “as the marketplace rationalizes.”99

Barely a year later, the “Friends of Angelo” program was the topic of a June 2008

page one Wall Street Journal story and a subsequent series of June-August Portfolio

articles for loaning at lower-than-market rates to legislators and executives involved with

oversight and management of the mortgage industry and the GSEs.100 By September

2008, the federal government seized the insolvent GSEs and placed them into

conservatorship, pledging $200 billion to cover the companies’ losses.101 By the end of

February 2009, the government committed an additional $200 billion to “remove any

possible concerns debt and mortgage-backed securities investors have about the strong

commitment of the U.S. Government to support Fannie Mae and Freddie Mac.”102

94 Id.

95 Jody Shenn, Fannie, Freddie Subprime Sprees May Add to Bailout, BLOOMBERG, Sept. 24, 2008.

96 Jonathan Stempel, Countrywide mortgage lending in foreclosure rises, REUTERS, April 13, 2007.

97 Id.

98 Id.

99 Id., (quoting Countrywide C.O.O. David Sambol).

100 Glenn R. Simpson and James R. Hagerty, Countrywide Friends Got Good Loans, WALL ST. J., June 7,

2008, at A1.

101 Binyamin Appelbaum, Government Doubles Available Aid to Fannie and Freddie, WASH. POST, Feb.

18, 2009 (quoting James Lockhart, director of the Federal Housing Finance Agency).

102 Id.
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IV. The VIP Program

A. Program Administration

Countrywide Senior Vice President Doug Perry was the program administrator

and “primary contact,” with “direct responsibility for the origination of VIP loans.”103

Three account executives originated loans, including Robert Feinberg.104 Perry

discouraged discussing VIP loan policy and procedure with the account executives

originating VIP loans, urging internal Countrywide discussion of terms and treatment of

VIPs to go through him.105 Perry also explained Executive Vice President Stephen

Brandt “is often the one communicating with senior management about [VIP loans].”106

Because of the “high visibility of VIP loans” and Brandt’s role as liaison between the

VIP unit and senior management, he was to be copied on any communications about VIP

loans.107

Loans to be processed by the California-based VIP unit were specified for all

Countrywide Account Executives to ensure “the origination and routing of VIP loans is

handled flawlessly.”108

An internal Countrywide e-mail specifies seven categories of loans to be

processed through the VIP unit:109

 FOA [Friends of Countrywide CEO Angelo R. Mozilo]

 FOS [Friends of Countrywide President Stanford L. Kurland]

 ARM, SLK personal loans [personal loans for Mozilo and Kurland]

 BOD [Board of Directors] personal loans, close personal referrals (family

members)

 MD [Managing Director] & SMD [Senior Managing Director] personal

loans

 MD & SMD close personal referrals (family members)

 EVP [Executive Vice President] and SVP [Senior Vice President] personal

loans

103 E-mail from Doug Perry to Mary Turel (Jul. 11, 2003) (Countrywide_000900).

104 Id.

105 Id.

106 Id.

107 Id.

108 E-mail from David Doyle to Linda Klein (Oct. 8, 2002) (Countrywide_000900).

109 Id.
- 23 -

In 2003, a decision was made to route all VIPs not classified as “Friends of

Angelo” through Countrywide’s Florida processing unit.110

B. Program Intent

FINDING: Countrywide’s VIP loan program was a tool with which

Countrywide built its relationship with Congress and protected its

relationship with Fannie Mae. Senior Countrywide officials and

lobbyists openly and explicitly weighed the value of relationships

with potentially influential borrowers against the cost to

Countrywide in terms of forfeited fees and payments.

According to the documents, Countrywide explicitly designed the VIP program to

establish relationships with borrowers with the potential to influence policy, law, and

public image.

According to former managing director Sidney Lenz, Countrywide’s Washington

lobbyists identified potential customers on Capitol Hill to “keep their edge.”111 Lenz

oversaw government relations for Countrywide.112 Lenz told Portfolio magazine the

company’s lobbyists were “incredibly receptive” to loan requests from potentially

influential borrowers.113 As a result, Countrywide found itself relied upon by Congress

to provide insight and share expertise when industry-related legislation was being

considered. According to Lenz:

110 E-mail from Stephen Brandt to Doug Perry (Jul. 11, 2003) (Countrywide_000901).

111 Daniel Golden, Angelo’s Many ‘Friends’, CONDE NAST PORTFOLIO, Aug. 2008 [hereinafter Golden].

112 Id.

113 Id.
- 24 -

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?114

In most cases, the value of a relationship with a VIP borrower outweighed the

cost to Countrywide of bestowing preferential treatment on the borrower. However, in

some cases, Countrywide debated internally whether the value of the influence they were

potentially purchasing with preferential treatment and discounts was worth the cost.

1. Billings, Montana Mayor Chuck Tooley

Chuck Tooley, Mayor of Billings, Montana and husband of Joan Stapleton

Tooley, former publisher and then-director of national advertising for the New Republic

magazine, met Countrywide’s Jimmie Williams during the U.S. Conference of Mayors in

Madison, Wisconsin.115 There, he asked Williams about cancelling mortgage insurance

he believed he was no longer obligated to hold.116

Williams circulated the mayor’s inquiry within Countrywide, and according to the

documents, Countrywide’s attorneys determined the lender was legally entitled to enforce

the mortgage insurance clause in the mayor’s loan.117 Before making a final

determination as to how to proceed, Countrywide attorney Jay Laifman made sure there

were no political reasons to waive the mortgage insurance requirement:

We are legally able to enforce the MI [mortgage insurance].

Jimmie, Pete, Sydney, anyone, are our non-legal reasons why we

would not want to enforce it strong enough for CHL to pay for the

MI for the remainder of the loan?118

In response to Laifman’s question, Sydney Lenz, a Countrywide Managing

Director, weighed the potential value of giving preferential treatment to the mayor

against the cost of waving the mortgage insurance fee:

I’m usually in favor of settling on the side of the borrower with

political influence. However, in this case, I think the MI payment

for the life of the loan has the potential of being a greater number

than the Mayor of Billings Montana influence. Jimmie, since you

work with the mayors, what’s your opinion?

114 Id.

115 E-mail from Jimmie Williams to Angela Romano (June 21, 2002) (Countrywide_000019).

116 Id.

117 E-mail from Jay Laifman to Angela Romano, Pete Mills, Sydney Lenz, Melissa Guerra, Janis Allen and

Jimmie Williams (June 26, 2002) (Countrywide_000018).

118 Id.
- 25 -

Williams responded by reciting Tooley’s credentials, mentioning his wife’s role at

the New Republic 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 as Mayor.”119

Williams’s review of the ways Tooley was able to help Countrywide apparently

swayed the office of Countrywide’s president. Cindy Wortham recommended:120

Due to the Mayor’s (and his wife’s) potential influence and

accessibility to media outlets and publications, [Countrywide

should] 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.

119 E-mail from Jimmie Williams to Sidney Lenz (June 27, 2002) (Countrywide_000016-17).

120 E-mail from Cynthia Wortham to Angela Romano (June 27, 2002) (Countrywide_000015-16).
- 26 -

Williams was satisfied with this suggestion, declaring in an e-mail “For political

and public relations reasons, I think this is a better option.”121 The matter apparently

settled, Wortham ordered her offer be passed along to Tooley through the VIP

department.122

2. Judge Richard Aldrich

Many of the “Friends of Angelo” were borrowers with influence in the realm of

law and policy affecting Countrywide, and some were Mozilo’s neighbors and fellow

members of Sherwood Country Club. Judge Richard Aldrich was both.

In January 2004, Aldrich, a California state appeals court judge, decided to

refinance his Sherwood, California home. Aldrich's loan application was assigned to a

loan officer in Countrywide’s VIP division; the judge was seeking a $1 million loan and a

$900,000 line of credit.123 In an e-mail to Mozilo with the subject line “VIP Judge

Richard Aldrich,” Countrywide VIP loan unit officer Robert Feinberg alerted Mozilo the

credit line was “above what guidelines allow.”124

Mozilo responded, “Go ahead and approve the loan and close it as soon as

possible. Don't worry about this deal, it's golden.”125 In addition to ignoring credit line

guidelines, Countrywide’s VIP treatment of Aldrich included waiving half a point on the

million-dollar loan, saving the judge $5,000.126

According to Portfolio magazine, at the time Aldrich refinanced, “a class action

lawsuit against Countrywide was pending before the appellate court, brought by

borrowers contending the company offered an inadequate payment to settle allegations it

charged excessive fees for credit reports. Aldrich was part of a three-judge panel that

unanimously rejected the borrowers' appeal.”127

121 E-mail from Jimmie Williams to Cynthia Wortham (June 27, 2002) (Countrywide_000015).

122 E-mail from Cynthia Wortham to Angela Romano (June 27, 2002) (Countrywide_000015).

123 E-mail from Robert Feinberg to Angelo Mozilo (Jan. 29, 2004) (Countrywide_000028).

124 E-mail from Robert Feinberg to Angelo Mozilo (Jan. 29, 2004) (Countrywide_000395).

125 E-mail from Angelo Mozilo to Robert Feinberg (Jan. 29, 2004) (Countrywide_000783).

126 Golden.

127 Id.; Aldrich demanded a retraction from Portfolio, disputing the magazine’s implication that he had

contact with Mozilo and that he received preferential treatment due to his position in California’s judiciary.

Aldrich described the matter involving Countrywide that came before him during his refinancing: “The

case involved a class action lawsuit against Countrywide; I was not a member of the class as defined in that

case. The plaintiffs alleged that Countrywide overcharged borrowers for credit reports. The case settled in

mediation. Two of the plaintiffs and their attorney objected to the settlement and the attorney asked for

attorney fees of $76,741.26 for filing the objections. The trial court overruled the objections, denied the

attorney fees and approved the settlement. The objecting attorney appealed. In these kinds of cases, great

deference is given to the trial court. Only two votes were required. In this case the opinion was

unanimous, affirming the settlement approved by the trial judge. The California Supreme Court denied

review.”
- 27 -

3. Calabasas, California Official Robert Yalda

If Countrywide were presented the opportunity to help a borrower with the

potential to help the company, the VIP program was mobilized. In Robert Yalda’s case,

he found himself in the fortunate position of simultaneously shopping for a loan and

working with Countrywide on a “highly visible and controversial” expansion of its

headquarters in Calabasas, California.128

A Countrywide managing director e-mailed the VIP department on August 12,

2003, to notify them he and other Countrywide officials had been “meeting with many

city officials to try to develop the proper political strategy” that will provide the company

with “the most success. One of those individuals is Robert Yalda, the city’s director of

transportation and intergovernmental affairs. He is in the process of buying a house and

needs some help.”129

Benton asked the VIP department to “ease the process for [Yalda].”130 On the

same day, Yalda applied for a $500,000 mortgage from Countrywide.131 Countrywide

never followed through on the expansion project.

