GOP and Clueless Media Fan Flames of Phony Scandal

Posted by David Fiderer, Huffington Post at 10:45 AM on February 5, 2009.

Mortgage products are confusing, which is why a "whistleblower" could bamboozle the press into believing that Chris Dodd saved $75,000 on mortgages from Countrywide Financial. Suzie Orman could have immediately explained why the correct amount is approximately zero. Senator Dodd made full disclosure last Monday, but the media narrative about Dodd's "sweetheart deals" seems to have stuck. Here's how a political scandal, a sort of mini-Whitewater, was contrived in the absence of credible evidence, and why the primary source of the revelations could be a Republican shill.

From his brief appearance on CNBC last summer, it was clear that Robert Feinberg was in over his head, less than honest, or both. Not that anyone noticed. Journalists heard what they wanted to hear, and filtered out the rest. Then the Senate Ethics Committee began investigating. And then, on October, 30, 2008, NBC News reported on a "wide-ranging criminal investigation" by Justice Department prosecutors into so-called sweetheart deals extended by Countrywide Financial.

Feinberg had come forward to expose the deals offered by Countrywide to high ranking public officials, celebrities and business executives. Before he was laid off, Feinberg had worked at a Countrywide call center in southern California, where he processed the paperwork on mortgages in the company's V.I.P. unit.

Countrywide's V.I. P. Program was large -- annual loan volume totaled hundreds of millions of dollars -- and it was not unique to Countrywide. "Among many mortgage lenders it was not an unusual practice to waive fees and waive certain underwriting guidelines if they had personal or business ties to the CEO or other senior executives," according to Chain of Blame, a book on the subprime mortgage industry. Clients in Countrywide's V.I. P. Program included Walter Cronkite, Stanley Tucci, the Chairman of KB Homebuilder and the Chairman of Sprint.

Before he left Countrywide, Feinberg took copies of loan documents for seventeen V.I.P.s, which included ten prominent Democrats and their relatives. These documents ostensibly constituted smoking gun evidence of corruption associated with a company embroiled in the mortgage crisis. But the evidence does not withstand scrutiny.

Selected details on loans extended to Senator Chris Dodd were revealed by Portfolio.com on June 12, at a critical juncture in Dodd's longstanding effort to bring his housing bill, intended to increase regulatory oversight on Fannie Mae and Freddie Mac, to a floor vote. "The controversy swirling around Dodd's and [Senator Kent] Conrad's VIP mortgages has cost Democrats crucial credibility on the issue as they compete with Republicans to portray themselves as the party most sympathetic to the plight of struggling homeowners," wrote the Associated Press on June 17. The controversy was more than a little ironic, given that Dodd had been a consistently staunch advocate for stronger regulation of the mortgage loan industry. On June 25, a group of nine Republican senators sent Harry Reid a letter, stating, "We request that you delay consideration until we have adequate time to read the bill and better understand the allegations and how much Countrywide will benefit from the bill." It would not be the first or the last time that Republicans would try to stall action on the mortgage crisis.

Only when Portfolio's August issue hit the news stand could anyone figure out the details which showed that Dodd's mortgages were in line with market terms. On July 21, when Feinberg appeared on CNBC's Squawkbox, Michelle Caruso-Cabrera cut to the heart of the matter:

 

CARUSO-CABRERA: Tell me about your conversations with Senator Dodd and exactly how this went down and how he got a cheaper loan than most people could get.

FEINBERG: My conversations with Senator Dodd were maybe once or twice. It wasn't long conversations because he is a very busy person, but basically he came through a receptionist for one of the managers and I was given what to do with him as for discounts. I mostly spoke with his wife. So most of the work was done with his wife via e-mail or phone calls.

CARUSO-CABRERA: Can you definitely say that they knew they were getting better terms than they would have gotten otherwise?

FEINBERG: Absolutely.

CARUSO-CABRERA: No doubt in your mind?

FEINBERG: No doubt in my mind. When anyone entered on a phone call into the V.I.P. unit it wasn't just your job to provide them with discounts. It was your job to get the loan so you did explain where they were and how they were being treated and also that there was a lot of taglines that we used that the pricing was specially priced by [CEO] Angelo [Mozilo] and you're getting a better rate than a regular customer would get.

That was it. Feinberg recounted nothing, but he had no doubt in his mind about what Senator Dodd knew. Feinberg never considered that his phone taglines might sound like the shopworn marketing cliches. "Unless they asked, V.I.P. borrowers weren't told exactly how many points were waived on their loans," reported Portfolio. "I'm not clairvoyant," Dodd told the Associated Press. "There was no red flag to me that we were getting some special treatment."

