JPMorgan Chase & Co. (Chase) — the same company that up until earlier this year encouraged it’s own loan officers to fudge facts and figures on loan applications — announced today a voluntary loan modification program it says will help up to 400,000 homeowners over the next two years. Today’s announcement applies only to owner-occupied properties with mortgages owned by Chase, Washington Mutual (which Chase acquired a few weeks ago), or EMC (the loan-servicing company acquired in the takeover of Bear Stearns earlier this year).

Within the next 90 days, Chase, which just a few weeks ago accepted more than $20 Billion as a cash infusion from the U.S. government, will open regional counseling centers, hire additional loan counselors, introduce financing alternatives, reach out to borrowers to offer pre-qualified modifications, and commence a new process to independently review each of its loans.

Since early 2007, Chase claims to have helped about 250,000 families — with $40 billion in loans — avoid foreclosure, primarily by modifying their loans or payments.

Specifically, for Chase, WaMu and EMC customers, today’s announcement means Chase will:

1. Systematically review its entire mortgage portfolio to determine which homeowners are most likely to require help — and try to provide it before they are unable to make payments.
2. Proactively reach out to homeowners to offer pre-qualified modifications such as interest-rate reductions and/or principal forbearance. The pre-qualified offers will streamline the modification process and help homeowners understand that Chase is offering a specific option to make their monthly payment more affordable.
3. Establish nearly 25 regional counseling centers to provide face-to-face help in areas with high delinquency rates, building on the success of one- and two-day Hope Now reach-out days.
4. Add 300 more loan counselors — bringing the company’s combined total to more than 2,500 — so delinquent homeowners can work with the same counselor throughout the process, improving follow-through and success rates.
5. Create a separate and independent review process within the company to examine each mortgage before it is sent into the foreclosure process (in order to validate that each homeowner was offered appropriate modifications). In order to pull this off, Chase will hire 150 dedicated staffers.
6. Not add any more Chase-owned loans into its foreclosure process while enhancements are being implemented.
7. Disclose and explain in plain and simple terms the refinancing or modification alternatives for each kind of loan. Chase also will use in-language communications, including local publications, to more effectively reach homeowners.
8. Expand the range of financing alternatives offered to modify pay-option adjustable rate mortgages, including 30-year, fixed-rate loans with affordable payments, principal deferral and interest-only payments for 10 years. All the alternatives eliminate negative amortization.
9. Offer a substantial discount on — or donate 500 homes — to community groups or through non-profit or government programs designed to stabilize communities.
10. Use more flexible eligibility criteria on origination dates, loan-to-value ratios, rate floors and step-up features.

More than 765,000 homeowners received foreclosure notices during the 3rd quarter of 2008, the most since records began in January 2005, according RealtyTrac.

When you include Countrywide’s mandatory loss mitigation efforts, today’s announcement spells possible relief for some 800,000 Americans facing imminent foreclosure.

The criminal investigation covering allegations of real estate and mortgage fraud at Countrywide Home Loans now includes a serious focus on a sweetheart loan program for members of Congress and others that Flipping Frenzy first told you about back on the 16th of June:

Feds probe Countrywide’s ‘V.I.P.’ program
By Lisa Myers & Amna Nawaz, NBC News

The wide-ranging criminal investigation into wrongdoing at Countrywide - once the nation’s largest mortgage originator - now includes serious scrutiny of a loan program that provided special mortgage deals to the well-connected and powerful, including two U.S. senators.

NBC News has learned that Robert Feinberg - a former Countrywide loan officer who handled what were known as the “V.I.P.” mortgages - spent six hours last Thursday with a six-person team from the Justice Department. The team included prosecutors from the Public Integrity section, which handles investigations of possible public corruption.

“The Justice Department is making very serious inquiry into any possible wrongdoing that may involve (former Countrywide CEO) Anthony Mozilo, other Countrywide employees, Sen. Chris Dodd, Sen. Kent Conrad, (former Fannie Mae CEO) Franklin Raines or other public officials,” said Feinberg’s lawyer, Anthony Salvano. “Robert has always cooperated thoroughly with authorities and is strictly a witness in their investigation.”

‘Friends of Angelo’s’

Salvano said the prosecutors and FBI agents seemed focused on whether the preferential treatment given to V.I.P. costumers was part of an effort by Countrywide to buy influence - as well as on the conduct of each public official who received a mortgage from Countrywide.

Feinberg says that Countrywide’s clients in this program were known by a nickname.

“We called them F.O.A.’s,” Feinberg told NBC News, “which were Friends of Angelo’s.”

“Angelo” is Countrywide’s then-CEO, Angelo Mozilo, who once called an ordinary borrower’s plea for help on his mortgage payments, “disgusting.”

But Mozilo seemed to have a different attitude toward people of influence. In fact, Feinberg says part of his job was to hammer home to the V.I.P. clients that they were getting special deals.

“You spoke in a manner that was different than you spoke with a regular customer,” said Feinberg. “‘Your loan has been specially priced by Angelo.’ ‘You’re getting special discounts because you’re in the V.I.P. loan department.”

So what would a “Friend of Angelo” get that an average customer would not? According to Feinberg, the possible benefits ran the gamut.

“They got a discount on the interest rate,” said Feinberg. “They got discounts on their fees. They got a free floatdown option before closing.”

In one instance of a “Friends of Angelo” deal, Mozilo sent an e-mail to Feinberg ordering him to “Take off one point” on a loan to Sen. Conrad. That one point equaled a savings of $10,700 in fees.

Feinberg’s client list also runs the gamut. Among those benefitting from the VIP program were four former Cabinet members spanning Democratic and Republican administrations: Henry Cisneros, Richard Holbrooke, Alphonso Jackson, and Donna Shalala. Two former CEO’s of Fannie Mae, James Johnson and Franklin Raines, heads of the government-sponsored entity which bought Countrywide’s mortgages - also received VIP mortgages from Countrywide.

All have denied impropriety and declined to elaborate to NBC News. Some say they had no idea they were getting favorable rates or any sort of discount.

But Feinberg insists part of his job was to make clear to VIP’s they were receiving special treatment.

“There were many, many taglines we used to let them know their level of importance to make sure that they understand where they’re located,” said Feinberg. “And nine times out of ten, once you mention ‘V.I.P’ the person’s gonna ask you ‘what am i getting for being in this V.I.P department?’ Or ‘what am I getting because I know Angelo?’ Or ‘I talked to Angelo and he said I’m getting this.’”

Senator Conrad says he never asked for, expected, nor was aware of any special treatment from Countrywide, and only found out about the discount after it had been reported in the press. He released and posted to his website all his mortgage documents, and donated all the money he saved to Habitat for Humanity.

Senator Dodd says he thought the VIP program just meant better customer service, and that he received market terms that he could have received from other lenders. The senator said in a press conference on the matter that if anyone had suggested at the time that he was receiving some kind of financial benefit on the loans because of his position, he would have terminated the relationship immediately.

Both Conrad and Dodd say they never sought any favors, and are cooperating with the Senate Ethics Committee investigation.

Feinberg says he’s not aware of any discounts linked to favors, but he did see e-mails noting the potential value of the relationships to Countrywide’s political and business interests. The e-mails noted one particular client was “of importance to Countrywide.” Another encouraged a discount, noting “they are incredibly important to us.” Yet another asked that the loan officer, “make an exception” in Countrywide’s lending rules, “due to the fact that the borrower is a Senator.”

Daniel Golden investigated the program for Condé Nast’s Portfolio magazine.

“There was a great variety of people who got special deals,” said Golden. “Many of them were figures in Congress or government or business partners of Countrywide - all of whom were in a position to help Countrywide in one way or another.”

To Golden, the company’s intention was clear.

“The purpose for Countrywide was to ingratiate itself with the people in Washington who might be able to help the company down the road,” said Golden.

But was any of it illegal? Legal experts say prosecutors will be looking into whether Countrywide was trying to buy influence, and into whether public officials were taking improper gifts, or gifts they should have disclosed.

Back on the 12th of June, I posted this blog entry about the FBI and U.S. Attorney General’s disagreement over how to fight real estate and mortgage fraud, and that in respect to the severity of the problem, U.S. Attorney General Michael Mukasey stated the following:

[We] won’t create a national task force to combat mortgage fraud as the government did with corporate crime after Enron. This isn’t that kind of phenomenon.