128 E-mail from Patrick Benton to Robert Feinberg (Aug. 12, 2003) (Countrywide_000012).

129 Id.

130 Id.

131 Daniel Golden, Countrywide’s Many Friends, CONDE NAST PORTFOLIO, June 12, 2008.
- 28 -

4. Rebuilding Together, Inc.’s Patty Johnson

Countrywide made sure to take care of the allies of laws and policies that increase

home ownership. Some of Countrywide’s most valuable allies were advocacy groups

who lobbied Congress about affordable housing initiatives. Policies to increase home

ownership meant more loans for Countrywide. One such group was Rebuilding

Together, Inc., based in Washington. Rebuilding Together “provides free rehabilitation

and critical repairs to the homes of low-income Americans.” 132 Rebuilding Together has

a growing “advocacy and public policy platform.”133

Patty Johnson, then-CEO and President of Rebuilding Together, wanted to

arrange a refinance with cash out in 2003.134 She was in touch with Rick Simon,

Countrywide’s Vice President of Public Relations. In an e-mail with “Subject: VIP

lead,” Simon passed off the contact to Countrywide Managing Director Andy Bielanski,

who made contact with the VIP loan unit.135 Bielanski highlighted the importance of

giving VIP treatment to Johnson, explaining “Patty espouses the virtues of Countrywide

nearly every day – she needs to get the “full treatment”.”136

Doug Perry asked Robert Feinberg to handle Johnson’s refinance. He ordered

Feinberg to take off .5 to .75 points and “no junk.”137

132 Rebuilding Together website, http://www.rebuildingtogether.org/section/about/ (last visited Mar. 10,

2009).

133 Id., http://www.rebuildingtogether.org/section/policy/ (last visited Mar. 10, 2009).

134 E-mail from Rick Simon to Stephen Brandt (June 19, 2003) (Countrywide_001681).

135 E-mail from Andy Bielanski to Rick Simon and Doug Perry (June 19, 2003) (Countrywide_001681).

136 Id.

137 E-mail from Doug Perry to Robert Feinberg (June 20, 2003) (Countrywide_001681).
- 29 -

V. Jimmie Williams and the VIP Program Referral

Process

FINDING: Countrywide’s Washington lobbyist Jimmie Williams identified

influential borrowers for VIP treatment. Williams justified his

referrals to the director of the VIP program by explaining the

borrower’s position and how he or she could be valuable.

Among others, Williams referred the Chief Counsel to the House

Financial Services Housing and Community Opportunity

Subcommittee Clinton Jones, HUD Secretary Alphonso

Jackson’s daughter Annette Watkins, U.S. Rep. Melvin Watt’s

Chief of Staff Joyce Brayboy, and former Democratic National

Committee official and Director of White House Political Affairs

under President Clinton Minyon Moore.

Angelo Mozilo relied on references from several key sources to amass his

“friends.” Referrals of VIPs with the potential to influence legislation affecting

Countrywide often came from Jimmie Williams, Countrywide’s Vice President of

Legislative and Regulatory Affairs.

Williams served as Countrywide’s lobbyist in Washington. He began his career

in Washington as a legislative assistant in the U.S. House of Representatives, where he

briefed his Member and Chief of Staff on “legislative issues relating to economic
- 30 -

development; public works and transportation.”138 Williams left Countrywide in 2006

and became Director of Industry and State Relations for Freddie Mac.139

Williams recommended several contacts in Washington for VIP treatment,

including elected officials and Congressional staff. Williams identified potential VIPs

interested in a loan or a refinance and notified the VIP department, often including an

explanation of the importance of the potential client in his referral e-mails. According to

Portfolio magazine, Williams “initially directed them to local Countrywide branches, but

began hearing complaints some branches were slow or overwhelmed. To ensure quality

service, he referred more of them to the VIP program, based in Countrywide’s Rosemead,

California, call center.”140

Williams usually noted in the subject line of his referral e-mails about the

borrower’s VIP status.141 Referrals from Williams were given discounts by Doug Perry,

Countrywide Senior Vice-President, based solely on Williams’s explanation of the value

of the borrower to Countrywide.142

A. The Referral of House Subcommittee Chief Counsel

Clinton Jones

In November 2002, Williams notified Doug Perry of a “loan request that would

require specialized handling”143 because of the importance of the borrower:

[Clinton] Jones is the Chief Counsel on the House Financial

Services Housing and Community Opportunity Subcommittee.

Jones is also an advisor to ranking Republican members of

Congress responsible for legislation of interest to the financial

services industry and of importance to Countrywide.144

Perry then e-mailed Feinberg, a Countrywide loan officer responsible for VIP

borrowers: “Can you please handle this? 0.5 off. No garbage fees.”145

138 Linkedin, http://www.linkedin.com/pub/7/1a0/822 (last visited Mar. 10, 2009).

139 Id..

140 Daniel Golden, Angelo’s Fannie Pack, CONDE NAST PORTFOLIO, Jul. 17, 2008.

141 See, e.g., E-mail from Jimmie Williams to Doug Perry (Dec. 19, 2003) (“Subject: VIP Loan Referral –

Depty. Sec. Jackson Daughter”) (Countrywide_001655); E-mail from Jimmie Williams to Doug Perry

(Mar. 17, 2004) (“Subject: VIP Loan”) (Countrywide_1574).

142 See, e.g., E-mail exchange between Jimmie Williams and Doug Perry (Dec. 19, 2003) (authorizing a

discount for Annette Watkins) (Countrywide_001655); E-mail exchange between Jimmie Williams and

Doug Perry (Nov. 14, 2002) (authorizing a discount for Clinton Jones) (Countrywide_000830).

143 E-mail from Jimmie Williams to Doug Perry (Nov. 14, 2002) (Countrywide_000830).

144 Id.

145 E-mail from Doug Perry to Robert Feinberg (Nov. 27, 2002) (Countrywide_000830).
- 31 -

The House Financial Services Housing and Community Opportunity

Subcommittee oversees the Department of Housing and Urban Development (“HUD”)

and the Government National Mortgage Association (“Ginnie Mae”).146 Ginnie Mae is a

government corporation with the full faith and credit backing of the United States

government that packages mortgages purchased from companies such as Countrywide

into mortgage-backed securities.147

B. The Referral of HUD Sec. Alphonso Jackson’s Daughter

Annette Watkins

Annette Watkins, daughter of Alphonso Jackson, Secretary of Housing and Urban

Development, had a second mortgage on a property in Texas processed through the

Countrywide VIP program.148 Jimmie Williams contacted Countrywide Senior Vice

President Perry on Watkins’s behalf because “Jackson suggested his daughter talk with

Countrywide.”149

To ensure preferential treatment, Williams told Perry her father “is expected to be

confirmed by the Senate as secretary of Housing and Urban Development.”150

Because the property Watkins was financing was in Texas, unique lending laws

applied. Williams notified Perry of this potential complication.151 Perry assured

146 House Committee on Financial Services, http://financialservices.house.gov/jurisdiction.html (last visited

Mar. 10, 2009).

147 Ginnie Mae News Release, “Government Corporation MBS Issuance Exceeds Government-Sponsored

Enterprises,” Feb. 12, 2009.

148 E-mail from Jimmie Williams to Doug Perry (Dec. 19, 2003) (Countrywide_001655).

149 Id.

150 Id.

151 Id.
- 32 -

Williams the Texas laws do not prevent Countrywide from helping Watkins, telling him

“Not a problem. We are on it.”152

HUD regulates real estate settlements and closing costs and runs the Federal

Housing Administration, the agency charged with guaranteeing mortgages.153 In 2004,

the agency ordered Fannie and Freddie to increase their holdings of loans made to

subprime borrowers, thereby jeopardizing the American economy while simultaneously

driving revenue for Countrywide and the GSEs. According to the Washington Post,

“HUD stuck with an outdated policy that allowed Freddie Mac and Fannie Mae to count

billions of dollars they invested in subprime loans as a public good that would foster

affordable housing. Housing experts and some congressional leaders now view those

decisions as mistakes that contributed to an escalation of subprime lending that is roiling

the U.S. economy.”154

C. The Referral of U.S. Rep. Mel Watt’s Chief of Staff Joyce

Brayboy

The Chief of Staff for U.S. Rep. Melvin Watt (D-NC) Joyce Brayboy received

preferential treatment from Countrywide due to her position of influence with a

Congressman on the House Financial Services Committee. Jimmie Williams urged Doug

Perry to “carefully” handle Brayboy’s loan. He wrote:

[Brayboy] reports directly to Congressman Mel Watt who

introduced predatory lending legislation to address unscrupulous

lending practices, and they do view Countrywide as a trusted

advisor.155

152 E-mail from Doug Perry to Jimmie Williams (Dec. 19, 2003) (Countrywide_001655).

153 Golden.

154 Carol D. Leonnig, “How HUD Mortgage Policy Fed the Crisis,” WASH. POST, June 10, 2008, at A1.

155 E-mail from Jimmie Williams to Doug Perry (Mar. 17, 2004) (Countrywide_001574).
- 33 -

Watt serves on the House Financial Services Committee and the House Judiciary

Committee. The Financial Services Committee has jurisdiction over all aspects of the

financial services industry, including banking, insurance and securities; the Committee’s

legislative and oversight authority extends to housing and consumer protection laws such

as the U.S. Housing Act, the Truth in Lending Act, the Housing and Community

Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures

Act, the Community Reinvestment Act, and financial privacy laws.156

D. The Referral of Mike Garver, Brother-in-Law of an Aide

to a Member on the House Financial Services Committee

Countrywide’s outreach to the House Financial Services Committee through its

Washington-based lobbying operation was not limited to one borrower. Countrywide

Senior Vice-President of Legislative and Regulatory Affairs Pete Mills was contacted by

Mike Garver to discuss refinancing a Countrywide mortgage in 2003. Garver was

referred to Mills by his brother-in-law, an “aide to a senior Member of Congress on the

House Financial Services Committee.”157 Mills was willing to help Garver because his

brother-in-law was “a big supporter of Countrywide’s [who] called me to see if we could

help out.”158

Jimmie Williams suggested to Mills he forward Garver’s request to Doug

Perry.159 Mills did so. He explained to Perry why the borrower was important and how

the borrower should be classified, recommending Perry “put this one in a ‘moderate VIP’

status – the Hill staffer is very important to us.”160

156 Website of U.S. Representative Mel Watt, “Committee Assignments,”

http://watt.house.gov/committeeassignments.asp (last visited Mar. 10, 2009).

