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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.

A federal grand jury in Michigan has indicted four men–including a mortgage broker and an appraiser–for allegedly running a $1.9 million real estate/mortgage fraud scheme. Hassan Nagi, 30, of Dearborn Heights, Michigan; Ali Haidous, 24, of Dearborn; Safi Bzeih, 35, of Dearborn; and Hussein Aoun, 23, of Dearborn Heights reportedly conspired to secure fraudulent mortgages from Countrywide Bank, Washington Mutual, Fifth Third Bank, IndyMac Federal Bank, Net Bank, and Sun Trust for more than 15 properties between April 2005 and April 2008.

The indictment alleges that Hassan Nagi worked as a mortgage broker and was responsible for submitting false and fraudulent applications to obtain the mortgages. Ali Haidous was a real estate appraiser who provided fraudulent appraisals for the properties. Bzeih and Aoun recruited sellers and straw buyers for the properties.

According to the indictment, after the Nagi and Haidous identified a willing seller of a property, Nagi secured financing for a straw buyer. False income and employment information was provided to the lender using fraudulent W-2 forms. In support of each loan, Nagi also submitted an inflated appraisal, created by Haidous.

After the inflated mortgage was funded at closing, the seller received sufficient funds to pay off any existing mortgage as well as a bonus for participating in the real estate fraud scheme. The remainder of the proceeds from the inflated mortgage were shared between Hassan Nagi, Ali Haidous and one of the straw buyers.

Nagi, Haidous, and Bzeih were expected to appear in federal court before Magistrate Judge Virginia Morgan yesterday afternoon, for their initial appearances and arraignment on the indictment. Hussein Aoun is a fugitive in Lebanon. The case is being prosecuted by Assistant U.S. Attorney Leonid Feller.

Less than 48 hours after federal regulators seized IndyMac Bank, the Board of Governors of the United States’ Federal Reserve System announced today that it has granted the Federal Reserve Bank of New York the authority to lend to Fannie Mae and Freddie Mac should such lending prove necessary.

Any lending would be at the primary credit rate and collateralized by U.S. government and federal agency securities. This authorization is, according to the Fed, intended to supplement the Treasury Department’s existing lending authority and to help ensure the ability of Fannie Mae and Freddie Mac to promote the availability of home mortgage credit during a period of stress in financial markets.

For the uninitiated, Freddie Mac is a stockholder-owned corporation established by the United States Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world’s capital markets to finance mortgages for homeowners across U.S. Over the years, it has been estimated that Freddie Mac has made homeownership possible for one in six homebuyers.

For his part, Freddie Mac chairman and CEO Richard Syron, had this to say about today’s development:

We are heartened by today’s announcement and the steps outlined by the U.S. Department of the Treasury and the Federal Reserve Board. This affirmation of the important role of the GSEs, and that we should continue to operate as shareholder-owned companies, should go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America’s homebuyers and renters. I applaud Secretary Paulson and Chairman Bernanke for their leadership and encourage Congress to act quickly to pass the new legislative proposals.

Freddie Mac and the Office of Federal Housing Enterprise Oversight (OFHEO) say the company is adequately capitalized, has a large liquidity portfolio and access to the world’s debt markets. The company is in the process of finalizing its June 30, 2008 financial results and says they will show that Freddie Mac has a substantial capital cushion above the 20% mandatory target surplus established by federal regulations.

Speaking on behalf of the United States government, the Secretary of the U.S. Department of the Treasury, Henry Paulson, said:

Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.

Below, when Paulson refers to “GSEs” he’s talking about government sponsored enterprises, which are a group of financial services corporations created by the United States Congress. Their function is to enhance the flow of credit to targeted sectors of the economy and to make those segments of the capital market more efficient and transparent.

GSE debt is held by financial institutions around the world. Its continued strength is important to maintaining confidence and stability in our financial system and our financial markets. Therefore we must take steps to address the current situation as we move to a stronger regulatory structure.

In recent days, I have consulted with the Federal Reserve, OFHEO, the SEC, Congressional leaders of both parties and with the two companies to develop a three-part plan for immediate action. The President has asked me to work with Congress to act on this plan immediately.

First, as a liquidity backstop, the plan includes a temporary increase in the line of credit the GSEs have with Treasury. Treasury would determine the terms and conditions for accessing the line of credit and the amount to be drawn.

Second, to ensure the GSEs have access to sufficient capital to continue to serve their mission, the plan includes temporary authority for Treasury to purchase equity in either of the two GSEs if needed.

Use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.

Third, to protect the financial system from systemic risk going forward, the plan strengthens the GSE regulatory reform legislation currently moving through Congress by giving the Federal Reserve a consultative role in the new GSE regulator’s process for setting capital requirements and other prudential standards.

I look forward to working closely with the Congressional leaders to enact this legislation as soon as possible, as one complete package.