Now comes word that U.S. Congressman John Conyers (pictured left), Chair of the House Judiciary Committee — along with two of his Committee’s Subcommittee Chairs — sent a letter today to both Mukasey and FBI Director William Mueller suggesting they are not doing nearly enough to deal with the real estate and mortgage fraud crisis. In the letter, which you can read in its entirety below, Conyers, Congressman Robert Scott, and Congresswoman Linda Sanchez, state “A national crisis requires a national response, and the department has yet to convince us that it did, and is doing, its part to adequately and promptly respond.” The letter also conveys awe over the fact that states attorneys general — not the U.S. Justice Department — have taken the lead on dealing with the problem, and demanded information on the amount of resources the FBI is devoting to its investigations.

Dear Mr. Attorney General and Director Mueller:

We write to request detailed information about the Department of Justice’s investigation of mortgage fraud. Given the central role of mortgage fraud in our Nation’s current economic crisis, we are concerned that the Department’s action on this issue has been unduly delayed and underfunded. Recent news reports have indicated that the Department and the Bureau have only recently begun to devote additional resources to the investigation of mortgage fraud and that even with these increased resources, the Bureau might not have sufficient resources to investigate mortgage fraud and is struggling to handle this financial crisis.

This is of particular concern in that, as early as 2004, FBI officials warned that mortgage fraud posed a looming threat. Notwithstanding these early warnings and Bureau requests for additional resources to combat the problem, the Department and the Office of Management and Budget (OMB) rebuffed the requests for additional agents to investigate mortgage fraud, in favor of an increased focus on counterterrorism.

We are struck by the fact that the state attorneys general - not the Department of Justice - have appeared to take the lead in addressing legal aspects associated with some of the major lenders, as illustrated by the recent settlement agreement between certain states and Bank of America to modify the subprime and adjustable-rate mortgages that Countrywide Financial serviced.

We further note that the Department seemed resistant to devoting its resources to this serious problem when, earlier this year, it declined to create a U.S. Task Force to investigate mortgage fraud. At that time, Mr. Attorney General, you likened the problem to “white-collar street crime.” In short, a national crisis requires a national response, and the Department has yet to convince us that it did, and is doing, its part to adequately and promptly respond. Our concern regarding this issue is also buttressed by the recent October 20, 2008 bipartisan letter that more than thirty Members of Congress sent to you, Mr. Attorney General, requesting that you open criminal investigations into potential financial crimes that contributed to our economic crisis, including mortgage fraud.

It is in the context of these foregoing concerns that we request that you respond to the following questions and document requests:

Questions

1. A recent New York Times article reported that “[the F.B.I. … has said that the [mortgage fraud] schemes it is investigating involve material misstatements, misrepresentations or omissions relied upon by an underwriter or lender to finance, purchase or insure a loan.” This description seems to focus primarily on fraud committed by the borrower in connection with loan applications. Absent is any reference to frauds committed by appraisers, loan officers, mortgage brokers, mortgage originators that sold these loans to the trusts (such as The Money Store and Ameriquest), and all the other entities involved in issuing loans and then marketing them to others. Please provide the guidelines (including the FBI memoranda that contain the definitions) that the FBI uses to describe what it considers “mortgage fraud,” and provide information as to how the FBI has prioritized and is prioritizing its investigations into the various types of fraud.
2. Reports suggest that the Bureau intends to double the number of agents working on financial crimes by reassigning several hundred agents.
1. Please provide information by an appropriate statistical measure as to the number of agents who have been assigned to mortgage fraud since 2004. (In addition, please provide information as to whether the agents assigned to “mortgage fraud” were exclusively assigned to that crime, or whether they were assigned more generally to “white collar” crime, of which mortgage fraud is simply one component.)
2. Please provide information as to any recent or intended reassignments of personnel to combat mortgage fraud, including the nature of the reassignments, and the sections from which these resources have been reassigned.
3. Please provide information as to the number of mortgage fraud investigations that have been opened/closed from 2004 to the present.
3. Why did state attorneys general take the lead in reaching the settlement with Bank of America? What role, if any, did the Department play?
4. What resources have been devoted to the FBI’s investigations into Freddie Mac, Fannie Mae, American International Group (AIG), and Lehman Brothers?

Document Requests

1. Please provide copies of all documents (including, but not limited to, e-mails) from 2003 to the present relating to the Bureau’s requests for additional resources to investigate mortgage fraud, including, but not limited to, budget requests within the Bureau, budget requests that the Bureau sent to the Department and OMB, and Department and OMB responses (including, but not limited to, e-mails) to the Bureau’s budget requests.
2. Please provide copies of all documents (including, but not limited to, e-mails), as well as materials and intelligence assessments used to brief the FBI Director, Deputy Director, and Assistant Directors regarding mortgage fraud for the years 2003 to the present.

We request that you provide the requested documentary materials and other information to us by Monday, November 10, 2008. Responses and any questions should be directed to the Judiciary Committee office, 2138 Rayburn House Office Building, Washington, DC 20515 (tel: 202-225-3951; fax: 202-225-7680). Thank you for your cooperation in this matter.

John Conyers, Jr.
Chairman

Robert “Bobby” C. Scott
Chairman
Subcommittee on Crime, Terrorism, and Homeland Security

Linda Sánchez
Chairwoman
Subcommittee on Commercial and Administrative Law

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Editor’s Note: The following Guest Commentary was written by Ray Mathoda, former Executive Vice President, Chief Administrative Officer of Indymac Bank — the last remaining national independent mortgage lender — until she resigned from her position during the summer of 2008. For more information on Ray Mathoda, please see her bio at the end of this post.
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I worked at Indymac Bank for a little over 4 years till July 2008 when — after the FDIC took management control of the Bank after a “run on the Bank” was triggered by Senator Schumer’s leaked WSJ letter — I resigned from my position as Chief Administrative Officer. My role had put me in charge of the “People” and “Expense/Cost” functions of the Company…but thankfully (I guess — given the massive blame game going on against anyone involved in the lending industry) I was not involved in any way with making loans.

Headquartered in Pasadena, my Indymac was a performance focused/driven but family friendly place which was discrimination free at the highest levels (certainly, no “discriminating” CEO would have ever hired me, given all the minority categories I fall into!). All that mattered at work was “output” (i.e., what you got done) not politics. In fact, my Indymac experience included more “head” and “heart” than I’d personally expected to find in Corporate America (where I’ve been walking Executive hallways at “Fortune 1000” companies for about 12 years since I graduated from college).

I do believe fraud was a key contributing factor to the housing bubble that we have realized too late was both national and huge, and also believe we must find and punish those that perpetrated it because personal accountability is critical to the stable/smooth go forward functioning of the market. However based on my own personal experience at Indymac I have a strong instinct that the government is focusing its limited resources in the wrong places, and working in bureaucratic and inefficient ways. In particular, I believe the government has an excessive focus and has over-allocated resources to search for fraud by management, but is not pursuing the most efficient ways (e.g., interviewing other managers) to quickly find/punish any such “bad managers”. On the other side, the effort to investigate/prosecute perpetrators of individual fraud (i.e., at the transaction level) is woefully under-resourced (See this article on mortgage fraud and note the FBI was only able to investigate 2.6% of the over 46,000 suspicious activity reports submitted in 2007: http://www.consumeraffairs.com/news04/2008/05/mortgage_fraud_fbi.html).

What makes me think this? Well, I can tell you I didn’t see anything that looked or felt like fraud around me at Indymac. I say this as a member of Indymac’s Executive Committee (comprised of roughly the top 25 managers at the company) since late 2006, prior to which I was the CEO’s Chief of Staff (in which role I attended most of his meetings and reviewed most of his emails and other communications).

You’d think as a key member of management, I would have been interviewed after the FDIC took control of Indymac. It certainly looks like they are investing significant resources in investigating Indymac. For example, during the 48 hours after the FDIC takeover of Indymac, millions of pieces of paper were taken from Indymac’s Corporate Offices for review/investigation. I walked into my office on July 12th, the day after the FDIC took over Indymac, to find my office (and my Assistant’s filing cabinets) stripped of every piece of paper I had accumulated over the course of my 4 years at Indymac (and I can tell you I am highly organized…so there was lots of it).

No one really explained what was being investigated or why…just that conducting a detailed investigation was “standard protocol”. Given I had a lot of exposure to top management’s activities in the years preceding the companies’ failure I thought I would try to help, so mentioned to one of the top FDIC managers that they were welcome to interview me as I had spent a lot of time with the CEO (who was no longer at the Bank as part of the government takeover) and had read a lot (perhaps even most) of his communications for roughly a 2 year period (from fall 2004 to fall 2006). He nodded, but nothing happened.

