by Paul Kiel ProPublica, Nov. 9, 2012, 1:18 p.m.
An executive who the Justice Department says facilitated a scheme to defraud Fannie Mae and Freddie Mac is now spearheading JPMorgan Chase's role in the government's program to compensate victims of the big banks' abusive foreclosure practices.
The executive, Rebecca Mairone, worked at Countrywide and Bank of America from 2006 until earlier this year, when she left for JPMorgan Chase, according to her LinkedIn profile.
In a lawsuit filed last month in federal court in New York, Justice Department attorneys allege that Countrywide, which was bought by Bank of America in 2008, perpetrated a two-year scam to foist shoddy home loans on Fannie and Freddie. Neither Mairone nor any other individuals are named as defendants in the civil suit, and no criminal charges have been filed against her or anyone else in connection with the alleged misconduct. But Mairone is one of two bank officials cited in the suit as having repeatedly ignored warnings about the "Hustle," as the alleged scheme was called inside the company, and she prohibited employees from circulating some of those warnings outside their division.
Mairone was chief operating officer of the Countrywide lending division that allegedly carried out the "Hustle." She took the helm of JPMorgan Chase's involvement in the Independent Foreclosure Review this summer, according to a former Chase employee.
The review, overseen by federal banking regulators, requires the nation's biggest banks to compensate victims for harm they inflicted on borrowers. Victims can receive up to $125,000 in cash or, in some cases, get their homes back. But the review has already been marred by evidence that the banks themselves play a major role in identifying the victims of their own abuses, raising the question of whether the review is compromised by a central conflict of interest.
Mairone's role raises additional questions about the Independent Foreclosure Review.
The review "never seemed designed to place first the interests of those who were supposed to be helped u2014 victimized homeowners," said Neil Barofsky, the former federal prosecutor who served as the special inspector general for the Troubled Asset Relief Program, better known as the bank bailout.
"Finding out that the person running it for JPMorgan Chase is a person whose conduct in the run-up to financial crisis was allegedly so egregious that she somehow managed to be one of the only people actually named in a case brought by the Department of Justice goes beyond irony," he continued. "It speaks volumes to the banks' true intent and lack of concern for homeowners when addressing the harm that they caused during the foreclosure crisis."
In response to ProPublica's questions about Mairone's role in the foreclosure review and the suit's allegations, Chase issued a brief statement confirming that Mairone is a managing director who is "working on the Independent Foreclosure Review process." The statement added, "It would not be appropriate for us to discuss another firm's litigation."
Chase declined to make Mairone available for comment, and she did not return a message left at her home number.
The Suit's Allegations
Countrywide was the industry leader in subprime loans, which are typically given to borrowers with a troubled credit history. In 2007, the subprime market began to collapse as more and more of those borrowers defaulted on their loans. Countrywide grew desperate to find ways to keep profiting from issuing mortgages.
Fannie and Freddie guarantee home loans, relieving banks of the risk that borrowers will default. So in 2007, the government's suit alleges, Countrywide began the Hustle to pass a huge number of risky loans, many with phony incomes attributed to the borrowers, on to Fannie and Freddie.
At that time, the two mortgage giants were restricting their underwriting guidelines, making it harder for lenders like Countrywide to find borrowers who qualified for Fannie and Freddie backed loans.
The suit alleges that Countrywide deliberately gutted its system for detecting unqualified borrowers, leading to a flood of flawed and outright fraudulent loans backed by Fannie and Freddie.
The new modus operandi was called the "High Speed Swim Lane"; its motto was "Loans Move Forward, Never Backward," according to the suit. The company allegedly paid bonuses to its employees based on the number of loans they pushed through, not on whether the loans were sound. According to the suit, the new system created a torrent of loans that often featured inflated borrower incomes, accelerated by employees who had every incentive to fabricate numbers to get the loans into the "High Speed Swim Lane."
The suit says a number of employees within Countrywide raised alarms about the Hustle before it launched, but that Mairone and the division's president "ignored" those warnings.
