According to testimony in an SEC lawsuit, the Calabasas firm’s co-founder fostered the practice of making exceptions to its lending standards.

By E. Scott Reckard, Los Angeles Times

August 25, 2010

The late “Tonight Show” announcer Ed McMahon was far from the only person to get a special mortgage thanks to Countrywide Financial Corp. co-founder Angelo Mozilo.

Mozilo approved so many loans that fell outside company guidelines that at least one high-ranking Countrywide executive questioned them, drawing heated responses from Mozilo, according to testimony filed in a Securities and Exchange Commission lawsuit.

The people who got such loans were among a group of Countrywide borrowers known within the company as “Friends of Angelo” or VIP customers.

Countrywide’s former chief risk officer, John P. McMurray, testified that his duties normally didn’t include hearing about individual loans made by the Calabasas company, which at the time was the nation’s largest home lender.

But certain large, Mozilo-authorized loans with small down payments, including mortgages totaling $4.8 million for McMahon, “got escalated to my attention,” McMurray said, because a Countrywide executive wanted him to know about the risk the company was taking with them. McMahon’s mortgage wound up in default.

Paying attention to the VIP loans could cause friction. At one point, McMurray testified, Mozilo fumed in an e-mail: “What is McMurray doing looking at this loan? I’ve already approved it.”

McMurray gave his testimony in a deposition in preparation for the trial of an SEC suit accusing Mozilo and two other former Countrywide executives of defrauding investors.

The suit, pending in U.S. District Court in Los Angeles, says the defendants concealed increasingly risky lending from 2005 through 2007. An SEC filing says the VIP loans show that Mozilo fostered the practices by encouraging the company to make frequent exceptions to its lending standards.

“The ‘exceptions’ culture at Countrywide started at the top,” the SEC filing says.

Mozilo’s attorney, David Siegel, couldn’t be reached for comment Tuesday. But lawyers for the three defendants contend in court filings that investors were fully informed of the risks in the loans and mortgage bonds generated by Countrywide, which was near collapse when Mozilo struck a deal to sell the company to Bank of America Corp. in 2008.

The defense filings argue that exception loans were common in the mortgage industry at the time and that the “mountain of publicly available information about Countrywide loans” included disclosures to investors that exception loans were being made.

The Friends of Angelo loan program has triggered investigations of dozens of loans given to members of Congress and congressional employees. But the filings made this month by the SEC appear to be the first time a government regulator has alleged that Mozilo himself authorized loans on more favorable terms than those provided to the general public.

McMurray said he became aware of the Mozilo-approved special loans when an executive who supervised underwriting of a large Countrywide division’s mortgages “brought to my attention some loans that appeared to be outside of guidelines.”

“When I attempted to get involved,” McMurray testified, “my involvement wasn’t warmly met.”

Asked by an SEC attorney, “Who did not warmly meet your involvement?” McMurray replied: “Typically, Angelo.”

McMurray told of one Mozilo e-mail that complained: “You know, with [an] X-hundred billion-dollar balance sheet, it seems like we could find room for one loan.”

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