To cut a long story short, I decided shortly thereafter to resign from the company…as the “head” and “heart” of the company was gone and I just couldn’t sit and watch the FDIC create a massive loss by fire-selling the company’s assets into the worst market for mortgage assets in 80 years. Before departing the company about a week later (with no ‘golden parachute’ or severance, I should note), I repeated my offer one more time. To this day, no one from the FDIC or any other governmental organization has called me to take me up on my offer.

So my hypothesis — based on my own personal experience — is that people’s ire and the government’s dollars are misdirected in the fraud category. I believe it is unlikely there was widespread fraud at the top levels of the (recently or currently distressed) financial institutions…and that in fact mortgage fraud was largely perpetrated at lower levels within companies and by individuals outside the financial institutions who were independent.

As a result, I believe the government should speed up the blame game by interviewing all the executives (remaining and departed) at the various distressed financial institutions. This process would take weeks, not years….and would be more effective at identifying management fraud than reviewing millions if not billions of pieces of paper. Then shift the resources currently deployed to read/review the millions of pages collected from these companies largely over to investigating and prosecuting individual fraud.

Copyright 2008 Rayman Mathoda. The above commentary was originally published on October 22, 2008 on Intent.com, and is used here by permission.

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About the Author: Rayman Mathoda was Executive Vice President, Chief Administrative Officer of Indymac Bank — the last remaining national independent mortgage lender — until she resigned from her position during the summer of 2008. In that role, she was responsible for managing all labor and non labor expense related infrastructure and functions for Indymac including recruiting, compensation, and global outsourcing/ workforce management, corporate communication and culture, real estate and purchasing, as well as Corporate Information Technology (IT). Ms. Mathoda joined Indymac Bank in May 2004, leading Indymac Bank’s company-wide Business Process Outsourcing program. Prior to joining Indymac, Ray worked at McKinsey & Company, a global management consulting firm focusing on strategic issues and performance transformation programs at Fortune 500 companies. While at McKinsey, Ray focused on the high-tech/internet and healthcare industries and was a co-leader of the Firm’s west coast payor-provider practice. Ray graduated with an A.B. with honors from the Woodrow Wilson School of Public and International Affairs at Princeton University. While at Princeton, Ray focused on studying Developmental Economics and South Asian politics. She also has an M.B.A. in Marketing and Entrepreneurship from the Kellogg School of Business at Northwestern University.

According to the State Foreclosure Prevention Working Group — a group of state attorneys general and state banking regulators working together under the Conference of State Bank Supervisors to prevent home foreclosures — industry efforts and measures to keep homeowners out of foreclosure have slipped.

“Too many homeowners face foreclosure without receiving any meaningful assistance by their mortgage servicer,” the report concluded, “a reality that is growing worse rather than better, as the number of delinquent loans, prime and subprime, increases.”

The State Foreclosure Prevention Working Group issued its third Analysis of Subprime Mortgage Servicing Performance, based on data collected from subprime mortgage servicers for February through May 2008. The report — which was issued late-September prior to the U.S. government’s $700 Billion Troubled Asset Relief Program and to Countrywide’s mandatory loan modification program — revealed nearly eight out of ten seriously delinquent homeowners are not on track for any loan work-out or loss mitigation assistance that might enable them to avoid foreclosure, a higher percentage than the Group found in its April 2008 report.

The September report concluded: “While some progress has been made in preventing foreclosures, the empirical evidence is profoundly disappointing.”

Servicers appear to have reached the ‘low-hanging fruit’ of subprime loans facing interest rate resets, while not developing effective approaches to address the bulk of subprime loans which are in default before interest rate resets,” the report said. “Based on the rising number of delinquent prime loans and projected numbers of payment option ARM loans facing reset over the next two years, we fear that continued reactive approaches will lead to another wave of unnecessary and preventable foreclosures.”

The report says “the number of loans on track for a loan modification has declined precipitously” in recent months. “The mortgage industry’s failure to develop systematic approaches to prevent foreclosures has only spurred declines in property values and further increased expected losses on mortgage loan portfolios,” according to the state officials’ new report.

Major findings from the Analysis of Subprime Mortgage Servicing Performance report include:

1. Nearly eight out of ten seriously delinquent homeowners are not on track for any loss mitigation outcome. Previously, seven out of ten homeowners were not on track for any loss mitigation outcome. “This already disappointing ratio has become even worse, with 40,000 fewer loans in loss mitigation in May 2008 than in January 2008, the report said.
2. New efforts to prevent foreclosures are on the decline, despite a temporary increase in loan modifications through the 2nd Quarter of 2008. The number of homeowners working toward a loan modification has fallen to a level not seen since late in 2007. This 28% decline of loan modifications in process between January and May stands in stark contrast to the 51% increase in loan modifications closed over this same period. This declining trend of new loans in process suggests that current loan modification approaches have been tailored to a limited group of homeowners. Instead of expanding loan modification options to reach a broader set of homeowners, more loss mitigation is being directed to selling homes short of foreclosure. In January, modifications in process outnumbered short sales in process by four to one; in May, that ratio had dropped to two to one.
3. One out of five loan modifications made in the past year is currently delinquent. The high number of previously-modified loans currently delinquent indicates that a significant number of modifications offered to homeowners has not been sustainable. Recent reports identify that many loan modifications are not providing any monthly payment relief to struggling homeowners. “We are concerned that unrealistic or ‘band-aid’ modifications have only exacerbated and prolonged the current foreclosure crisis, the report said.
4. 300,000 subprime loans were in the process of foreclosure as of the end of May 2008. Thirty-eight percent (38%) of seriously delinquent subprime loans are in the process of foreclosure, with over 131,000 foreclosures completed on subprime loans in May 2008 alone.

Since October 2007, the State Foreclosure Prevention Working Group has been collecting data from the largest subprime mortgage servicers, with 13 of the largest 20 servicers participating, representing approximately 60% of subprime mortgage loans serviced. The Group includes representatives of the Attorneys General of 11 states (Arizona, California, Colorado, Iowa, Illinois, Massachusetts, Michigan, New York, North Carolina, Ohio and Texas), two state banking departments (New York and North Carolina), and the Conference of State Bank Supervisors.

The former operators of an elegant Victorian-style bed & breakfast in northwestern Vermont have been indicted for mortgage fraud. Benjamin Osmanson, 29, of Sarita, Texas, and Jillian Protzman, 26, of Essex, Vermont, stand accused by the Office of the U.S. Attorney for the District of Vermont of obtaining more than $26,000,000.00 in fraudulent loans for the purchase of approximately 50 properties in California, Florida, Kentucky, and Vermont. According to the U.S. Attorney’s Office, Osmanson and Protzman owned The Historic Highgate Manor Inn (pictured above), located about 40 miles north of Burlington, VT, and 60 miles south of Montreal, Canada.

On Thursday, October 2, 2008, a federal grand jury in Burlington returned an eleven-count indictment charging Osmanson and Protzman with, among other offenses, conspiracy to commit wire fraud and money laundering. Benjamin Osmanson was arrested on 10/1/08 in Texas, while Jillian Protzman surrendered to the FBI in Burlington a week earlier.

The indictment alleges that from at least as early as January 2006 through at least April 2007, Osmanson and Protzman orchestrated the purchase of at least 50 properties in Vermont, California, Kentucky, and Florida in the names of at least 10 investors, obtaining more than $26,000,000.00 in loans to support the purchases. In Collier County, Florida alone, the pair is accused of obtaining more than 20 different residential properties.

According to the court documents, Ben Osmanson recruited friends, family members, and acquaintances to invest in real estate. Osmanson and Jillian Protzman then submitted fraudulent loan applications in the names of the investors to obtain fully-financed mortgage loans. The indictment states that Osmanson, Protzman, and others sought loans from multiple lenders and closed the loans for each investor within a short period of time in order to preserve the appearance of the investor’s good credit until the transactions were complete.

The indictment further alleges that Osmanson and Protzman enriched themselves with rebates, fees, and commissions connected to the fraudulent property purchases, and continued to recruit investors and submit applications for new loans even after the loans to the initial investors began to fail.

Relatively speaking, Vermont is far removed from the rest of the nation when it comes to real estate and mortgage fraud and foreclosure rescue scams. According to the latest U.S. Foreclosure Market Report™ published by RealtyTrac, Vermont continues to document the nation’s second lowest state foreclosure rate, with only one in every 17,198 households receiving a foreclosure filing in August.