Indeed, Senator Dodd got rates that were in line with the market. "You might get an adjustable mortgage that's locked in at 4 percent for five years and then it adjusts after that," said Ray Martin for Money Matters on CBS' The Early Show on June 12, 2003. On July 9, 2003, Dodd closed on a five-year adjustable rate mortgage with Countrywide at 4.25 percent.

Described in simpler, non-mortgage terms, the strongest case against Dodd goes something like this. A former employee says, "The Senator got to use the employee discount for his purchases at FAO Schwartz." And Dodd's response was, "I wasn't paying attention when I ordered the toys over the phone, because I knew I could buy the same stuff for the same price K-Mart."

But that's not how Feinberg played it.

CARUSO-CABRERA: How much did Senator Dodd save?

 

FEINBERG: The savings that we calculated was mainly over the life of the loan, which is really what you want to look at. You can look at a monthly savings, but over the life of the loan on one of those particular loans I think was calculated at about savings of $77,000 if the loan was kept for a 30-year period of time.

Portfolio calculated $75,000 in savings on both loans. Whether $77,000 or $75,000, the calculations were completely bogus. Neither Dodd, nor any of the other 16 V.I.P.'s paid below-market interest rates, according to the documents obtained by Portfolio.

To understand how the smoking gun is really smoke and mirrors, you need to get into the details of the loans. In 2003, when Dodd applied to refinance the mortgages on his homes in Connecticut and Washington, he did what many other consumers do. He locked in his interest rate at the lower of the current rate, 4.875 percent, or the prevailing rate at the time of closing. The option to take the lower of the locked in rate or the prevailing rate is called a float-down.

By the time Senator Dodd's closings took place prevailing rates had fallen. On June 16, 2003 he closed on a $275,000 loan for his Connecticut home at 4.5 percent. On July 9, 2003 he closed on the $506,000 loan on his Washington townhouse at 4.25 percent, or .625 percent less than the locked-in rate.

But Dodd never got a 30-year fixed rate mortgage. For both residences, he got adjustable rate mortgages that had fixed rates for the first few years, and then went floating. The supposed discounts ended on June 16, 2008 and July 9, 2013.

Portfolio noted that Countrywide was "eschewing its usual charge of half a point," to give Dodd a free float-down. That represents a savings of $3,905 on both mortgages, or 1/20 of the imagined $75,000 savings. But even that amount is unsupportable.

The usual half-point fee almost certainly applied to float-downs on 30-year fixed rate mortgages. According to financial publisher HSH, the typical fee is one-quarter or one-eighth of a point. But most lenders offer the float-down on a five-year ARM for free. (Try Googling, "free float-down five-year ARM.") How does Portfolio know that Countrywide waived a fee that it might have otherwise charged? Not because of anything in the documentation. They reported the waiver based solely on Feinberg's recollection. It's quite remarkable that Feinberg would remember this detail on loans he processed five years earlier.

That's how $75,000 dissolves down to zero.

Caruso-Cabrera also asked Feinberg if Dodd saved any money on fees.

FEINBERG: Fees, roughly you have you have the points plus costs, the documentation preparation fees, the processing fees, the underwriting fees, what we call in the business the junk fees or the garbage fees was waived. So probably somewhere in the neighborhood of, you know, $1,000 or $2,000, it depended on the loan balance.

Portfolio reported that waived garbage fees totaled $2,700. "Garbage" or "junk" fees, "are the excessive processing and documentation fees charged by unscrupulous lenders," according to Neill Fendly, the legislative chair for the National Association of Mortgage Brokers, quoted in SmartMoney. Again, Suzie Orman would say you should always get those fees waived.

All in, the evidence corroborates Dodd's claim; he had no reason to believe he was getting a deal that was better than market. On February 2, Dodd released a report prepared by CrossCheckCompliance that backs up Dodd's claim that he had no reason to believe he got terms that were better than market. As Portfolio noted, when Dodd first did business with Countrywide, the nation's largest mortgage lender, in 2001, he did not receive any "V.I.P. treatment."

The evidence against the other 16 V.I.P.s is similarly weak. According to the documentation, there were no fee waivers, or other financial benefits, for three V.I.P.s -- Paul Begala, Henry Cisneros and Alphonso Jackson. Their names were simply added as window dressing to beef up Portfolio's online piece, "The Countrywide Lineup."

But the media didn't focus on the evidence, or lack thereof. It merely emphasized the narrative of scandal, which took on a life of its own.

The New York Times Editorial Board insisted that exoneration in the Senate ethics committee was, by definition, a sham. It wrote,

"The Senate ethics committee has opened an investigation to see whether gift rules have been violated. The trouble is, that throws the matter back to the clubby world of the Senate. Given its track record, it is hard to believe the committee will find that Mr. Dodd and Mr. Conrad acted improperly. It's not even clear that the Senate these days is in touch enough to understand how terrible this home-loan back-scratching looks."