157 E-mail from Pete Mills to Joseph Reed (Mar. 17, 2003) (Countrywide_000931).

158 Id.

159 E-mail from Pete Mills to Doug Perry (Mar. 17, 2003) (Countrywide_000931).

160 Id.
- 34 -

Perry instructed Robert Feinberg to complete the refinancing process with Garver.

Garver’s “moderate VIP” status earned him a discount of one-quarter point and “branch

processing.”161

E. The Referral of Former White House Staffer Minyon

Moore

Minyon Moore, former Chief Operating Officer of the Democratic National

Committee and Director of White House Political Affairs under President Clinton, was

given preferential treatment from Countrywide in accordance with her relationship with

Angelo Mozilo. In her case, Jimmie Williams explained to Doug Perry:

[Moore] is a former White House staffer and lead lobbyist for

Dewey Square whom we have on retainer. The lobbying company

161 E-mail from Doug Perry to Robert Feinberg (Mar. 17, 2003) (Countrywide_000931).
- 35 -

is also one of Angelo’s preferred, so we should handle this loan

accordingly.162

The Dewey Square Group is a “powerhouse public affairs firm with close ties to

just about every important Democratic politician in the country.”163 According to the

company’s code of ethics, Dewey Square Group employees “will not accept for our

personal benefit goods or services of more than nominal value from suppliers, potential

suppliers or other third parties.”164

VI. The Perks of Being a “Friend of Angelo”

FINDING: Countrywide loan officers waived fees and knocked off points for

VIP borrowers at no cost, amounting to thousands of dollars in

savings. Countrywide charged non-VIP borrowers hundreds of

dollars in upfront fees. Non-VIP borrowers paid one percent of

the total amount of the loan for an interest rate reduction of one

point. In many cases, Countrywide facilitated and expedited the

loan process for VIPs by ignoring company policies.

When offering preferential treatment to a VIP, Countrywide loan officers had a

variety of options, including discounts in the form of waived points and fees. In many

cases, Countrywide facilitated and expedited the loan process for VIPs by ignoring

company policies.

A. “One Point Off”

Home-loan customers can reduce their interest rates by paying “points.” To

reduce the interest rate on a mortgage by one point, a borrower pays one percent of the

total value of the loan upfront. Deciding whether to pay points when negotiating a loan

requires a borrower to decide whether to pay upfront to reduce monthly payments over

the life of the loan. Paying for points requires the borrower to have more cash available

upfront. This is an expensive option for many borrowers. Taking points off a loan at no

cost saves a borrower thousands of dollars.

162 E-mail from Jimmie Williams to Doug Perry (Jan. 16, 2004) (Doug Perry instructed Robert Feinberg to

take .5 point off Moore’s rate and waive junk fees) (Countrywide_000011).

163 Josh Kurtz, Shop Talk, ROLL CALL, Feb. 13, 2003.

164 WPP Code of Conduct, http://www.wpp.com/NR/rdonlyres/9B04A19D-D286-40C8-8D70-

D564B73509E8/0/WPP_Code_of_Business_Conduct_Jan06.pdf (last visited Mar. 10, 2009).
- 36 -

Franklin D. Raines, former CEO of Fannie Mae, is one Countrywide VIP who

received preferential treatment in the form of free points. When Raines refinanced his

mortgage in June 2003, his assistant, Wendy Hogan, telephoned Countrywide on his

behalf. According to the phone message, “Wendy stated that per Angelo, Frank needs to

refi.”165

In response to Wendy Hogan’s phone call, Doug Perry arranged a one point

discount and waiver of junk fees on Raines’s June 2003 refinance.166 According to the

documents, the discounts ordered by Perry were applied to the June 2003 loan. The rate

for the loan was 4.125 percent,167 exactly one point less than the initial rate of 5.125

percent applied to the loan being refinanced (Raines’s April 2003 mortgage).168

According to The Wall Street Journal, the market average rate for comparable loans at

the time of the June 2003 refinance was 5.1 percent.169 Reducing the rate by a point on

the $1 million loan would have cost Raines $10,000.

165 E-mail from Claudia Velazquez to Doug Perry (June 9, 2003) (Countrywide_000010).

166 E-mail from Doug Perry, Countrywide to Robert Feinberg, Countrywide, June 9, 2003

(Countrywide_000010).

167 “Estimation of HUD-1 Settlement Statement” for Borrower Franklin D. Raines (Loan No. 31460379),

prepared by Lucy C. Hidalgo, Countrywide Loan Specialist, VIP Employee Loan Unit, June 25, 2003

(FDR-OGR_0298).

168 “Fixed/Adjustable Rate Note” for Borrower Franklin D. Raines (Loan No. 25258841), prepared by Silva

Momjian, Apr. 29, 2003 (FDR-OGR_0259).

169 Glenn R. Simpson and James R. Hagerty, Countrywide Friends Got Good Loans, WALL ST. J., June 7,

2008. The story explains that 5.1 percent represents the “low end of average market range for similar

mortgages based on surveys of lenders in the six weeks preceding loan closing.”
- 37 -

Reducing the interest rate applied to a loan at no cost to the borrower was a

common discount arranged for VIPs. Among the many VIPs who received interest rate

reductions were Minyon Moore, for whom Perry ordered a .5 point rate reduction;170

Senator Kent Conrad, for whom Mozilo instructed Feinberg to “Take off 1 point;”171 and

Ambassador Richard Holbrooke, on behalf of whom Perry informed Arpine

Tchoukadarian “Per Angelo this loan is to be at zero points. Waive the 1.25 points.”172

B. No Junk Fees

Collecting fees was a large part of Countrywide’s business. During the 12 months

ending in August 2007, Countrywide conducted and collected fees for 3.5 million flood

certifications, 10.8 million credit checks and 1.3 million appraisals, its filings show.173

Appraisal fees at Countrywide totaled $137 million in 2006, and credit report fees were

$74 million.174 When borrowers close on their loans, in addition to being charged for

flood certifications, credit checks and appraisals, they are assessed fees for document

preparation, e-mailing documents or using FedEx to send or receive paperwork,

according to Countrywide documents reviewed by the New York Times.

175 Many of the

fees were paid to Countrywide’s loan closing services subsidiary, LandSafe Inc.176

170 E-mail from Doug Perry to Robert Feinberg (Feb. 3, 2004) (Countrywide_000011).

171 E-mail from Angelo Mozilo to Robert Feinberg (Mar. 17, 2004) (Countrywide_000021).

172 E-mail from Doug Perry to Arpine Tchoukadarian (Feb. 20, 2003) (Countrywide_000032).

173 Id.

174 Id.

175 Gretchen Morgenson, Inside the Countrywide Lending Spree, N.Y. TIMES, Aug. 26, 2007.

176 Id. (According to dozens of loan documents reviewed by the N.Y. Times, “LandSafe routinely charged

tax service fees of $60, far above what other lenders charge, for information about any outstanding tax

obligations of the borrowers. Credit checks can cost $36 at LandSafe, double what others levy. Some

Countrywide loans even included fees of $100 to e-mail documents or $45 to ship them overnight.

LandSafe also charges borrowers $26 for flood certifications, for which other companies charge $12 to $14,

according to sales representatives and brokers familiar with the fees.”)
- 38 -

Many of these upfront lender charges are commonly referred to as “junk” fees,

assessed by the lender at closing. For VIPs, Countrywide often eliminated fees

amounting to hundreds of dollars for underwriting, processing and document preparation.

In addition to taking a point off Franklin D. Raines’s June 2003 refinance,

Countrywide’s VIP unit waived fees payable in connection with the loan. According to

the estimated HUD-1 settlement statement for the loan, Raines was not to be charged at

settlement for a variety of items (items such as lender’s inspection fees, application fees,

assumption fees, warehouse fees, processing fees, and other fees referred to as “junk”

fees).177

Fees were also waived for Postmaster General John Potter. Potter benefited from

an encounter with Mozilo in 2003. Potter was in the process of arranging a

“complicated” bridge loan when he “coincidentally” ran into Mozilo.178 Mozilo

instructed Countrywide’s Kay Gerfen to “let Mr. Potter know we/CW will take care of

it.”179 Mozilo instructed Perry to “take 1 point off” Potter’s rate and to charge “no extra

fees.”180 Potter was referred to Mozilo and/or the VIP program by former Fannie Mae

Chief Executive Jim Johnson.181

A discount in the form of waived fees was applied to many loans handled by the

VIP department. Among several examples is the loan of Clinton Jones, for whom Perry

177 “Estimation of HUD-1 Settlement Statement” for Borrower Franklin D. Raines (Loan No. 31460379),

prepared by Lucy C. Hidalgo, Countrywide Loan Specialist, VIP Employee Loan Unit, June 25, 2003

(FDR-OGR_0298).

