It has recently been revealed that Countrywide Mortgage had a special loan program for the so called “Friends of Angelo”. Angelo Mozilo was the CEO of countrywide and his group of friends included several politicians, two CEOs of Fannie Mae and a plethora of well connected individuals. Mozilo waived points and reduced the rates on mortgages for his group of “friends”. This is raising ethical questions and rightly so (from the WSJ):

The Countrywide Financial sweetheart loan scandal continues to grow, spreading to Senators and other Beltway potentates. We are about to find out if Congress’s passion for investigating business ethics extends to conflicts of interest and cash that involve fellow Members.

Take Senator Kent Conrad, the North Dakota Democrat whose office issued a Friday statement saying that “I never met Angelo Mozilo.” What he did not say then but admitted under later questioning by a Journal reporter is that, although he may not have had a face-to-face meeting with the Countrywide CEO, Mr. Conrad had called Mr. Mozilo and asked for a loan. The result was a discounted loan on his million-dollar beach house and a separate commercial loan of a type that residential lender Countrywide did not even offer to other customers, regardless of the rate.

Conrad is being cute when he says he never met Mozilo; surely speaking with him on the phone would qualify as “meeting” him. More disturbing though is the relationship Countrywide had with Fannie Mae:

In the week since the Journal revealed this program, the key questions have become clear: What did Countrywide CEO Angelo Mozilo receive – or think he would receive – in return for the friendly loans to politicians? And what did Mr. Mozilo get – or think he would get – in return for sweetheart loans to Fannie Mae CEOs Jim Johnson and Franklin Raines? Mr. Conrad says he called Mr. Mozilo at the suggestion of Mr. Johnson, a leading and long-time member of the Democratic Beltway establishment.

The relationship between Countrywide and Fannie Mae goes to the heart of the mortgage crisis. Fannie makes its money by borrowing vast sums at low rates (thanks to an implied taxpayer guarantee on its loans) and then using that cash to buy loans from mortgage originators like Countrywide. Fannie then holds the mortgages and earns interest on them, or pools them into securities for sale to investors.

Fannie has been buying more home loans from Countrywide than from anyone else. In its most recent 10-K report filed with the Securities and Exchange Commission in February, the company reports: “Our top customer, Countrywide Financial Corporation (through its subsidiaries), accounted for approximately 28% of our single-family business volume in 2007, compared with 26% in 2006.”

A Fannie spokesman tell us that “for competitive and proprietary reasons, we can’t provide information about the terms we agree to with specific lenders,” and adds, “We don’t have lender-specific performance data available.” Count us among the skeptics that Fannie hasn’t bothered to check how well Countrywide’s loans perform compared to those of other lenders vying to do business with the government-sponsored giant. But then again, we don’t know what terms Countrywide’s competitors offer on loans to Fannie CEOs.

Those wondering why Bank of America continues to move forward on its planned purchase of the controversial Countrywide might consider that BofA, despite its huge brand name and resources, has been able to capture only 4% of Fannie’s single-family business on its own. Clearly, there’s something about Angelo.

It matters if Fannie Mae favored Countrywide over other lenders because taxpayers have provided Fannie Mae(and Freddie Mac) an advantage over their competitors through the implicit taxpayer guarantee. In other words, if Fannie Mae bought a bunch of bum loans from Countrywide, we could be on the hook for the losses. This is exactly why we should get rid of these hybrid public/private organizations. Politicians in the boardroom is a recipe for trouble.

I don’t know what to think about the loans to Senators. They are citizens too and should be able to get a mortgage, but how do we police it so they don’t get preferential treatment? I don’t have an answer to that, but it would seem we need to find one.

This should also be a cautionary tale for all those hoping that a politician can “change” D.C. Politicians are human and as such are susceptible to the perks of office. Their party affiliation doesn’t seem to matter much if at all. Democrats and Republicans alike sought out Angelo for loans at preferential rates. And he provided them no doubt because he thought there was something to be gained. As long as government employees have the ability to deliver favors to people like Mozilo, we will have corruption (or at least the appearance of it). The key to reducing corruption is to limit the power of government. Simplify the tax code and politicians won’t be able to craft loopholes for campaign contributors. Reduce regulations and businesses will not be tempted to coerce regulators. It is simply impossible to have big, centralized government and low levels of corruption.

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