True to form, The Wall Street Journal Editorial Board treated Dodd's protestations with the expected derisiveness:

"Mr. Dodd continues to insist that, though he knew he was a 'special' Countrywide customer, he didn't think he was getting any special financial benefit. But a $75,000 reduction in mortgage payments is no small matter for anyone living on a Senate salary of $169,300. Why else would he be known around Countrywide as a 'Friend of Angelo' - Angelo being Countrywide CEO Angelo Mozilo."

There's a standard method for deflecting the weaknesses is any scandal narrative. No matter how flimsy the evidence, you can always say, "This raises serious questions about ... " Yes, the Countrywide V.I.P. loan story does raise some serious questions, about Robert Feinberg.

CARUSO-CABRERA: Mr. Feinberg, do you stand to gain in any way by coming out publicly? Are you suing the company? Do you have any financial incentive to talk?

 

FEINBERG: Not to sue the company. I am not in a position to do that. I'm just coming out to talk because I feel there is a need for this information to come out because of the situation we are in now.

Feinberg did not say, "I do not stand to gain in any way." There are a an awful lot of coincidences about the Countrywide story that make you wonder, not only about Feinberg's motivations, but also about how sources can manipulate journalists in a way that crosses over into political P.R.

Again, there's the uncanny timing that threw a monkey-wrench into Dodd's legislative efforts and killed his chances of being considered as Obama's V.P. pick. Five days before Dodd got dinged, Obama's V.P. selection process was also slammed by the Countrywide story from a different venue, The Wall Street Journal:

"Countrywide Financial Corp. makes mortgage loans through a vast network of offices, brokers and call centers. But a few customers have gotten their loans a special way: through Countrywide Chief Executive Angelo Mozilo. "These borrowers, known internally as "friends of Angelo" or FoA, include two former CEOs of Fannie Mae

"One was James Johnson, a longtime Democratic Party power and an adviser to Sen. Barack Obama's campaign...Another was Franklin Raines, a onetime Clinton administration budget director, who left Fannie Mae amid an accounting scandal in 2004."

A "few customers" known as "friends of Angelo"? The article never explained how Johnson, who days earlier had been named to Obama's V.P. selection committee, and Raines "got" loans through Mozilo. The

Journal

pursued the "sweetheart deals" narrative from another dubious angle:

"A comparison of the Fannie Mae officers' terms with interest rates prevailing when they got their loans raises the possibility Countrywide gave them preferential terms. But it's impossible to tell for sure from public documents."

"Translation for those who lack any financial sophistication: They don't know jack," I wrote in HuffingtonPost at the time. The Journal touted the Countrywide/James Johnson connection for four days running, until Johnson resigned from Obama's VP selection committee.

So there is this big V.I.P. loan unit, extending hundreds of millions of dollars of loans annually, and Robert Feinberg, who at the time is unemployed, approaches the media and touts these sweetheart loans with these stolen company documents. What would his motivations be? Why would he choose to publicize these V.I.P.'s?

Part of it could be that he doesn't understand the distinction between how things seem inside Countrywide's call center and how things seem to an outside customer. Feinberg, who self-deprecatingly referred to himself as a "dumb bodybuilder" to Portfolio, managed a gym before joining Countrywide in 1996. His idea of how those taglines come across may not jive with the impressions of the V.I.P.'s, who would most likely dismiss them as sales puffery. Borrowers do not care about the internal workings of the credit approval process; they just want to know when they can close. Most V.I.P.'s are also sophisticated enough to know that interest rates jump around and that fees can be sliced and diced a myriad number of ways. They are very busy people and do not obsess over the details of Feinberg's former job.

Also, why did Feinberg choose to steal the documentation of these 17 V.I.P.s, out of potentially thousands of customers? Dodd never acted like a "Friend of Angelo." And though Angelo Mozilo did contribute $10,000 to Dodd's campaigns, he devoted most of his largess to Republicans. As reported in The Los Angeles Times, Countrywide donated $150,000 to the California Republican Party, and $83,000 to Gov. Arnold Schwarzenegger.

Could somebody have a partisan agenda? In October 2008, Feinberg was interviewed by the Bush Justice Department. He is still talking to selected media, still dissembling to the point of fraud. He was interviewed by Lisa Myers on The Today Show on October 30:

MYERS: What kinds of special breaks or discounts did the V.I.P.s get that average customers did not?

 

FEINBERG: They got a discount on the interest rate, they got discounts on their fees.

 

MYERS: Did these V.I.P.s know that they were getting special deals?

FEINBERG: Absolutely.

If Portfolio and the Journal want to go after a real scoop, they should go back to their source ask him some hard questions, to determine if he was coached by somebody with Republican ties.

Tagged as: whitewater, chris dodd, loan scandal