Once the new system was up and running, one concerned executive had underwriters run checks on the loans. Mairone allowed the checks, but said they should be run in parallel to the loan funding process so, according to the suit, they didn't "'slow the swim lane down.'"
The tests found a "staggering rate of defects," the suit says, but Mairone did not "alter or abandon the Hustle model." Instead, the suit alleges, she "prohibited" underwriters from circulating the results outside of the lending division. "As warnings about the Hustle went unheeded," the complaint alleges, "Countrywide knowingly churned out loans with escalating levels of fraud and other serious material defects and sold them to" Fannie and Freddie.
The Hustle continued "through 2009," the Justice Department alleges, well after Bank of America acquired Countrywide. The scheme led to more than $1 billion in losses at Fannie and Freddie as borrowers defaulted, according to the suit.
The government took over Fannie and Freddie in 2008, and since then taxpayers have pumped in $187.5 billion to keep them afloat.
The federal suit was first brought under seal as a qui tam suit under the False Claims Act by a former Countrywide and Bank of America executive, Edward O'Donnell, who says he tried to stop the Hustle. A qui tam suit allows a private citizen to sue on behalf of the government and receive a portion of the settlement or judgment if the suit is successful. The Justice Department joined O'Donnell's suit in October in Southern District of New York, filing its own complaint and trumpeting it in a press release.
A Bank of America spokesman disputed allegations in the suit that it had refused to repurchase the faulty "Hustle" loans from Fannie Mae after they defaulted in large numbers. "Bank of America has stepped up and acted responsibly to resolve legacy mortgage matters," said spokesman Lawrence Grayson. "At some point, Bank of America can't be expected to compensate every entity that claims losses that actually were caused by the economic downturn."
A Career Spans the Crisis
Mairone's career has spanned the entire life cycle of the foreclosure crisis.
After working for Countrywide and Bank of America's lending divisions, Mairone moved to the bank's servicing division in 2009. There, at the height of the crisis, she was in charge of deciding how to deal with homeowners who could not pay their mortgages and wanted to modify the terms of their loans.
It didn't go well. The big banks all signed up for the government's main foreclosure prevention program and agreed to provide modifications for qualified borrowers. But as we've reported over the years (we even interviewed Mairone herself in early 2011), the biggest banks often botched loan modifications and regularly subjected customers to errors and abuses, some resulting in mistaken foreclosures. The big banks in general did a poor job, but analyses have shown that Bank of America performed the worst of all. Homeowners had less of a chance of getting a modification from Bank of America than any other major mortgage servicer, studies show.
Such failings eventually led to government efforts to compensate homeowners for the banks' errors and abuses. The Federal Reserve and the Office of the Comptroller of the Currency launched the Independent Foreclosure Review in late 2011. About 4.4 million homeowners are eligible for the review, and those who are determined to have been harmed can receive up to $125,000 in cash compensation.
Regulators required each of the banks to hire an outside consultant to independently conduct the review, but as ProPublica has reported, there is abundant evidence that the banks themselves are playing a large role. The program has also been marked by low participation by borrowers and a lack of transparency.
Regulators have said the banks are only playing a supporting role in the review, and that the consultants are entirely responsible for deciding how borrowers are compensated.
Mairone's current employment at Chase was first reported by The Street, an online news service that covers finance, but the story did not say Mairone was working on the bank's Independent Foreclosure Review. She oversees hundreds of Chase employees who gather documents for the reviews, according to the former Chase employee. Chase declined to say how many employees Mairone oversees or detail her job responsibilities.
Chase's main regulator, the Office of the Comptroller of the Currency, said its policy is not to comment on specific individuals or ongoing litigation. "The OCC and the Federal Reserve are monitoring the conduct of the Independent Foreclosure Review to ensure reviews are conducted fairly and thoroughly," said spokesman Bryan Hubbard.
Jonathan Gandal, a spokesman for Deloitte, the consultant Chase hired for the review, said, "We are conducting an independent review of the files and it is our review and analysis alone that will drive our recommendations. Beyond that, we are not at liberty to discuss matters pertaining to our services."