178 E-mail from Kay Gerfen to Doug Perry (May 21, 2003) (Countrywide_000008-09).

179 Id.

180 Id.

181 Id., (Subject: IMPORTANT – Mr. Jack Potter (Head of the U.S. Postal Service & referred by Mr. Jim

Johnson).
- 39 -

ordered “no garbage fees.”182 For Charles and Heather Campion, Mozilo instructed

Feinberg to charge “no extra fees.”183 For Martha Belcher, Perry ordered Feinberg to

waive three-eights of a point and charge “no junk.”184

C. No Appraisal Fee

When initiating a mortgage or refinance, a lender requires an appraisal of the

home being financed. Because the appraisal is conducted by an independent appraisal

company and not the lending company itself, the fee for the appraisal is often charged to

the borrower. According to a national survey of more than 150 lenders conducted in

2006, “79% of the lenders [surveyed]...charged an up-front appraisal fee. The average

amount charged was $331.”185

In 2001, a Countrywide loan officer noticed certain VIP referrals were not being

charged upfront for appraisal fees. According to Countrywide’s Maritza Cruz, “there are

some loans referred by managing directors, e.g., Sandy Samuels, where we didn’t collect

the fees for the appraisal.”186 Cruz noted in the case of one borrower, Countrywide

would be out a $600 appraisal fee if he were to choose to complete his loan with another

company.

187 Cruz cited a “circular letter sent by CMD [Countrywide Managing Director]

stressing the need for the appraisal fee to be collected upfront” to remind Doug Perry the

company has a policy against waiving those fees.188

182 E-mail from Doug Perry to Robert Feinberg (Nov. 27, 2002) (Countrywide_000020).

183 E-mail from Angelo Mozilo to Robert Feinberg (Feb. 17, 2003) (Countrywide_000041).

184 E-mail from Doug Perry to Robert Feinberg (Jan. 24, 2003) (Countrywide_001140).

185 HSH Associates Financial Publishers, “Average Selected Closing Fees and Charges for Home

Mortgages,” copyrighted 2006 (available at http://library.hsh.com/?row_id=34).

186 E-mail from Maritza Cruz to Doug Perry (Nov. 27, 2001) (Countrywide_001031).

187 Id.

188 Id.
- 40 -

D. “Policy” vs. “Actual Charged”- Countrywide Policy

Overrides

FINDING: Countrywide’s internal software calculated rates for borrowers

based on established industry criteria, including loan-to-value

ratio, debt-to-income ratio, and credit history. If the terms of a

loan violated company policy, the software would instruct the

loan officer to “correct and resubmit.” Countrywide loan

officers performed manual overrides to apply the reduced rates

specified by Angelo Mozilo. Manual overrides were also

necessary to breach company policy in order to accommodate

VIP borrowers.

Countrywide’s company policy required loan officers to use software to calculate

rates and fees applied to loans.189 The relevant rates and fees were displayed in a

borrower’s “Loan Policy Analysis,” a screen that detailed borrower information and the

total points added to the interest rate on the loan.190 In the analysis, columns headed

“Policy,” “Actl Chrgd,” and “Reason for Override” show how the final interest rate was

calculated for every loan.191

For James Johnson, former CEO of Fannie Mae, Mozilo specified the rate and

terms of a loan in 2003. Mozilo instructed Countrywide Executive Vice-President

Stephen Brandt to “begin the process of refinancing” for two properties owned by

Johnson.192 Mozilo specified the interest rate for each refinance: 4.375 percent fixed for

five years.193 When the details of Johnson’s loan were entered into Countrywide’s

internal “Loan Policy Analysis” software, the analysis confirmed 1.375 additional points

were to be added to the base rate specified by Mozilo per Countrywide “policy.”194 The

assessment of these points was manually overridden. It was reduced to “0.000” in the

Loan Policy Analysis column denoting what rate was actually charged.195

189 See, e.g., Countrywide Loan Policy Analysis documents (Countrywide_000093, Countrywide_000097,

Countrywide_000099, Countrywide_000101, Countrywide_000105, Countrywide_000107).

190 Id.

191 Id.

192 E-mail from Angelo Mozilo to Stephen Brandt (Mar. 13, 2003) (Countrywide_000829).

193 Id.

194 Countrywide “Loan Policy Analysis” for James Johnson, Policy Analysis “Policy” column, Mar. 17,

2003 (Countrywide_000085).

195 Id., Policy Analysis “Actl Chrgd” column.
- 41 -

When the terms of a loan processed by Countrywide’s software violated a

company policy, a notice with a specific error number alerts the user.196 The user has the

option of correcting the terms causing the error and resubmitting the loan, or overriding

the error message.197 In addition to the loans for Johnson, Countrywide policy was

manually overridden on terms of loans for Judge Richard Aldrich,198 Senator Kent

Conrad,199 Senator Christopher Dodd,200 former Sprint CEO William Esrey,201

Ambassador Richard Holbrooke,202 former Fannie Mae Chief Executive James

Johnson,203 and House Financial Services Committee Senior Counsel Clinton Jones.204

196 Countrywide PLATS software, “Rules Results” screen capture (Countrywide_001807).

197 Id.

198 Countrywide “Loan Policy Analysis” for Richard Aldrich, Jan. 27, 2004 (Countrywide_000101).

199 Countrywide “Loan Policy Analysis” for Kent Conrad, Mar. 15, 2004 (Countrywide_000099).

200 Countrywide “Loan Policy Analysis” for Christopher Dodd, Apr. 17, 2003 (Countrywide_000095).

201 Countrywide “Loan Policy Analysis” for William Esrey, Mar. 5, 2004 (Countrywide_000062).

202 Countrywide “Loan Policy Analysis” for Richard Holbrooke, Jan. 7, 2003 (Countrywide_000093).

203 Countrywide “Loan Policy Analysis” for James Johnson, Mar. 17, 2003 (Countrywide_000085).

204 Countrywide “Loan Policy Analysis” for Clinton Jones, Nov. 27, 2002 (Countrywide_000089).
- 42 -

E. “Do Whatever It Takes”

In 2003, Mozilo was contacted by Peter Segal of Powell, Goldstein, Frazer &

Murphy L.L.P., a law firm with an office in Washington, D.C.205 Segal represented the

seller of a home in Georgetown.206 The home was being sold by Segal’s client for $3.8

million to Senator John Edwards and his wife.207 The closing was scheduled for

December 23, just 12 days after Segal contacted Mozilo, a timeline Segal acknowledged

was “ambitious.”208 Segal also told Brandt in Countrywide’s consumer loan division to

expect a call from the Senator.209

After hearing from Segal, Mozilo instructed Brandt and Perry to accommodate

Senator Edwards’s urgent need to arrange financing because “Edwards will probably be

either the Vice Pres or Pres candidate for the democrats for 2004. Do whatever it takes to

get it closed by the 23rd and call me for the pricing.”210

Despite Angelo Mozilo’s best efforts, ultimately, Edwards did not take a loan

from Countrywide for this property.

205 E-mail from Peter Segal, Powell Goldstein, to Angelo Mozilo (Dec. 11, 2002) (Countrywide_000024).

206 Id.

207 Id.

208 Id.

209 E-mail from Peter Segal to Stephen Brandt (Dec. 11, 2002) (Countrywide_000025).

210 E-mail from Angelo Mozilo to Stephen Brandt and Doug Perry (Dec. 15, 2002) (Countrywide_000024).
- 43 -

F. Free “Float-Down”

If interest rates fell while a VIP loan was pending, Countrywide provided a free

“float-down” to the lower rate. Lenders charge .125 point or .25 point for a float-down

option, which allow borrowers to access lower rates if they become available during the

commitment period.211 According to Portfolio magazine, Countrywide charged .5 point

for a float-down.212

Senator Christopher Dodd, like many other Countrywide VIPs, received floatdowns on his two Countrywide mortgages.213 According to a former Countrywide

employee, Dodd’s float-downs were free.214

Stephen Brandt was instructed by Mozilo to “knock [the] socks off” of borrower

and former Secretary of Health and Human Services Donna Shalala with “great

service.”215 Among the perks given to Shalala were .25 point float downs on each of the

two loans she was arranging with Countrywide.216

211 HSH Associates Financial Publishers, “What To Do When Mortgage Rates Are Rising,” copyrighted

2005-06 (available at http://library.hsh.com/read_article-hsh.asp?row_id=23) (last checked Mar. 10, 2009).

212 Daniel Golden, Countrywide’s Many Friends, CONDE NAST PORTFOLIO, Jun. 12, 2008.

213 “Review of the Terms and Conditions of Certain Residential Mortgage Loans,” CROSSCHECK

COMPLIANCE, produced at the request of Dodd’s lawyers at Perkins Coie LLP, July 22, 2008 (available at

http://blogs.courant.com/on_background/Dodd%27s%20Independent%20Review%20Report.pdf) (last

checked Mar. 10, 2009).

214 Daniel Golden, Countrywide’s Many Friends, CONDE NAST PORTFOLIO, Jun. 12, 2008.

215 E-mail from Stephen Brandt to Maritza Cruz (Aug. 20, 2002) (Countrywide_000006).

216 E-mail from Maritza Cruz to Robert Feinberg (Sep. 21, 2002) (Countrywide_000007).
- 44 -

G. Ignore the Rules

Some VIPs who bought or refinanced second homes were given the lower interest

rate associated with primary residences. Lenders consider financing vacation homes

more risky because borrowers are more likely to default on a vacation home mortgage

than on one for a primary residence.

Senator Kent Conrad, chairman of the Budget Committee, first arranged a

mortgage through Countrywide when Jim Johnson referred him to Mozilo in 2002.217 At

the time, Conrad was seeking financing for the purchase of a vacation home in Bethany

Beach, Delaware.218

According to Conrad, he “called (Mozilo). I said, ‘I’m buying this property.

Would you be interested in the mortgage?’, and he said, Yeah. Call these people and

we'll take a look.’”219 When Conrad refinanced the million-dollar loan in 2004, Mozilo

waived one point.220

Feinberg communicated with Geri Gaginis, Conrad’s executive assistant in the

Senator’s personal office, throughout the refinance process. After Gaginis informed

Conrad his rate had been locked in and his loan was in process, she informed Feinberg

the Senator was very appreciative.221

217 Julie Hirschfeld Davis, Sens. Dodd, Conrad Tied to Special Mortgage Deals, Associated Press, June 13,

2008.

