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Today, the SEC released a statement regarding its move to file fraud charges against Angelo Mozilo, the former CEO of Countrywide.  He’s been accused of “deliberately misleading investors about significant credit risks that were taken in an effort to maintain the company’s market share”.  He’s also been charged with insider trading.

This is the first high level executive to face the consequences of and possibly be forced to take financial responsibility for his role in the current mortgage crisis.  He doesn’t stand alone in these charges, though.  Standing next to him will be the former COO and former Countrywide president, David Sambol and former CFO Eric Sieracki.  Their charges are similar to Mozilo’s.  In part, they’re accused of providing false assurances that Countrywide primarily held prime mortgages and weren’t as much at risk as other lenders that specialized in subprime mortgages.  This is surprising since any mortgage loan officer in this country can attest to Countrywide’s B-C side that specialized in…you guessed it: subprime mortgages.

Mozilo’s lawyer, David Siegel, told The Wall Street Journal that there was no fair basis for any of these charges and reiterated his client’s insistence that all sales were both legal and ethical.  Despite an email that was discovered, written by Mozilo to Sambo and other high level officers, he still claims his actions were ethical:

                … The 100% loan-to-value subprime product is “the most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from guidelines be permitted irrespective of the
circumstances.”

Of course, we know those guidelines he speaks of were widely ignored and 100% LTV loans continued, even when potential homeowners had FICO scores in the 400-600 range.  What this boils down to is people were buying homes, with absolutely no money up front aside from the costs of the appraisals and possibly closing costs (which in total, probably amounted to less than $5,000 - if that much).  They could have been considered poor credit risks (any FICO score below 550 is considered poor by most lenders) and still could have purchased a house that they might not could have afforded.

For now, the SEC seems to be content with its big fish.  Whether or not further charges for other head honchos will surface remains to be seen.

Twelve percent is the number of American homeowners who are facing foreclosure right this minute.  Now, though, the House has approved a plan that would allow options for lowering payments and/or interest rates through bankruptcy.  It now must survive a tough beating from the Senate.  Not surprising, voting fell along party lines with the vast majority of Republicans vehemently opposing this bill. 

Bankruptcy courts have long since had the authority to modify loan terms for automobiles and even student loans.  It’s now this much closer to being able to modify home mortgages, including interest rate changes without the approval of banks or mortgage companies.  Many say this will be a great incentive for these same banks and mortgage companies to negotiate with homeowners before their loans are flagged for foreclosure. 

Still, there are those who are convinced this will overwhelm bankruptcy courts by hopeless homeowners who have no more options.  Further, it’s been suggested this will ultimately raise interest rates for new home purchases as a way to offset the forced lowering of interest rates by the courts. 

Another interesting facet of this proposal allows bankruptcy judges to determine if homeowners were victims of aggressive and perhaps illegal mortgage companies’ tactics.  It’s believed the bill itself will have many subprime mortgage companies scrambling to extend modified agreements with current homeowners to avoid the scrutiny of a bankruptcy court. 

Of course, there are always those peculiar happenings that leave us wondering about the motives of some of the politicians who sponsor or support these bills.  CitiGroup has already made a deal with a group of Democrats that will allow it to bypass some of the rules, should this be passed into law.  CitiGroup has agreed to begin enacting this yet-to-be-passed law with some restrictions and far less input from bankruptcy judges.  Another motive of some politicians includes inclusion of only subprime mortgage companies, which means the bigger lenders such as Wells Fargo, CitiGroup and even Wachovia will be exempt from the law altogether.

Ah, but then there’s yet another angle.  The scrutiny this bill will set into motion, should it be passed into law, will include repercussions for those who knowingly lied on their mortgage applications.  Many, during the height of the subprime golden days, were allowed to “state” their income with absolutely no verification by employers; the same rules applied to their bank balances as well.  With no verification from their banks, potential homeowners “stated” their bank balances.  With 100% financing offered the vast majority of the time, most subprime loans required no down-payments either. 

Clearly this bill has the potential to uncover a lot of less than honest deals.  The Senate is expected to vote in the coming months.