Osmanson and Protzman, whose trial date has not been determined as of yet, face maximum possible terms of five years on the conspiracy count, 30 years on each count of wire fraud, and 10 years for each count of money laundering. However, as astute Flipping Frenzy readers know, the actual sentence in the event of a conviction will be determined in accordance with the federal sentencing guidelines.

The U.S. Attorney’s Office for the Eastern District of Michigan has finally created a multiagency task force to deal with real estate and mortgage fraud in eastern Michigan. As mortgage fraud continues to have significant consequences that affect the housing market, law enforcement in Michigan has decided now is the time to formally step up its commitment to fighting what for the last three years has been the fastest-growing white collar crime in America.

Participating agencies and financial institutions include:

• Bank of America
• Federal Bureau of Investigation (FBI)
• Federal Deposit Insurance Corp. – Inspector General Office
• Flagstar Bank
• Internal Revenue Service
• JP Morgan Chase Bank
• Oakland County Register of Deeds
• Small Business Administration- Office of Inspector General
• State of Michigan Attorney General’s Office
• State of Michigan Office of Financial Regulation
• U.S. Department of Agriculture- Office of Inspector General
• U.S. Dept. of Housing & Urban Dev. – Office Inspector General
• U.S. Trustee Program
• United States Postal Inspection Service
• Washtenaw County Clerk/Register of Deeds
• Wayne County Register of Deeds – Deed Fraud Unit
• Wayne County Sheriff’s Department
• Wayne County Prosecuting Attorney

The acting U.S. Attorney for the District, Terrence Berg, issued a press release stating:

“I want to commend the leadership of the FBI in Detroit for taking the initiative on this project, and also recognize the participation of our private sector partners. I am very encouraged by the commitment of the Task Force members.“

Rather than congratulating themselves for the task force’s formation, as Berg does above, perhaps the U.S. Attorney’s office for the Eastern District of Michigan — along with the other agencies and the banks involved in this new effort — should apologize to the residents of Michigan for taking this long to act in a coordinated way.

As Flipping Frenzy has relentlessly reported over the years, Michigan’s real estate and mortgage fraud woes are legendary. In August of this year, the Mortgage Asset Research Institute (MARI) reported Michigan ranked 3rd in the nation for loans containing alleged fraud or serious material misrepresentation (and just in case you’re wondering, MARI ranked the state #12 in 2001, #8 in 2003, and #5 in 2004). For its part, the FBI’s most recent index of the worst states for mortgage fraud puts Michigan in the slot: #3.

Recognizing that roughly 90% of all reported real estate and mortgage fraud losses involve collaboration or collusion by real estate industry insiders, the Mulit-Agency Mortgage Fraud Task Force will concentrate their efforts on fraud for profit, which everyone knows by now involves the skimming of equity, falsely inflating the value of the property through false appraisals, and the issuance of loans on fictitious properties.

To report real estate and mortgage fraud in Detroit or anywhere in Michigan, Flipping Frenzy readers can call the Detroit Metro Mortgage Fraud Hotline at (313) 237-4530, or contact the Wayne County Register of Deeds’ Deed Fraud Hotline at (313) 224-5869.

For Flipping Frenzy readers interested in diving a little deeper into the role mortgage-backed securities played in the current credit crunch, take a look at this short video about Collateralized Debt Obligations (CDOs):

For the uninitiated, CDOs are an unregulated type of asset-backed security and structured credit product. Some news and media commentary blame our current financial woes on the complexity of CDO products and the failure of risk and recovery models used by credit rating agencies to value these products. Between 2003 and 2006, new issues of CDOs backed by asset-backed and mortgage-backed securities had increasing exposure to subprime mortgage bonds. As delinquencies and defaults on subprime mortgages occur as a result of real estate fraud, mortgage fraud or predatory lending, CDOs backed by subprime collateral experience severe rating downgrades and possibly future losses.

If you weren’t up late last night to catch it, Nightline — ABC’s nationally televised late-night news program — featured a segment that included an interview with a former Washington Mutual (WaMu) senior risk manager who says company executives ignored significant warnings about real estate and mortgage fraud and encouraged reckless lending:

Exclusive: WaMu Insiders Claim Execs Ignored Warnings, Encouraged Reckless Lending Ex-Washington Mutual Risk Manager: Execs ‘Took the Brakes Off and Drove Over a Cliff’

By PIERRE THOMAS and LAUREN PEARLE
Oct. 13, 2008—

With Americans reeling from a global financial crisis, dozens of former Washington Mutual insiders have come forward to expose what they claim were calamitous executive decisions that led to the biggest bank failure in U.S. history.

These former WaMu employees, 89 of them who worked throughout the company and around the country, described a bank eager to profit from a housing boom and lending frenzy that seemed to have contributed to the credit crunch and housing bust now plaguing the economy. Some of them spoke to ABC News, all of them are confidential witnesses in a recently filed shareholder class action lawsuit against WaMu.

In court documents, the insiders said the company’s risk managers, the “gatekeepers” who were supposed to protect the bank from taking undue risks, were ignored, marginalized and in some cases, fired. At the same time, some of the bank’s lenders and underwriters who sold mortgages directly to home owners said they felt pressure to sell as many loans as possible and push risky but lucrative loans onto all borrowers, according to insiders who spoke to ABC News.

And this is “only the tip of the iceberg,”a former high-level executive claimed in the lawsuit.

A company representative told ABC News that Washington Mutual Inc. would not comment for this story.

Former Risk Manager: WaMu ‘Took the Brakes Off the Car’

Dale George, a former WaMu senior risk manager who spoke exclusively to ABC News, explained that risk managers are like the brakes on a car. WaMu executives “took the brakes off and drove over a cliff,” he said.

George described how he said senior management willfully ignored warnings from its own “gatekeeper,” the bank’s risk management group. He and other company insiders claimed that risk managers were brushed aside while the business units adopted a strategy of dangerous and reckless lending that eventually took down the company.

George, an MBA with three decades of experience in banking and risk management, said that the WaMu he joined in 2003, “was all about good old-fashioned banking.” He described a company with a rigorous risk management program and sensible loan production. It was a bank he said he was proud to work at.

But as the housing bubble swelled and high-risk mortgage lending became more lucrative, the bank changed, according to George. WaMu began approving as many loans as it could. “Everything was refocused on loan volume, loan volume, loan volume,” he told ABC News.

And to further boost profit, WaMu increased its share of higher-risk subprime and option adjustable rate loans, known as “option arms,” said George. These loans offer low introductory rates and let borrowers defer interest payments, but can strap them with significantly higher interest rates and payments in the future.

George said WaMu was competing with subprime giant Countrywide, which also imploded. “They were in a neck-and-neck race.” and “both went off the cliff together, one after the other,” he said. This high-risk, high-return game turned a century-old traditional bank that made steady but modest returns into “just an arm of Wall Street,” said George.

WaMu executives knew of these risks but chose to ignore them, according to statements by former WaMu insiders cited in the lawsuit. In a September 2005 confidential “Corporate Risk Oversight Report” obtained exclusively by ABC News, WaMu’s own risk management team found that the future performance of popular loans like Option Arms was “untested” and created “major and growing risk factors in our portfolio.”

This document shows that the top WaMu executives “were on notice that their own risk management systems had no ability to even measure, let alone control, the extraordinary risks that they were taking,” according to Chad Johnson from Bernstein Litowitz Berger & Grossmann LLP, attorneys for the plaintiff shareholders.

But rather than heeding this warning, George said risk managers were told to “lay off.” In an October 31, 2005 e-mail also obtained by ABC News, one WaMu executive told risk managers about a “cultural change” at the bank, and urged them to “lead the charge in modifying the perception of compliance and risk oversight from a regulatory burden to a competitive advantage.”

George said this had a chilling effect: It told risk managers that they “could not raise meaningful issues” and “really had to sweep negative findings under the carpet.”

George told ABC News that he refused to sweep away his findings. He claimed “there were a number of instances where I was pressured to fix a certain rating or upgrade the rating.”

In one case, he said he refused to improve the risk rating on a $50 million commercial loan, an improvement that would have allowed the bank to significantly increase the loan. For that, he said he was taken off the project, reprimanded by senior management, and eventually fired when he raised his concerns to top executives. WaMu denied any wrongdoing and said the firing wasn’t retaliatory.