218 Id.

219 Id.

220 E-mail exchange between Angelo Mozilo and Robert Feinberg (Mar. 15, 2004) (Countrywide_000021).

221 E-mail from Geri Gaginis to Robert Feinberg (Mar. 15, 2004) (Countrywide_000022).
- 45 -

Later in 2004, Conrad contacted Feinberg and inquired about refinancing an

eight-unit apartment building he and his brothers owned in Bismarck, North Dakota.222

Conrad had recently refinanced a loan for a property in Delaware through Countrywide

and he was given a one point discount.223 Feinberg was unsure how to handle the new

request given the fact the loan violated Countrywide’s policy of providing loans only for

buildings of four units or fewer.224 Feinberg contacted Mozilo and asked him to “Please

let me know how to proceed.”225

Mozilo instructed Feinberg to ask Countrywide Managing Director Dave Spector

to “make an exception due to the fact that the borrower is a senator.”226

222 E-mail from Robert Feinberg to Angelo Mozilo (Apr. 23, 2004) (Countrywide_000038).

223 E-mail from Robert Feinberg to Angelo Mozilo (Mar. 15, 2004) (Countrywide_000021); E-mail from

Angelo Mozilo to Robert Feinberg (Mar. 17, 2004) (Countrywide_000021).

224 E-mail from Robert Feinberg to Angelo Mozilo (Apr. 23, 2004) (Countrywide_000038).

225 Id.

226 E-mail from Angelo Mozilo to Robert Feinberg (Apr. 23, 2004) (Countrywide_000760).
- 46 -

VII. Mozilo’s Hands-On Approach

FINDING: Angelo Mozilo personally specified rates and fees for VIP

borrowers. When the terms of a VIP loan violated Countrywide

policy, Mozilo was notified and would personally authorize

overrides. Mozilo substituted his familiarity with and the

reputation of VIP borrowers for credit checks and reviews of debt

and assets. According to the documents, no VIP borrower was

ever given anything less than an “A-paper” loan.

When Countrywide’s VIP unit arranged loans for “Friends of Angelo,” Mozilo

often personally set the terms or approved an override of Countrywide policy to reduce a

borrower’s interest rate. Mozilo personally knew many of the borrowers processed

through the VIP program.

According to the documents, in addition to his personal involvement in Franklin

D. Raines’s refinancing, Mozilo personally authorized discounts and specified terms for

numerous other VIPs, including Ambassador Richard Holbrooke,227 former Sprint CEO

William Esrey,228 Senator Kent Conrad,229 and former Fannie Mae CEO Jim Johnson.230

A. “Per Angelo”

Angelo Mozilo personally specified terms for VIP loans. These terms differed

from those recommended by Countrywide’s loan officers, who were informed by internal

software applying Countrywide lending policies. While the VIP unit calculated terms

and processed loans for VIP customers, in many instances Mozilo superseded company

policy with special discounts and benefits.

For Ambassador Richard Holbrooke, Mozilo instructed Perry not to charge any

points despite the calculations made by Countrywide underwriter Gene Soda.231

Mozilo’s waiver of 1.25 points on Holbrooke’s $1.1 million dollar loan represented a

discount of $13,750.

227 E-mail from Angelo Mozilo to Robert Feinberg (Feb. 19, 2003) (Countrywide_1697).

228 E-mail from Kay Gerfen to Angelo Mozilo (June 26, 2002) (Countrywide_000836).

229 E-mail from Angelo Mozilo to Robert Feinberg (Apr. 23, 2004) (Countrywide_000760).

230 E-mail from Angelo Mozilo to Stephen Brandt (Mar. 13, 2003) (Countrywide_000829).

231 E-mail from Doug Perry to Arpine Tchoukadarian (Feb. 20, 2003) (Countrywide_000032).
- 47 -

In 1980, Holbrooke and Jim Johnson founded Public Strategies, a Washington

consulting firm that “gave advice to business clients, including investment banking

firms.”232 Public Strategies counted Fannie Mae as a client.233 Johnson referred several

borrowers to Countrywide’s VIP loan unit.234

For Kati Marton, a writer, reporter, former Chief of Outreach for the United

Nations, and wife of Richard Holbrooke, Mozilo personally approved several exceptions

to Countrywide policy to move the loan process forward. Specifically, the terms of her

loan exceeded the permissible loan-to-value ratio, involved an excessive amount of cash

out of the deal, and “excessive ratios.”235 The excessive ratios could be mitigated if

Marton furnished additional information related to income and employment, but Feinberg

first had to ask Mozilo “if you don’t want us to go after additional information since this

is an FOA [Friend of Angelo].”236

Feinberg was further notified by the processor previously handling Marton’s loan,

Maritza Cruz, that .625 points would be added to the loan if Mozilo did not provide a

memo authorizing waiver of the points.237 A memo from Mozilo was also required to

process a loan for Mamphela Ramphele, one of four managing directors of the World

Bank.238 Mozilo personally approved both loans and dictated the terms to Feinberg.239

B. “Speak With [Angelo] to Get a Better Deal”

When “Friends of Angelo” believed they were not getting loan terms from to

which they believed they were entitled, some asked the loan officer handling the deal to

232 Muolo and Padilla at 110.

233 Id.

234 See e.g., E-mail from Kay Gerfen to Doug Perry (May 21, 2003) (Countrywide_000008-09); E-mail

from Kay Gerfen to Robert Feinberg (Mar. 12, 2003) (Countrywide_001679).

235 E-mail from Robert Feinberg to Angelo Mozilo (Dec. 10, 2002) (Countrywide_000049).

236 Id.

237 Id.

238 Id., Feinberg noted a one point charge would be applied to her loan rate if it were processed by Gene

Soda in the consumer loan division.

239 E-mail from Robert Feinberg to Angelo Mozilo (Dec. 10, 2002) (confirming the details of the loans

previously approved by Mozilo for Marton and Ramphele) (Countrywide_000048).
- 48 -

consult Mozilo. In 2003, Robert Feinberg worked with Leon Burda, financial planner for

Ed McMahon, regarding a refinance of the entertainer’s mortgage. With a loan-to-value

ratio of 78 percent on the loan, Feinberg offered Burda a rate of 7.125 percent with no

points “with the customary FOA discounts.”240

Burda did not believe Feinberg was offering the best rate available to a “Friend of

Angelo.” According to Feinberg, Burda “does not like the rate we are offering him and

seems to think we can do better. This has been cut to the bare minimum and he insists I

speak with you to get a better deal.”241

Burda’s request to involve Mozilo paid off. Mozilo instructed Feinberg to “do it

at 6 7/8 at 75%.”242 Mozilo’s personal pricing meant McMahon received a one-quarter

point discount and a slightly-reduced loan amount in relation to the appraised value of his

home.

C. “She’s No Problem”

If Mozilo was familiar with a borrower, he gave the VIP loan department the

latitude to accommodate the borrower in whatever way he or she wanted. When Jerry

Weintraub referred his employee Susan Ekins to the VIP program, Feinberg worked with

her to come to terms on a refinance.243 Her request for a loan in excess of $1.6 million

exceeded the $650,000 maximum amount guidelines allowed.244 Feinberg contacted

Mozilo and asked him “how to proceed.”245

Mozilo, apparently familiar with Ekins and comfortable with her quality as a

borrower, told Feinberg to disregard the guidelines.246 He instructed Feinberg to “Do

whatever Susan wants. She’s no problem. Close the loan as soon as you can.”247

D. “Treating This as an A Paper Loan”

In 2004, a couple interested in a refinance was referred directly to Mozilo.248

Mozilo instructed the VIP department to “check them out and see how qualified they

are.”249 According to Perry, “it appear[ed] they are in a sub prime loan.”250

A subprime loan, also known as a “C-paper” loan, is used by lenders for

borrowers considered risky based on credit history or limited debt experience. Subprime

240 E-mail from Robert Feinberg to Angelo Mozilo (Apr. 22, 2003) (Countrywide_000353).

241 Id.

242 E-mail from Angelo Mozilo to Robert Feinberg (Apr. 22, 2003) (Countrywide_000819).

243 E-mail from Robert Feinberg to Angelo Mozilo (Aug. 6, 2003) (Countrywide_000389).

244 Id.

245 Id.

246 Id.

247 E-mail from Angelo Mozilo to Robert Feinberg (Aug. 8, 2003) (Countrywide_000389).

248 E-mail from Doug Perry to Angelo Mozilo (Feb. 3, 2004) (Countrywide_000212).

249 Id.

250 Id.
- 49 -

loans do not conform to Fannie Mae and Freddie Mac guidelines regarding the size of the

loan, debt-to-income ratio or income documentation provided.

In the case of the couple referred directly to him, Mozilo alerted his VIP

department that he would “decide how he wants to price it” as soon as the VIP officers

“know what they have.”251 However, prior to an evaluation of the borrowers’

creditworthiness, Mozilo ordered his loan officers to treat the loan “as an A paper

loan.”252

VIII. Borrower Awareness of VIP Status

FINDING: Countrywide VIP account executive Robert Feinberg testified it

was the practice of VIP loan officers to communicate to “Friends

of Angelo” they were receiving special pricing and preferential

treatment. Documents obtained by the Committee confirm this.

VIP borrowers were informed Angelo Mozilo personally priced

their loans and they relied on their status as “Friends of Angelo”

to guarantee preferential treatment for themselves and others.

Borrowers previously processed through the VIP department

expected discounts on subsequent refinances. In case a borrower

had any doubt about which department was processing a loan,

Countrywide loan officers attached business cards to loan

documents clearly indicating the officers processing the loan

worked in the VIP unit.

According to the documents, it was the practice of the VIP loan unit to make

borrowers aware they were being afforded preferential or VIP treatment. Borrowers in

the VIP program were made aware by loan officers they were processed through the VIP

department. Borrowers who had previous loans processed through the VIP department

expected discounts on subsequent refinances. At times, “Friends of Angelo” used their

preferred status to refer friends or family members to the VIP department. Sometimes

the “Friends of Angelo” expected their friends and family to receive the same preferential

treatment. Some borrowers informed loan officers they had been referred to

Countrywide by Mozilo prior to requesting rate quotes.