To those wondering why no one saw the risks, George responded: “We did. … WaMu had all these great, experienced risk managers around. But they were ignored.”

Pressure to ‘Sell, Sell, Sell,’ Said Former WaMu Lenders

With no gatekeeper, former WaMu lenders and underwriters described the companywide loan approval process as “very scary.” They claimed there was an “abandonment of basic tenants of underwriting and risk” and said loans were made to anyone, because “once you get paid, you don’t care what happens,” according to legal documents. “It was all about sell, sell, sell,” according to a former WaMu lender identified only as Confidential Witness 7.

Dorothea Larkin, a former WaMu senior underwriter, told ABC News that she was uncomfortable with what she said were loose lending standards. “It was all about making the numbers, closing all the loans that came through the door,” she said — loans like higher risk option arms and subprime.

WaMu’s underwriters were told not to question whether or not a home loan should have been approved, but just to ensure certain lending procedures were followed, according to Larkin. She called this hands-off underwriting approach “unusual.”

Larkin described a bank eager to loan money at any long-term cost. For example, she said WaMu lent millions to a borrower even after he defaulted on a multimillion dollar home construction project. “We just kept giving him money,” she said, “and I’m sure that’s one of the foreclosures WaMu is still sitting on.”

Larkin blamed senior management, and like George, claimed that she and many others saw it coming.

“The executives are the ones who made the decision to take WaMu in this direction,” she said. “Too many of the middle folks like myself said this is wrong, we’re making loans we shouldn’t be making, we’re qualifying borrowers who we know are going to struggle to pay the loan back.”

Undated internal documents obtained by the shareholders’ lawyers suggest that to increase profits, WaMu pushed risky loans on just about anyone, even borrowers likely to default.

In a WaMu Option Arm presentation titled “Washington Mutual Option ARM: At last a mortgage that puts your clients in control of their monthly payments,” the company described the “Arm Borrower” as being “All Ages,” “Any Social Status,” and “All Economic Levels.” Johnson said this shows a bank “trying to shove this extraordinarily risky mortgage on everyone out there.”

Investors Lose All, Accuse Company of Lying

While just a year ago, WaMu stock traded at about $36 a share, it’s now essentially worthless. Angry investors now taking WaMu to court claim they were lied to.

“WaMu was saying, consistently, up to the end, that they were conservative, prudent, rigorous,” said Johnson. But in reality “it was run in a way that was irresponsible, reckless, dangerous,” he contended.

The bulk of WaMu investors are pension funds, “funds that were looking out for firemen, for teachers, for nurses, for policemen alike,” claimed Johnson.

People like Tedda and Benjamin Hughes, a San Francisco couple who invested almost their entire savings, $27,000, into WaMu stock because they said they really liked the bank and thought it was a safe long-term investment.

Tedda, a stay-at-home mother, and her husband, Benjamin, a teacher earning $55,000 a year, said they now must skimp on everything. “If there was a corner that can be cut, we do it. We’re driving a thousand-dollar car, we rent this place. … I clean with vinegar instead of getting a fancy product,” she told ABC News.

The Hugheses said it took a long time to save that money, and that “it’s absolutely horrifying to go from something to really nothing. .. then have to start all over, change all of your plans, your entire life.”

And they said it shouldn’t have happened. Tedda told ABC News that she did her research by diligently reading research and investor reports and checked the stock price daily. She said that up until the end, even hours before the bank collapsed, WaMu’s investment division kept assuring shareholders that they had more than enough money to weather the storm.

“We understood that there was a risk,” she said, “but we didn’t think that the company was just going to go under.”

“It felt like robbery. It felt like a violation,” said Tedda.

The Hugheses said they’re scared and angry, anger amplified by the fact that WaMu executives got to keep their millions, paid out in salaries and bonuses, while they lost everything.

ABC News’ Arash Ghadishah and Beth Tribolet contributed to this report.

Copyright © 2008 ABC News Internet Ventures

I wonder how long it will take for former insiders from other large financial institutions to come forward and tell us what we’ve all suspected for so long!

The U.S. Attorney for the Eastern District of California announced last Friday morning that a federal grand jury returned an indictment charging Derek Davis — aka Terry McCullough, 62 — of Sacramento, California, and Dino Rosetti, 39 (pictured left), of Roseville, California, with mail fraud and making false statements in loan documents. Davis was separately charged with attempting to cause a financial institution to fail to file a currency transaction report, and Rosetti was separately charged with engaging in a monetary transaction in criminally derived property in an amount greater than $10,000.

Dino Rosetti (pictured above) was arrested last Friday morning by federal agents. Derek Davis was previously arrested on a criminal complaint and is in custody. Both were arraigned on the indictment at 2:00 p.m. Friday afternoon before United States Magistrate Judge Kimberly J. Mueller in Sacramento.

The Davis/Rosetti indictment is the product of an extensive investigation conducted by the FBI, the IRS-Criminal Investigation, the California Department of Real Estate, and the El Dorado County District Attorney’s Office.

According to Assistant United States Attorney Courtney J. Linn, who is prosecuting the case, the indictment charges that from June 2005 through December 2006, Derek Davis and Dino Rosetti engaged in a scheme to defraud mortgage lenders in connection with residential real estate purchases in Sacramento, El Dorado, and Placer Counties.

Davis recruited various individuals, including straw and nominal purchasers, to purchase 16 properties. He orchestrated the transactions and Rosetti, through his company 1st Option Mortgage, acted as the mortgage broker.

The indictment charges that the transactions involved fraudulent or false representations to obtain 100% mortgage financing, including misstatements about the purchasers’ monthly income, intent to occupy the property, and existing liabilities.

In addition, the indictment charges that in each transaction, the purchase price was above the true market price of the property. An amount approximately equal to the difference between the purchase price and the true market price was then diverted as “cash back” at the close of each escrow to the bank account of a Nevada Corporation called Calorneva Land Company.

As part of the scheme, Derek Davis caused the cash to be concealed from the mortgage lenders. The indictment charges that Davis in fact exercised control over the Calorneva Land Company bank account and used the fraudulently obtained funds for various purposes, including extensive cash withdrawals.

From U.S. Attorney McGregor Scott:

“Over the course of numerous investigations we have seen how fraud-for-profit mortgage schemes took root in our Sacramento-area housing market, particularly in this 2005 to 2006 time frame. There were undoubtedly many catalysts to the lending crisis that now grips our national economy. Mortgage fraud was one of them. As this investigation illustrates, the Department of Justice is committed to prosecuting those responsible for mortgage fraud, and to working with federal, state, and county law enforcement agencies to investigate and prosecute those involved in these activities.”

The maximum penalty for mail fraud is 30 years in prison if the fraud affects a financial institution, and a fine of up to $250,000, or twice the value of the gain or loss, whichever is greater. The maximum penalty for making false statements in loan applications is 30 years in prison and a fine of $1,000,000. The maximum penalty for engaging in monetary transactions involving more than $10,000 in crime proceeds is 10 years in prison and a fine of $250,000, and the maximum penalty for money laundering is 20 years in prison and a fine of up to $500,000 or twice the value of the money laundered, which ever is greater. The maximum penalty for causing or attempting to cause a financial institution to fail to file a currency transaction report is ten years in prison and a fine of $500,000.

The actual sentence, however, will be determined at the discretion of the court after consideration of the Federal Sentencing Guidelines, which take into account a number of variables and any applicable statutory sentencing factors.

Back on February 15, 2006, I posted a blog entry titled “Stop Fraud Act: U.S. Senate Tackles Real Estate Fraud,” detailing U.S. Senator Barack Obama’s 2006 proposal to fight real estate and mortgage fraud.

Thanks to a tip from Diana Golobay of HousingWire.com, I ran across the following from Obama’s campaign Web site:

Barack Obama and Joe Biden’s Plan

Protect Homeownership and Crack Down on Mortgage Fraud

Obama and Biden will crack down on fraudulent brokers and lenders. They will also make sure homebuyers have honest and complete information about their mortgage options, and they will give a tax credit to all middle-class homeowners.

Create a Universal Mortgage Credit: Obama and Biden will create a 10 percent universal mortgage credit to provide homeowners who do not itemize tax relief. This credit will provide an average of $500 to 10 million homeowners, the majority of whom earn less than $50,000 per year.

Ensure More Accountability in the Subprime Mortgage Industry: Obama has been closely monitoring the subprime mortgage situation for years, and introduced comprehensive legislation over a year ago to fight mortgage fraud and protect consumers against abusive lending practices. Obama’s STOP FRAUD Act provides the first federal definition of mortgage fraud, increases funding for federal and state law enforcement programs, creates new criminal penalties for mortgage professionals found guilty of fraud, and requires industry insiders to report suspicious activity.