When Countrywide sent mortgage documents to a VIP borrower to review, they

included business cards clearly indicating the officers processing the loan worked in the

VIP unit.253

251 Id.

252 Id.

253 See, e.g., business card of Lucy Hidalgo (“Loan Specialist, VIP Employee Loan Unit”) (FDROGR_0291); business card of Maritza Cruz (“VIP Employee Loan Manager”) (FDR-OGR_0292); business

card of Arpy Tchoukadarian (“Underwriter II, VIP Employee Loan Unit”) (FDR-OGR_0292) [hereinafter

VIP Unit Business Cards].
- 50 -

A. “What Am I Getting Because I Know Angelo?”

Staff interviewed former Countrywide VIP/”Friends of Angelo” loan officer

Robert Feinberg.254 Feinberg was employed by Countrywide for 12 years, from 1996 to

2007.255 According to Feinberg, during a four and half year stretch of his tenure with the

company, over the years 2000 to 2004, he had responsibility for processing VIP loans.256

During this time period, according to Feinberg, he processed thousands of loans for VIPs

including those specifically referred by Countrywide’s Chief Executive Angelo

Mozilo.257 Feinberg told the staff it was the practice of Countrywide to communicate to

its VIP borrowers they were receiving preferential treatment.258 For those VIPs referred

by Mozilo, the “Friends of Angelo,” it was the practice of Countrywide’s VIP unit, to tell

the prospective borrowers, according to Feinberg, “your loan was specially priced by

Angelo.”259 Feinberg told the staff one of the primary purposes of the “Friends of

Angelo” program was to ingratiate Countrywide to politically influential people who

could help the company.260

In an interview with MSNBC, Feinberg explained it was “part of his job . . . to

hammer home to the VIP clients they were getting special deals.”261 According to

Feinberg, to notify borrowers they were processed by the VIP unit, loan officers “spoke

in a manner that was different than you spoke with a regular customer. ‘Your loan has

been specially priced by Angelo.’ ‘You're getting special discounts because you're in the

VIP loan department.’”262

Feinberg also described using “taglines” to alert borrowers their loan was

processed through the VIP department.263 He described the typical borrower response to

being informed which department was handling their loan:

And nine times out of ten, once you mention ‘VIP’ the person's

gonna ask you 'what am I getting for being in this VIP

department?’ Or ‘what am I getting because I know Angelo?’ Or

‘I talked to Angelo and he said I'm getting this.’264

The documents support Feinberg’s testimony. In one instance, VIP/Employee

Loan Manager Maritza Cruz informed a borrower she had been instructed to “give you

254 Telephonic Interview of Robert Feinberg, by H. Comm. on Oversight and Gov’t Reform Republican

staff, in Wash. D.C. (Dec. 22, 2008) [hereinafter Feinberg Interview].

255 Id.

256 Id.

257 Id.

258 Id.

259 Id.

260Id.

261 Lisa Myers and Amna Nawaz, Feds probe Countrywide’s ‘VIP’ program, NBC NEWS, Oct. 30, 2008.

262 Id.

263 Id.

264 Id.
- 51 -

the VIP treatment on your purchase transaction.”265 Cruz was ordered to take .5 point off

the borrower’s rate and to waive the processing fee.266 In another instance, Mozilo

ordered Feinberg to “call [a borrower] on my behalf and inform her of all the discounts

that I have given her.”267

When mortgage documents were sent from Countrywide to a borrower, account

executives involved in facilitating the loan attached contact information. Franklin D.

Raines’s discounted June loan documents were prepared by Lucy Hidalgo, a member of

Countrywide’s VIP loan unit. She attached her business card to the loan documents

provided to Raines, as did VIP Employee Loan Manager Maritza Cruz and VIP

Employee Loan Unit Underwriter Arpy Tchoukadarian.268 All three business cards show

the loan was processed by VIP loan unit personnel.269

265 E-mail from Maritza Cruz to Mike Taliaferro (Apr. 30, 2004) (Countrywide_000317-318).

266 E-mail from Maritza Cruz to Robert Feinberg (Apr. 30, 2004) (Countrywide_000320).

267 E-mail from Angelo Mozilo to Robert Feinberg (Mar. 26, 2003) (Countrywide_000902).

268 Business Card of Countrywide VIP Unit Officer Lucy Hidalgo (FDR-OGR_0291).

269 VIP Unit Business Cards.
- 52 -

Mortgage documents sent to Senator Christopher Dodd also included a business

card from an officer in the VIP loan unit. In Dodd’s case, the card was from Robert

Feinberg. According to a Connecticut reporter who viewed Dodd’s loan documents, a

“Countrywide document generated on April 23, 2003 had the business card of Robert

Feinberg, a senior account executive with Countrywide, Xeroxed to the page and another

page had: *VIP FOA* written on it.”270 While Senator Dodd made some loan documents

available for a limited period of time to the local Connecticut media in February 2009, he

has resisted calls to release the documents publicly.271

B. Mortgage Bankers Association Dir. of Legislative Affairs

Barbara Albrecht

Borrowers who had been processed by the VIP unit on previous occasions were

often aware of their status as VIPs and reminded loan officers of their status in

subsequent dealings.

In 2002, Mortgage Bankers Association (“MBA”) Director of Legislative Affairs

Barbara Albrecht contacted Robert Feinberg to discuss a refinance of her Countrywide

mortgage.272 The original mortgage had been negotiated through Countrywide’s VIP

program. She notified Feinberg that Countrywide waived fees on her previous refinance,

and she wanted to know what discounts were available on this refinance. According to

the documents, she e-mailed Feinberg:

We would like to refinance this loan for a loan amount of $260,000

with a 30 year fixed rate, with no points. I am an employee of the

270 Christine Stuart, US Senator Chris Dodd Releases Mortgage Docs,

http://www.ctnewsjunkie.com/general_news/us_senator_chris_dodd_releases.php (last visited Mar. 11,

2009).

271 Kevin Rennie, Why we Just Can’t Trust Dodd, HARTFORD COURANT, Feb. 8, 2009.

272 E-mail from Barbara Albrecht, Mortgage Bankers Association of America, to Robert Feinberg (Dec. 31,

2002) (Countrywide_000187-188).
- 53 -

Mortgage Bankers Association, and last year Countrywide waived

a few of the fees associated with the refi. I would like to know

what you would do in this regard for a new loan.273

The MBA is the national association representing the real estate finance

industry.274 From its Washington, D.C. headquarters, MBA advocates on behalf of

members in the real estate finance industry. 275 The MBA considers itself the “voice of

the real estate industry,” protecting the interests of members “by staying in close

communication with Congress, the Administration, state and local officials and

regulatory bodies, as well as the general public.”276

C. Chairman of K.B. Home Bruce Karatz and His Son

Matthew

Some borrowers were aware of their status as a “Friend of Angelo” and used it to

solicit preferential treatment from Countrywide for themselves and, in some cases, for

family members.

In 2002, Mike Casey, Regional Sales Manager for Countrywide, was contacted by

a representative from one of his “top customers,” K.B. Home.277 Los Angeles-based

K.B. is “one of the nation’s biggest builders.”278 Countrywide and K.B. Home partnered

to form Countrywide K.B. Home Loans, a joint venture allowing the builder to provide

complete mortgage services to customers.279

273 Id.

274 Mortgage Bankers Association website, http://www.mbaa.org/AboutMBA (last visited Mar. 10, 2009).

275 Id.

276 Id.

277 E-mail from Mike Casey to Maritza Cruz (Dec. 18, 2002) (Countrywide_000174).

278 Allan Lengel, K.B. Home Reports Grim Results, WASH. POST, Jan. 9, 2008.

279 Jonathan Stempel K.B. Home Venture Sued by Fired VP, REUTERS, Jan. 29, 2008 (Countrywide K.B.

was sued by a former employee in January 2008. According to the complaint filed in U.S. district court in

Houston, former executive Mark Zachary “alleged that Countrywide K.B. Home Loans approved

unqualified borrowers for loans so that K.B. Home could build more homes. In the complaint, Zachary

questioned Countrywide's practice of using for K.B. Home just one appraiser who was "strongly

encouraged" to inflate appraised values by up to 6 percent because "that was the way K.B. Home wanted

it." He also questioned what he called Countrywide's practice of converting loan applications that required

full documentation into "stated income" or "no income, no assets" applications, saying loan officers would

sometimes help borrowers submit applications with false income amounts, the complaint said. "It gives a

snapshot of the lending practices in the industry," said Philip Hilder, Zachary's lawyer.”).
- 54 -

According to Casey, Bruce Karatz,280 Chairman of K.B., was looking for someone

to originate a loan for his son, Matthew.281 Instead of providing financing through K.B.,

Karatz turned to Countrywide to avoid a “conflict of interest.”282 Casey noted “[Karatz]

runs a Fortune 500 company, and is an FOA, and I thought it would be appropriate to get

his son a little extra special treatment.”283

D. Jim Lehrer NewsHour Correspondent Margaret Warner

According to the documents, borrowers relied on their status as an “FOA” to get

preferential treatment. In the case of Margaret Warner, on-air correspondent for PBS’s

Jim Lehrer NewsHour, she was aware Mozilo himself had referred her loan to the VIP

department and she made sure to notify Feinberg.284 Warner and Feinberg had previously

discussed the terms of a loan, while Warner was also getting quotes from another

lender.285 After suspending or cancelling the loan process with Countrywide, she

returned to Feinberg to re-open discussion of the terms of a refinance. 286

280 E. Scott Reckard, Former K.B. Home chairman is indicted in alleged backdating scheme, LOS ANGELES

TIMES, Mar. 5, 2009 (On March 5, 2009, a federal grand jury indicted Karatz on charges that he

“engineered a scheme to defraud shareholders by awarding himself and other executives of the Los Angeles

home builder millions of dollars in undisclosed stock-based compensation. The 20-count indictment

alleged that Karatz backdated stock options over a seven-year period to days on which K.B.'s stock was

trading at low levels. That made them worth more to Karatz and others, according to the indictment -- a fact

it said should have been disclosed to other shareholders. The indictment accused Karatz of concealing the

practice from K.B.'s board of directors and compensation committee as well as from shareholders. It

alleged that when K.B. undertook an internal investigation into the stock-option grants in May 2006, Karatz

falsely denied his orchestration of the backdating scheme and caused a false report of K.B.'s options

practices to be submitted to the company's auditors, resulting in improper disclosures in filings with the

Securities and Exchange Commission).