Mandate Accurate Loan Disclosure: Obama and Biden will create a Homeowner Obligation Made Explicit (HOME) score, which will provide potential borrowers with a simplified, standardized borrower metric (similar to APR) for home mortgages. The HOME score will allow individuals to easily compare various mortgage products and understand the full cost of the loan.

Close Bankruptcy Loophole for Mortgage Companies: Obama and Biden will work to eliminate the provision that prevents bankruptcy courts from modifying an individual’s mortgage payments. They believe that the subprime mortgage industry, which has engaged in dangerous and sometimes unscrupulous business practices, should not be shielded by outdated federal law.

Does knowing that Senator Obama wrote and introduced real estate and mortgage fraud prevention legislation sway or impact your opinion of him in terms of who you might cast your vote for this November?

A Missouri attorney has been sentenced in federal court for defrauding a North Kansas City, MO, bank in a series of loans totaling $866,810.00. Dawn Harpster, 38, of Kidder, MO, was sentenced by U.S. Chief District Judge Fernando J. Gaitan, Jr., on Monday morning to four years and two months in federal prison without the possibility of parole. The court also ordered Harpster to pay $866,810.00 in restitution.

On Nov. 28, 2007, Harpster pleaded guilty to five counts of bank fraud. Harpster, formerly doing business as Northwest Missouri Title Co., LLC, in Gallatin, MO, admitted that she defrauded Norbank (which was just bought by CCB Financial Corp. for an undisclosed amount) by obtaining five loans totaling $866,810.00 between March 2006 and December 2006.

For each of those loans, Dawn Harpster falsely claimed to have contracts with the Church of Jesus Christ of Latter-Day Saints in Salt Lake City, Utah, under which the LDS Church would purchase Daviess County, MO, properties from her. If Norbank would loan her the funds to purchase the properties, Harpster told the bank, then she would sell those properties to the LDS Church one year later at a price of at least $1,300 per acre above her original purchase price, or above the average appraised value of the properties.Image via Wikipedia

For each of the five loans, Harpster submitted false and fraudulent contracts in connection with applications for loans.

Harpster also told Norbank that Northwest Missouri Title would handle the closing and would obtain title insurance for her purchase of the properties and for the sale of the properties to the LDS Church. Harpster falsely represented to Norbank that she had obtained a title commitment and title insurance for each of the properties, when in fact she had not done so and the title insurance documents she provided to Norbank were false and fraudulent. Harpster falsely represented to Norbank that she had recorded deeds of trust from Northwest Missouri Title to Norbank, thereby securing the liens on the properties in the amounts of the loans.

When the bank disbursed the loans in the form of cashier’s checks, Harpster used the proceeds for personal expenditures and not for the purposes represented. Dawn Harpster’s license to practice law has been suspended due to matters unrelated to this felony conviction; the status of her license will be reviewed by the appropriate authorities as a result of today’s sentencing.

This case, which was investigated by the FBI, was prosecuted by Assistant U.S. Attorney Linda Parker Marshall.

It is rare that an opportunity like this presents itself.

Earlier today I received the following message from Special Agent Michelle Ahmad in the Office of Inspector General at the U.S. Department of Housing and Urban Development.

NOTE: For anyone interested in following through with Ms. Ahmad’s offer, please note that the offer itself is made ONLY in connection with claims involving Delroy Davy and/or DNK Investment Group, as outlined in my May 29, 2008 blog entry here on FlippingFrenzy.com titled “Real Estate Fraud and the Real Estate Investor: Banks can be victims too!”

Ralph,

You may post on your website, my information as follows:

If you have been a victim (Editor’s Note: of Delroy Davy or DNK Investment Group) and want to file a complaint, please contact me via email only: mahmad@hudoig.gov

Thanks,

Michelle Ahmad, Special Agent
US Department of Housing and Urban Development
Office of Inspector General, Investigations
75 Spring Street SW, Suite 346
Atlanta, Georgia 30303 USA

Tips for Contacting Special Agent Ahmed

• Do not contact Special Agent Ahmad unless you have a claim related to the details outlined in the following Flipping Frenzy blog post: “Real Estate Fraud and the Real Estate Investor: Banks can be victims too!“
• Be specific in your email communication (do not ramble or provide incomplete or unrelated information).
• Be sure to include your contact information, including: Your Name, Your Mailing Address, Your Telephone Number, Your Preferred Email Address for Replies, etc.).
• Provide as much information as possible but DO NOT include attachments (attachments are often blocked when sent to government email addresses; wait for a reply suggesting that you send additional materials before doing so).

Thank you, Special Agent Ahmad, for making yourself available like this. And thank you to everyone who plays a role in spotting, reporting and stopping real estate and mortgage fraud.

= = = = =
Update: You may also call Special Agent Ahmad’s office at (678) 732-2050.

Image via WikipediaNearly 400,000 U.S. homeowners may soon be able to secure more affordable home loans after Bank of America agreed yesterday to a mandatory loan modification program that impacts loans originated with its Countrywide Financial unit.

The development — which is a result of claims brought by attorneys general in 11 states that accused Countrywide of misrepresenting loan terms and more — could be worth as much as $8.4 billion to homeowners nationwide, and is by far the largest predatory lending settlement in U.S. history.

According to Bank of America, Countrywide’s mortgage servicing staff will contact eligible borrowers nationwide starting December 1, 2008. Bank of America also says all Countrywide-related foreclosure sales will not be “initiated or advanced” for borrowers likely to qualify under the settlement.

While the settlement was reached as a result of charges brought against Bank of America and Countrywide by the attorneys general representing Arizona, California, Connecticut, Florida, Illinois, Iowa, Michigan, North Carolina, Ohio, Texas and Washington, the loan modification program will be available in all 50 states, and preliminary estimates indicate nearly 400,000 borrowers nationwide may benefit.

The mandatory loan modification program — which is technically called the “Home Ownership Retention Program for Countrywide Customers” — is said to provide relief to homeowners who were put into the riskiest types of loans. State-by-state relief estimates from those states which forced the settlement include:

• Arizona: As many as 15,700 Arizonans should receive relief from the Home Ownership Retention Program for Countrywide Customers. In August 2008, Arizona ranked third in the nation for foreclosures. According to statistics released last month by RealtyTrac, more than 14,000 Arizonans were in or facing foreclosure in August 2008. This was a 67 percent increase from August 2007.
• California: As many as 124,000 struggling California homeowners could see their monthly mortgage payments lowered as a result of the settlement. California continued to document the nation’s second highest state foreclosure rate, with one in every 130 households receiving a foreclosure filing in August of this year (said differently, foreclosure filings were reported on 101,724 California properties in August, one-third of the national total and the most of any state.) California’s foreclosure activity increased more than 40 percent from the previous month and more than 75 percent from August 2007.
• Connecticut: Countrywide has agreed to provide relief to as many as 4,800 troubled Connecticut homeowners with various subprime mortgages who are facing foreclosure or struggling as a result of its business practices. Connecticut ranks 17th in the nation in foreclosure activity. One out of every 797 properties received a foreclosure filing in August, down by more than 10 percent over the previous month, and down more than 17 percent from the same time last year.
• Florida: The Home Ownership Retention Program for Countrywide Customers could provide nearly $1 billion in total relief for as many as 60,100 Florida homeowners. Florida posted the second highest total of foreclosure activity in August of this year, with foreclosure filings reported on 44,000 properties during the month — a 4 percent decrease from the previous month but still up nearly 30 percent from August 2007. One in every 194 Florida properties received a foreclosure filing in August, the nation’s fourth highest state foreclosure rate.
• Illinois: As many as 13,600 Illinois borrowers are expected to receive a loan adjustment, representing nearly $185 million in modifications. Illinois foreclosure-associated problems are well documented. In August of this year, the state ranked the 9th worst in the nation for foreclosure-related activity. One in every 483 properties in Illinois received a foreclosure notice in August, and the state continues to rank as one of the hottest spots in the nation for real estate and mortgage fraud.
• Iowa: As many as 1,300 Iowans will be offered mortgage loan modifications that will help many people avoid foreclosure and losing their homes. Iowa ranks 39th in the U.S. for foreclosure-related activity, with one in every 1,982 properties receiving a foreclosure notice in August. While that number may seem low when compared to other states, Iowa’s problems were nearly 34 percent worse than in the previous month.
• Michigan: The Home Ownership Retention Program for Countrywide Customers may impact as many as 13,600 mortgage holders in Michigan, giving families an opportunity to keep their homes, and saving them approximately $129 million as a result of more favorable terms. Like Illinois, Michigan’s foreclosure woes are well known. Despite a nearly 13 percent annual decrease in foreclosure activity, Michigan documented the nation’s fourth highest state foreclosure total in August, with foreclosure filings reported on 13,605 properties during the month (that’s about one filing for every 332 properties).
• North Carolina: As many as 6,400 North Carolina borrowers are expected to receive relief from the settlement. North Carolina currently ranks 23rd in the nation for the number of properties receiving foreclosure notifications (one in every 876).
• Ohio: As many as 10,200 Ohioans will be offered mortgage loan modifications that will help thousands of Ohio families avoid foreclosure and stay in their homes. The potential economic relief to borrowers in Ohio from the modification program is estimated to be about $97 million. Depending on the type of loan, about one-fourth to one-half of all Countrywide subprime loans in Ohio are delinquent.
• Texas: Bank of America estimates that up to 33,700 Texas homeowners will qualify for the loan modification program. Texas ranks 20th in the nation for foreclosure-related activity.
• Washington: As many as 10,000 Washington homeowners will receive about $200 million in payment relief. In the state of Washington, 42 percent of Countrywide’s subprime hybrid arms, 11 percent of pay option arms, and 24 percent of largely fixed-rate subprime loans are delinquent.

For anyone interested in a more complete state-by-state breakdown, here’s what Bank of America provided to Flipping Frenzy upon request:

In a nutshell, the final settlement, which can be read in its entirety here, will enable eligible mortgage borrowers to avoid foreclosure by obtaining a modified and more affordable affordable loan.

The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s mortgage meltdown and financial crisis. Assuming every eligible borrower and investor participates, the Home Ownership Retention Program for Countrywide Customers will provide up to $8.4 billion in relief within the next 12 to 18.

As a result of the settlement:

• In participating states, the agreement provides up to $150 million in payments to borrowers who defaulted early in their loan terms, while committing to a “soft landing” program to help borrowers who are unable to retain their homes with relocation costs.
• Countrywide no longer offers subprime, high cost or negative amortization mortgages and has significantly curtailed no- and low-documentations loans.
• Broker compensation will be limited to 4 percent of the amount borrowed.
• Countrywide will retain, until at least July of 2009, a minimum of 3,900 staff to assist with loan modifications and other foreclosure avoidance measures.
• Countrywide will waive late/delinquency fees for missed payments when modifying loans and will not charge modification fees to borrowers in the participating states.
• When possible, Countrywide will waive prepayment penalties in connection with any workout or refinance, whether or not the new loan is originated with Countrywide.

Borrowers who are eligible for loan modifications under the settlement must have received a qualifying subprime mortgage or a Pay Option adjustable rate mortgage prior to December 31, 2007, in addition to meeting other requirements, including:

• The borrower is 60 days or more delinquent and the current loan-to-value ratio is 75% or higher
• The borrower is current today but becomes 60 days or more delinquent at any time prior to June 30, 2012, and the loan-to-value ratio at the time of the modification is 75% or higher
• If the borrower has a subprime hybrid ARM and the borrower is current but reasonably likely to become 60 days or more delinquent as a consequence of a rate reset, and the loan-to-value ratio at the time of the modification is 75% or higher
• If the borrower has a Pay Option ARM and the borrower is current but reasonably likely to become 60 days or more delinquent as a consequence of a rate reset or payment recast based on negative amortization, and the loan-to-value ratio at the time of the modification is 75% or higher
• The property is a 1-4 unit owner-occupied residential property

In addition, Countrywide customers may be eligible for the early payment default benefit of this program if:

1. The customer has a Countrywide-originated first lien loan
2. The loan was made between January 1, 2004 and December 31, 2007
3. The customer’s primary residence is the property that secures the loan
4. The customer has made three or fewer payments over the life of the loan (the borrower’s state may expand eligibility)
5. The customer has either lost his home to foreclosure or is at least 120 days in arrears on mortgage payments.

Loan Modification Program Details

Countrywide says it will first offer eligible borrowers an FHA refinance under the HOPE for Homeowners Program. If not eligible for that program, Countrywide will offer these specific programs based on product type.

Subprime 2-, 3- 5-, 7- and 10-Year Hybrid ARM borrowers will receive an unsolicited extension/restoration of the introductory rate for five years and an invitation to contact Countrywide for additional relief if affordability concerns persist. Borrowers who cannot afford the introductory rate will be considered on a streamlined basis for a five-year interest rate reduction to as low as 3.5% (based on the affordability equation) and a conversion to a fixed-rate mortgage at the end of five years.

Pay Option ARM borrowers accepting a streamlined loan modification option will have the negative amortization feature eliminated from their loan. The mortgage interest rate will be reduced to as low as 2.5%, and the loan will be converted into either a fixed-rate mortgage or a ten-year interest-only loan. For single property owners who currently have no equity in their homes, Countrywide will write-down the principal balance to as low as 95% of the current value of the property to restore an equity position.

Subprime Fixed-Rate borrowers will receive a streamlined loan modification, by reducing the mortgage interest rate to as low as 2.5% and converting the loan into a fixed-rate or 10-year interest only loan with affordable step rate increases and lifetime cap.

Loan modification programs will provide payments within the limits of an Affordability Equation set out in the agreement and be targeted to equate to 34% of the borrower’s household income.

The following additional programs are available to Countrywide borrowers in the 11 states states participating in the agreement.

Soft Landing Program: Countrywide borrowers facing foreclosure who agree to voluntarily leave the premises at the time of the foreclosure sale will be provided with a cash payment. Countrywide anticipates payments to 35,000 borrowers in a total amount of more than $70 million to assist with relocation costs.

Early Payment Defaults: Countrywide will allocate up to $150 million nationally under an Early Payment Default program to provide relief for borrowers whose loans were originated directly by Countrywide (or through brokers) with owner-occupied properties who have either experienced a foreclosure sale or are 120 days or more delinquent as of the date of this agreement. These borrowers will be eligible for the payment if they made three or fewer payments over the life of the loan (or meet more inclusive criteria determined by each state). will be allocated for each state through a pro-rata formula based on the number of eligible borrowers with a Countrywide-originated first mortgage.

The Countrywide parties to the settlement include parent Countrywide Financial Corporation, Countrywide Home Loans and Full Spectrum Lending.

If you missed last night’s edition of 60 Minutes, you missed Steve Croft’s interesting segment on the role exotic mortgage-backed securities played in the nation’s current financial crisis:

For anyone who wants to read along, here’s a transcript:

On Friday Congress finally passed - and President Bush signed into law - a financial rescue package in which the taxpayers will buy up Wall Street’s bad investments.

The numbers are staggering, but they don’t begin to explain the greed and incompetence that created this mess.

It began with a terrible bet that was magnified by reckless borrowing, complex securities, and a vast, unregulated shadow market worth nearly $60 trillion that hid the risks until it was too late to do anything about them.

And as correspondent Steve Kroft reports, it’s far from being over.

It started out 16 months ago as a mortgage crisis, and then slowly evolved into a credit crisis. Now it’s something entirely different and much more serious.

What kind of crisis it is today?

“This is a full-blown financial storm and one that comes around perhaps once every 50 or 100 years. This is the real thing,” says Jim Grant, the editor of “Grant’s Interest Rate Observer.”

Grant is one of the country’s foremost experts on credit markets. He says it didn’t have to happen, that this disaster was created entirely by Wall Street itself, during a time of relative prosperity. And they did it by placing a trillion dollar bet, with mostly borrowed money, that the riskiest mortgages in the country could be turned into gold-plated investments.

“If you look at how this started with the subprime crisis, it doesn’t seem to be a good bet to put your money behind the idea that people with the lowest income and the poorest credit ratings are gonna be able to pay off their mortgages,” Kroft points out.

“The idea that you could lend money to someone who couldn’t pay it back is not an inherently attractive idea to the layman, right. However, it seemed to fly with people who were making $10 million a year,” Grant says.

With its clients clamoring for safe investments with above average return, the big Wall Street investment houses bought up millions of the least dependable mortgages, chopped them up into tiny bits and pieces, and repackaged them as exotic investment securities that hardly anyone could understand.