281 E-mail from Mike Casey to Maritza Cruz (Dec. 18, 2002) (Countrywide_000174).

282 Id.

283 Id.

284 E-mail from Margaret Warner, PBS, to Robert Feinberg (Apr. 27, 2004) (Countrywide_000044).

285 Id.

286 Id.
- 55 -

In an e-mail, she told him, “You and I spoke 4-6 weeks ago about refinancing our

current Countrywide mortgage. I believe Angelo referred us to you.”287

Having informed Feinberg of her relationship with Mozilo, Warner then solicited

a quote for interest rate, points and closing cost combinations.288

287 Id.

288 Id. (Countrywide_000044-45).
- 56 -

IX. Relevant Ethics Considerations

Federal regulations, House and Senate rules, and the codes of conduct applicable

to directors and employees of Government-Sponsored Enterprises similarly hold that

acceptance of discounts on loans is impermissible in cases where the terms of the loan are

not widely available to the public or a large group of people.289

Members of Congress and certain staff are prohibited from accepting gifts from

registered lobbyists or private entities retained or employed by them.290 There is an

indication of an impermissible discount or loan when favorable loan terms are offered

specifically due to the employment situation or position of such an individual.291

Members of Congress and senior Congressional staff, employees of the Executive

Branch, and directors and officers of GSEs are obligated to disclose gifts of certain

values and relationships which may present a conflict of interest.292

A. Legislative Branch Ethics Rules

FINDING: Senators Dodd and Conrad received discounted loans from

Countrywide. By waiving fees and reducing rates, Countrywide

saved each Senator thousands of dollars. The loans made to the

Senators were processed by the Countrywide’s VIP loan program

and they were identified as “Friends of Angelo.”

The House approved new ethics rules (H.Res. 6, subsequently amended) on

January 5, 2007, the first day of the 110th Congress. The Senate combined similar ethics

rules changes for the Senate with lobbying and ethics reform legislation. The Honest

Leadership and Open Government Act of 2007 (“HLOGA”) was signed into law by

President Bush on September 14, 2007. The HLOGA amended the Ethics in Government

Act of 1978 (“EIGA”). The most notable change was a ban on accepting gifts from

lobbyists or their clients.293 Both the House and Senate rules were amended to prohibit

Members and staff from accepting gifts of any value from registered lobbyists or private

entities employing or retaining them, such as Countrywide.294

289 House Rule XXV, clause 5(a)(3)(R)(v); Senate Rule XXXV, clause 1(c)(19)(A); 5 C.F.R. 2635.204(a)-

(f); Freddie Mac Employee Code, Policy 3-202.

290 House Rule XXV, clause 5(a)(1)(A)(ii); Senate Rule XXXV, clause 1(a)(2)(B).

291 House Rule 25, clause 5(a)(3)(D); Senate Ethics Manual, S. Pub. 108-1 at 22.

292 Ethics in Government Act, 5 U.S.C. app. 4 § 101 et seq. (“EIGA”)

293 Charles Babington, Bush Signs Lobby Ethics Bill, ASS’D PRESS, Sept. 15, 2007.

294 House Rule XXV, clause 5(a)(1)(A)(ii); Senate Rule XXXV, clause 1(a)(2)(B).
- 57 -

1. Gift Rules

As it was under the rules previously in place, the current “default” rule in the

House and the Senate is that no gifts may be accepted by Members and staff from

outside, private sources unless specifically permitted by the rules of the respective body.

The House and Senate rules define the term “gift” broadly:

[A] gratuity, favor, discount, entertainment, hospitality, loan,

forbearance, or other item having monetary value.295

Several exceptions to the default rule exist. Members and staff may accept gifts

exceeding the gift limit if they are subject to one of 24 exceptions, 23 of which are shared

by both the House and the Senate. The most notable exception to the default rule allows

acceptance of gifts valued at less than $50 on an infrequent basis.296 Other exceptions

include allowing campaign contributions, gifts from family and genuine personal friends,

gifts from colleagues in Congress, gifts of informational materials, and honorary

degrees.297

2. Rules Regarding Loans

Loans offered at discounted rates are considered gifts for the purposes of the rules

of both the House and Senate and are prohibited in most cases. Both bodies prohibit

loans on terms not generally available to the public. In the House, a loan from a financial

institution must be “on terms generally available to the public” in order to be

acceptable.298 In the Senate, “opportunities and benefits which are available to the

public” or to a class consisting of all Federal employees are acceptable.299

3. Disclosure Requirements

Legislative Branch personnel must disclose certain gifts and relationships. The

drafters of the original Senate Code of Official Conduct, in the 95th Congress, considered

“full and complete public financial disclosure” to be “the heart of the code of conduct.”300

The EIGA, enacted in 1978, mandated annual financial disclosure by all senior

federal personnel, including all Members of Congress.301 All Members of Congress,

295 House Rule XXV, clause 5(a)(2)(A); Senate Rule XXXV, clause 1(b)(1).

296 House Rule XXV, clause 5(a)(1)(B)(i); Senate Rule XXXV, clause 1(a)(2)(A).

297 House Rule XXV, clause 5(a)(3)(A)-(W); Senate Rule XXXV, clause 1(c)(1)-(24).

298 House Rule XXV, clause 5(a)(3)(R)(v).

299 Senate Rule XXXV, clause 1(c)(19)(A).

300 Senate Ethics Manual at 124, citing Senate Code of Official Conduct, Report of the Special Committee

on Official Conduct, United States Senate, to accompany S. Res. 110, S. Rep. No. 95–49, 95th Cong., 1st

Sess. 3 (1977).

301 Pub. L. 95-521, 92 Stat. 1824 (Oct. 26, 1978). Legislative branch disclosure requirements were then

codified at 2 U.S.C. § 701 et seq.
- 58 -

senior congressional staff, candidates for federal elected office, presidential nominees and

certain appointed officials are required to file an annual financial disclosure statement.

The Ethics Reform Act of 1989 amended and condensed the different requirements for each

branch into one uniform title covering the entire federal government.302 According to Title

1 of the EIGA, Members of Congress and some senior staff must disclose gifts

aggregating more than $335 from a single source during the year.303 Gifts having a value

of $134 or less need not be reported or aggregated.304

Individuals subject to the disclosure requirements of the EIGA are exempted from

including mortgage obligations in their annual statements. Section 102(4) of the EIGA

requires disclosure of liabilities in excess of $10,000 owed to any creditor, with the

exception of mortgages “secured by real property which is a personal residence of the

reporting individual or his spouse.”305 Filers of a disclosure are not required to disclose a

mortgage on their personal residence, regardless of fair market value of the property or

amount due on the mortgage.306

4. Possible Ethics Rules Violations Revealed by the

Documents

According to the documents, two Senators appear to have violated Senate Ethics

Rules in place when they received preferential treatment through Countrywide’s VIP loan

program. Senate rules prohibiting accepting gifts valued over $50 and accepting loans on

terms not generally available to the public apply, and disclosure requirements are relevant

in each case. These rules, in effect today, also applied in 2003-04 when the Senators

received loans from Countrywide.

Senator Christopher Dodd refinanced two Countrywide mortgages in 2003: one

on a property in Washington, D.C, and one in Connecticut.307 Countrywide loan

processors originally priced each refinance at an interest rate of 4.875 percent.308

Mortgage information released by Dodd in February 2009 in response to a July 2008

request by the Senate Ethics Committee reveals the rate on the refinance of Dodd’s

Washington home was 4.25 percent, and the rate on the Connecticut home was 4.500

302 Pub. L. 101-194, 103 Stat. 1716 (Nov. 30, 1989), amended by Pub. L. 101-280, 104 Stat. 149 (May 4,

1990), and Pub. L. 102-90, 105 Stat. 447 (Aug. 14, 1991).

303 5 U.S.C. app. 4 § 101 et seq. (“EIGA”); 5 U.S.C. app. 4 § 102(a) (2).

304 Id.

305 5 U.S.C. app. 4 § 102(4).

306 Committee on Standards of Official Conduct Memorandum, “Rules Regarding Financial Disclosure of

Mortgages,” Dec. 30, 2008.

307 Dodd 2003 Refinancing Information,

http://blogs.courant.com/on_background/Dodd%20Morgage%20Details.pdf (last visited Mar. 11, 2009)

[hereinafter Dodd documents].

308 Countrywide Contact Management Software for Borrower Christopher Dodd (Wash., D.C. property)

(handwritten note by loan processor specifying a rate of 4.875 percent and other terms for two loan options,

one with and one without a $100,000 cash-out) (Countrywide_001736); Countrywide Contact Management

Software for Borrower Christopher Dodd (Middlesex, CT property) (handwritten note by loan processor

specifying a rate of 4.875 percent) (Countrywide_001737).
- 59 -

percent. The waiver of three-eighths of a point on the first loan saved Dodd $1897.50,

and the waiver of one-fourth of a point on the second saved him $687.60.309

Senator Kent Conrad arranged a $1.07 million refinance in 2004 for a mortgage

on a vacation home in Bethany Beach, Delaware. According to Countrywide VIP

Account Executive Robert Feinberg, Countrywide policy applied a rate of 4.875 percent

and a one point charge for a loan with Conrad’s characteristics.310 Countrywide Chief

Executive Angelo Mozilo ordered Feinberg to “take off 1 point,” saving Conrad

$10,700.311 In 2004, Conrad contacted Feinberg to discuss refinancing an eight-unit

apartment building he owned in North Dakota.312 Countrywide policy was to make loans

for buildings of four units or fewer, so Feinberg contacted Mozilo and asked for

guidance.313 Mozilo instructed Feinberg to ask Managing Director Dave Spector to

“make an exception due to the fact that the borrower is a senator.”314 Spector told

Feinberg to proceed with the loan.315

In 2003-04, Senate rules regarding acceptance of gifts from entities employing

lobbyists were less restrictive.316 Senate rules have since been amended to prohibit a

Senator from accepting any gift from an entity employing lobbyists, such as

Countrywide.317

Neither Senator disclosed these discounts in required statements filed with the

Senate Office of Government Ethics.318 These rules and requirements were in effect in

2003-04, when the discounts were applied, and they remain in effect under current Senate

rules.

309 Loan customers pay 1 percent of the loan amount for every point deducted from their interest rate.

According to Dodd’s 2003 Refinancing Information documents, Dodd’s Wash., D.C. property loan amount

was $506,000 (three-eighths of one percent of that amount is $1897.50). The loan amount for Dodd’s

Connecticut property was $275,042 (one-fourth of one percent of that amount is $687.50).