60 Minutes looked at one of the selling documents of such a security with Frank Partnoy, a former derivatives broker and corporate securities attorney, who now teaches law at the University of San Diego.

“It’s hundreds and hundreds of pages of very small print, a lot of detail here,” Partnoy explains.

Asked if he thinks anyone ever reads all this fine-print, Partnoy says, “I doubt many people read it.”

These complex financial instruments were actually designed by mathematicians and physicists, who used algorithms and computer models to reconstitute the unreliable loans in a way that was supposed to eliminate most of the risk.

“Obviously they turned out to be wrong,” Partnoy says.

Asked why, he says, “Because you can’t model human behavior with math.”

“How much of this catastrophe had to do with the instruments that Wall Street created and chose to buy…and sell?” Kroft asks Jim Grant.

“The instruments themselves are at the heart of this mess,” Grant says. “They are complex, in effect, mortgage science projects devised by these Nobel-tracked physicists who came to work on Wall Street for the very purpose of creating complex instruments with all manner of detailed protocols, and who gets paid when and how much. And the complexity of the structures is at the very center of the crisis of credit today.”

“People don’t know what they’re made up of, how they’re gonna behave,” Kroft remarks.

“Right,” Grant replies.

But it didn’t stop ratings agencies, like Standard & Poor’s and Moody’s, from certifying the dodgy securities investment grade, and it didn’t stop Wall Street from making billions of dollars selling them to banks, pension funds, and other institutional investors all over the world. But that was just the beginning of the crisis.

What most people outside of Wall Street and Washington don’t know is that a lot of people who bought these risky mortgage securities also went out and bought even more arcane investments that Wall Street was peddling called “credit default swaps.” And they have turned out to be a much bigger problem.

They are private and largely undisclosed contracts that mortgage investors entered into to protect themselves against losses if the investments went bad. And they are part of a huge unregulated market that has already helped bring down three of the largest firms on Wall Street, and still threaten the ones that are left.

Before your eyes glaze over, Michael Greenberger, a law professor at the University of Maryland and a former director of trading and markets for the Commodities Futures Trading Commission, says they are much simpler than they sound. “A credit default swap is a contract between two people, one of whom is giving insurance to the other that he will be paid in the event that a financial institution, or a financial instrument, fails,” he explains.

“It is an insurance contract, but they’ve been very careful not to call it that because if it were insurance, it would be regulated. So they use a magic substitute word called a ’swap,’ which by virtue of federal law is deregulated,” Greenberger adds.

“So anybody who was nervous about buying these mortgage-backed securities, these CDOs, they would be sold a credit default swap as sort of an insurance policy?” Kroft asks.

“A credit default swap was available to them, marketed to them as a risk-saving device for buying a risky financial instrument,” Greenberger says.

But he says there was a big problem. “The problem was that if it were insurance, or called what it really is, the person who sold the policy would have to have capital reserves to be able to pay in the case the insurance was called upon or triggered. But because it was a swap, and not insurance, there was no requirement that adequate capital reserves be put to the side.”

“Now, who was selling these credit default swaps?” Kroft asks.

“Bear Sterns was selling them, Lehman Brothers was selling them, AIG was selling them. You know, the names we hear that are in trouble, Citigroup was selling them,” Greenberger says.

“These investment banks were not only selling the securities that turned out to be terrible investments, they were selling insurance on them?” Kroft asks.

“Well, it made it easier to sell the terrible investments if you could convince the buyer that not only were they gonna get the investment, but insurance,” Greenberger explains.

But when homeowners began defaulting on their mortgages, and Wall Street’s high-risk mortgage backed securities also began to fail, the big investment houses and insurance companies who sold the credit default swaps hadn’t set aside the money they needed to pay off their obligations.

Bear Stearns was the first to go under, selling itself to J.P. Morgan for pennies on the dollar. Then, Lehman Brothers declared bankruptcy. And when AIG, the nation’s largest insurer, couldn’t cover its bad debts, the government stepped in with an $85 billion rescue.

Asked what role the credit default swaps play in this financial disaster, Frank Partnoy tells Kroft, “They were the centerpiece, really. That’s why the banks lost all the money. They lost all the money based on those side bets, based on the mortgages.”

How big is the market for credit default swaps?

Says Partnoy, “Well, we really don’t know. There’s this voluntary survey that claims that the market is in the range of 50 to 60 or so trillion dollars. It’s sort of alarming that, in a market that big, we don’t even know how big it is to within, say, $10 trillion.”

“Sixty trillion dollars. I know it seems incredible. It’s four times the size of the U.S. debt. But that’s the size of the market according to these voluntary reports,” says Partnoy.

He says this market is almost entirely unregulated.

The result is a huge shadow market that may control our financial destiny, and yet the details of these private insurance contracts are hidden from the public, from stockholders and federal regulators. No one knows what they cover, who owns them, and whether or not they have the money to pay them off.

One of the few sources of information is the International Swaps and Derivatives Association (ISDA), a trade organization made up the largest financial institutions in the world. Many of them are the very same companies that created the vast shadow market, lobbied to keep it unregulated, and are now drowning because of unanticipated risks.

ISDA’s CEO, Robert Pickel, says there is nothing wrong with credit default swaps, and that the problem was with underlying mortgage securities.

“Well, there’s clearly something wrong with the system if all of these leveraged bets, hidden leveraged bets, caused a collapse in the financial system,” Kroft remarks.

“It is something that we all need to look at and learn lessons from. And we all need to work together to understand that and design a structure in the future that works more effectively,” Pickel says.

“My point is, the people that made these mistakes are the people you represent in your organization. And many of them sit on the board. I mean, if they didn’t get it right, who would?” Kroft asks.

“These people understand the nature of these products. They understand the risks,” Pickel replies.

“Well…they didn’t or they wouldn’t have bought them. They wouldn’t have used them,” Kroft says.

“These are very useful transactions. And the people do understand the nature of the risk that they’re entering into…but I’m not sure that…,” Pickel says.

“Useful?” Kroft interrupts. “How come they brought down the financial system?”

“Because, perhaps they didn’t understand the underlying risk, and nobody really saw the effects that were going to flow through from the subprime lending situation,” Pickel says.

That chapter is not over, and there is much suspense and fear on Wall Street that there are other big losses out there that have yet to be disclosed

They already dwarf what has been lost on those original risky mortgages. As bad as the mortgage crisis has been, 94 percent of all Americans are still paying off their loans. The problem is Wall Street placed its huge bets and side bets with all of those fancy securities on the 6 percent who are not.

“We wouldn’t be in any of this trouble right now if we had just had underlying investments in mortgages. We wouldn’t be in any trouble right now,” says Partnoy.

He says it’s the side bets.

“You got Wall Street firms, Bear Stearns, Lehman Brothers. You got insurance companies like AIG. Merrill lost a ton of money on this,” Kroft says. “Everybody’s lost a ton of money. They’re supposed to be the smartest investors in the world. And they did it themselves.”

“They did it all on their own,” Partnoy agrees. “That’s the most incredible thing about this crisis is that they pushed the button themselves. They blew themselves up.”

Asked how much of this was incompetence on the part of Wall Street and the people who ran it, Jim Grant tells Kroft, “The truth is that on Wall Street, a lot of people just weren’t very good at their jobs. It’s as simple as that.”

“These people were being paid $50 to $100 million a year. Some of them, the guys that were running the places,” Kroft remarks.

“There is no defending,” Grant replies. “A trainee making 45,000 a year would have had the common sense not to bet the firm on mortgage contraptions that no one in the firm actually understood. That is not a deep point to comprehend. Somehow, through, I will call it a criminal neglect and incompetence, the people at the top of these firms chose to look away, to take more risk, to enrich themselves and to put the shareholders and, indeed, the country, itself, ultimately, the country’s economy at risk. And it is truly not only a shame, it’s a crime.”

60 Minutes requested interviews with top executives at Bear Stearns, Lehman Brothers, Merrill Lynch, Morgan Stanley, Goldman Sachs, and AIG. They all declined.

“The nation’s economy is dependent on the real estate market to bottom out and turn the corner before any true healing from the mortgage crisis can begin in earnest. The federal government is attempting to legislate the economy back to health.

However, with the labor market continuing to shed jobs, more citizens filing for bankruptcy protection, and the foreclosure floodgates wide open, legislation alone is not enough. Investors and ordinary citizens need to feel confident of their own financial stability. Until that confidence returns to the marketplace, foreclosures will continue to delay any real economic recovery.”