310 E-mail from Robert Feinberg to Angelo Mozilo (Mar. 15, 2004) (Countrywide_000021).

311 E-mail from Angelo Mozilo to Robert Feinberg (Mar. 17, 2004) (Countrywide_000021). Reducing his

rate by one point would have cost Conrad one percent of the total loan value (one percent of $1.7 million is

$10,700).

312 E-mail from Robert Feinberg to Angelo Mozilo (Apr. 23, 2004) (Countrywide_001657).

313 Id.

314 E-mail from Angelo Mozilo to Robert Feinberg (Apr. 23, 2004) (Countrywide_000760).

315 E-mail from David Spector to Robert Feinberg (Apr. 28, 2004) (Countrywide_001656).

316 See, Lobbying Disclosure Act of 1995, Pub. L. No. 104-65, 109 Stat. 691 (1995) (codified as

amended at 2 U.S.C.A. §§ 1601 to 1612 and 22 U.S.C.A. §§ 611, 621); Lobbying Disclosure Technical

Amendments Act of 1998, Pub. L. No. 105-166, 112 Stat. 38 (1998).

317 Senate Rule XXXV, clause 1(a)(2)(B).

318 Senate Financial Disclosure Reports, http://projects.washingtonpost.com/congress/disclosure-reports/

(last visited Mar. 11, 2009).
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B. Executive Branch Ethics Rules

The default rule for employees of the Executive Branch is that no gift may be

accepted from an outside source unless the gift is (1) unsolicited,319 (2) not offered under

circumstances that might be construed by reasonable persons as influencing the

performance of their governmental duties,320 (3) not cash or a cash equivalent,321 (4)

valued at $20 or less,322 and (5) valued at $50 or less when aggregated with other gifts

from the same source in a calendar year.323

Federal regulations applicable to Executive Branch employees classify a loan at a

discounted rate as a gift. The Code of Federal Regulations defines the term “gift” as “any

gratuity, favor, discount, entertainment, hospitality, loan or other item having monetary

value.”324

Executive Branch officials are prohibited from soliciting gifts from persons

“seeking official action from, doing business with, or ... conducting activities regulated

by the individual’s employing entity” or from persons whose interests may be

“substantially affected” by the performance of the officials’ duties.325 Exceptions to

these restrictions allow employees of the Executive Branch to accept (1) any gift for

which the employee pays market value (or does not use and promptly returns), and (2)

discounts and similar benefits that are not directly related to government employment.326

Executive Branch employees who earn above a statutorily-established salary

threshold are required by federal law to report on their financial disclosure forms any

gifts from a single source valued over $335.327 The disclosure report must contain the

identity of the source, a brief description, and the value of all gifts aggregating more than

$335 in value received by the filer during the reporting period from any one source.328

319 5 C.F.R. 2635.204(d).

320 5 U.S.C. 7353 (b)(2)(B).

321 5 C.F.R. 2635.204(a).

322 Id.

323 Id.

324 5 C.F.R. § 2635.203 – 205.

325 5 U.S.C. §7353.

326 5 C.F.R. 2635.204(a)-(f).

327 5 C.F.R. § 2634.304(a).

328 Id.
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C. Government-Sponsored Enterprises (GSEs) Ethics

Rules

To provide guidance in recognizing and dealing with ethical issues, the GSEs

adopted codes of conduct. In addition to those requirements imposed on employees and

officers of GSEs, additional ethical requirements apply to directors of GSEs. While no

code can anticipate every ethical situation that may arise, the codes used by Fannie Mae

and Freddie Mac explicitly address gifts.

1. Fannie Mae Codes of Conduct

The Fannie Mae Code of Conduct for Employees (“Fannie Code”) notifies

employees of the existence of restrictions regarding giving or receiving gifts or other

items of value.329 According to the Fannie Code, accepting inappropriate gifts is a

violation and may also be a criminal act.330 According to a Fannie Mae spokesman, the

Fannie Code “requires the disclosure of potential conflicts of interest and prohibits

acceptance of substantial gifts, including loans with preferential terms, from an

organization seeking to do business without prior review and approval by the

company.”331

The Fannie Mae Code of Conduct and Conflicts of Interest Policy for Members of

the Board of Directors (“Fannie Director Code”) instructs directors to avoid conflicts of

interest, noting that “As a Government-Sponsored Enterprise with a mission to expand

affordable housing, Fannie Mae . . . is committed to the highest standards of corporate

compliance and ethics.”332 The Fannie Director Code states:

Conflicts of interest . . . arise when a director, or a member of his or

her immediate family, receives improper personal benefits as a result

of his or her status as a director of the Corporation.333

The Fannie Director Code also prohibits directors from accepting gifts in certain

situations. According to the Code, Fannie Mae directors and their immediate family

cannot accept, offer or solicit gifts:

329 Fannie Mae Code of Conduct for Employees at 4,

http://www.fanniemae.com/aboutfm/pdf/codeofconduct.pdf;jsessionid=AIFI03NFMRQ5VJ2FECISFGQ

(last visited Mar. 10, 2009) [hereinafter Fannie Mae Employee Code].

330 Id.

331 Glenn R. Simpson and James R. Hagerty, Countrywide Friends Got Good Loans, WALL ST. J., June 7,

2008.

332 Fannie Mae Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors at

1, http://www.fanniemae.com/governance/pdf/codeofethics.pdf (last visited Mar. 11, 2009) [hereinafter

Fannie Mae Director Code].

333 Fannie Mae Director Code § A(1).
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In those instances where the gift is being made in order to influence

the director’s actions as a Corporation Board member, or where the

offer, solicitation or acceptance of such gift gives the appearance of

a conflict of interest.”334

Directors are obligated to disclose any relationships that may give rise to a

conflict of interest. At Fannie Mae, directors are obligated to exercise good faith by

disclosing information relating to conflicts or potential conflicts of interest. Directors

must excuse themselves from voting on any issue that could result in a conflict or the

appearance of self-dealing.335

2. Freddie Mac Codes of Conduct

Like Fannie Mae, Freddie Mac has separate codes of conduct applying to

directors and employees. The Freddie Mac Employee Code of Conduct (“Freddie Code”)

prohibits employees from soliciting gifts, accepting cash, accepting aggregate gifts in

excess of $100 in value from a single source in a calendar year, and accepting cash

equivalents such as gift cards and gift certificates in excess of $25 in value from a single

source in a calendar year.336

The Freddie Mac Director Code of Conduct (“Freddie Director Code”) applies

more broad restrictions on receiving outside benefits. Directors are to refuse “gifts,

favors, travel, entertainment, loans, discounts or other preferential treatment from an

outside source” in cases where accepting such benefits “appear[s] to represent an attempt

by the outside source to obtain favorable treatment in its business dealings with Freddie

Mac.”337 According to the Freddie Code:

Employees may not solicit or accept discount prices, more

favorable loan terms, loan guarantees, investment opportunities, or

any other similar treatment or benefits from any source that are

offered to them because of their status as Freddie Mac

employees.338

Gifts or discounts are acceptable by Freddie Mac personnel if they are offered to a

broad group. Freddie Mac employees may only accept discounts and more favorable

loan terms when the terms are offered to “a broad group of individuals in order to

334 Fannie Mae Director Code § A(4) (emphasis added).

335 Fannie Mae Director Code § A(2).

http://www.fanniemae.com/governance/codeofethics/index.jhtml?p=Corporate+Governance&s=Codes+of+

Conduct (last visited Mar. 10. 2009) [hereinafter Fannie Mae Director Code].

336 Freddie Mac Employee Code of Conduct, Policy 3-202,

http://www.freddiemac.com/governance/pdf/employee_code_conduct.pdf (last visited Mar. 10. 2009)

[hereinafter Freddie Mac Employee Code].

337 Freddie Mac Director Code of Conduct, Section V(C),

http://www.freddiemac.com/governance/pdf/director_code_conduct.pdf (last visited Mar. 10, 2009)

[hereinafter Freddie Mac Director Code].

338 Freddie Mac Employee Code, Policy 3-202 (emphasis added).
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encourage sales of a product or service to those individuals.”339 Freddie Mac employees

may not accept such benefits if the offer is or appears to be an attempt to obtain favorable

treatment in dealings with Freddie Mac.340

Freddie Mac directors are obligated to make disclosures and seek advice any time

such disclosures may be required. Additionally, directors are required to respond to an

annual Proxy Questionnaire to provide updates on the nature of various relationships.341

X. Conclusion

Countrywide CEO Angelo Mozilo organized a deliberate and calculated effort to

establish relationships with key participants in the GSE-reform debate by affording

decision-makers and other influential opinion leaders preferential mortgage loan terms.

This effort was successful.

His friends, who were known inside of Countrywide as “Friends of Angelo,” in

many instances returned the favor. In Congress, for example, legislation adverse to

Countrywide’s interests was blocked. At Fannie Mae, Chief Executive Franklin D.

Raines – a “Friend of Angelo” – adopted strategies that assisted the continued growth of

Countrywide.

Some of the people in Congress and at the GSEs who were in the best position to

diagnose and prevent a colossal failure of the mortgage industry were targeted by

Countrywide for special handling.

Members of Congress and leaders of GSEs are explicitly prohibited from

accepting gifts and discounts for precisely this reason. Effective oversight requires

objectivity, and forging a relationship with and accepting preferential treatment from a

major stakeholder in the outcome of a reform effort compromises objectivity.

The gift and disclosure rules applicable to Congress do not merely prohibit quid

pro quo exchanges of gifts in exchange for specific action. The rules prohibit accepting

any gifts to avoid the appearance of a quid pro quo expectation.

The rules are restrictive because the stakes are high. In this case, the health of the

American economy was at stake.

We now know the economy was not adequately protected by some of the very

people who could have made a difference – several influential “Friends of Angelo.”

339 Id. For example, an offer of discounted banking services or discount restaurant coupons to all Freddie

Mac employees at the same geographic location or to all tenants in an office building that is occupied in

part by Freddie Mac would be acceptable.

340 Id.

341 Freddie Mac Director Code, Section VII(A).