'If you had a pulse, we gave you a loan'

Neil Kornswiet’s spokesman said they could find no record of Eileen Loiacono reporting allegations of attempted bribery. In a statement, he said: “Any effort to bribe underwriters, or for them to accept bribes or benefits for violating company rues, was clearly and absolutely against company policy. While it is possible that a few instances of violation of company policy escaped these tight controls, this type of activity was strictly contrary to the culture and the standards of the company to which its many good employees adhered.”

He also said that People’s Choice fired approximately 30 employees for violating company policies and cut off business ties with more than a hundred unethical mortgage brokers.

In addition, the spokesman provided Dateline with statements from five former People’s Choice underwriters, all saying that they did not know of any cases where underwriters had been offered or accepted bribes and that anyone caught engaging in such practices would have been fired.

Kornswiet’s spokesman acknowledged that it is possible that “People’s Choice was an occasional victim of fraud” and that some bad loans may have “slipped through.”  But, he said, those would represent the vast minority of cases.  He said that the company did more to verify stated income loan applications than most other subprime lenders. 

In 2005, Neil Kornswiet was planning to take the company public. As part of the process, the company hired auditors from Deloitte to conduct a so-called Ethical Climate Survey.

On a positive note, the survey found the 96 percent of employees said they are expected to comply with laws and policies.  Ninety-one percent said their supervisors behaved ethically.

But, on the whole, the findings were devastating. Nearly three quarters of respondents said they were expected to do what they were told “no matter what.”  Nearly half said that while they may care about ethics, “they act differently.”  One third said they had witnessed “breaches of applicable laws and regulations.” And ten percent said they had been asked “to do fraudulent things.”

“It was double digits.  And it was very disturbing to executive management,” said former COO LaLiberte.  “You look at that and you think to yourself, ‘How am I going to correct something that's this far out of control?’"

Through his spokesman, Neil Kornsweit conceded that “management and the Board were dismayed by what they read.” After reviewing the survey, he said the company took steps “to address the comments that were contrary to the company’s standards.”  They set up a whistleblower hotline and provided mandatory ethics training to employees. Kornswiet also held a town meeting, the spokesman said, telling employees: “We will not be satisfied until we reach 100 percent compliance with all ethical standards.”

'Wall Street was the end of the line'
Ethical problems were endemic throughout the industry, and arguably far worse at lenders like Ameriquest and Countrywide, both of which ended up paying huge settlements after they were accused of predatory lending (though neither admitted wrongdoing). The driving force was greed, not just among loan officers, but more significantly on Wall Street, where firms like Bear Stearns and Lehman Brothers were making a fortune buying up mortgages and bundling them into securities.

“Wall Street was the end of the line,” said Paul Muolo, Washington editor of the National Mortgage News and co-author of the book Chain of Blame.  “That's where the rubber met the road.”

Investment banks paid lenders a premium for subprime loans, often around 105 percent of the value. Securitization became so lucrative, many lenders began to issue their own mortgage-backed securities.

In fact, Parker-Jackson’s primary mortgage from People’s Choice was combined with nearly 6,000 others issued by the lender into a mortgage-backed security, People’s Choice Home Loan Securities Trust Series 2005-2, which was then sold as an investment on Wall Street.

Similarly, Countrywide combined Paula Taylor’s mortgage with more than 6,000 others in a security called CWABS 2006-13.

Bonds like those generated premiums for the lenders and fees for the investment banks administering them. Then, investment banks created more trusts, CDOs, which bought up portions of the mortgage-backed securities and repackaged them in enormous pools of debt.

Portions of the People’s Choice bond into which Parker-Jackson’s loan was bundled were sold and folded into at least 20 different CDOs.  Portions of the Countrywide bond that contained Paula Taylor’s were purchased by at least 34 different CDOs. 

The investment banks behind the CDOs then marketed them to institutional investors.  At each turn, they were collecting fees.

“They made money in all sorts of ways,” said Muolo. “It was a beautiful thing for Wall Street.  They ran a bond factory. They just wanted to buy those loans and make bonds as fast as they could.”

From 2004 through 2006, according to Inside Mortgage Finance MBS Database, more than $6 trillion in mortgage-backed securities were issued, slightly more than half in the private sector, with the remainder issued by government-backed entities like Fannie Mae and Freddie Mac.

Those trillions of dollars were helping fund the housing boom, which was spinning out of control.  Muolo recalled sitting out on a Sunday afternoon with friends sipping cocktails.  “We'd see the house across the street sell for 25 percent more than it did three months earlier, and we'd say, ‘You know, who the heck is buying these houses?’”

All too often, the people buying those houses were borrowers taking out subprime loans.

As home prices were soaring, Muolo said, Wall Street ignored the true risk of the loans they were buying and packaging.  “It looked like it was going to be limitless for Wall Street. They thought it was going to go on forever and ever.”

He said the investment banks had plenty of opportunities to figure it out. In some instances, the firms themselves did due diligence reviews of the loans being securitized.  In others, they hired outside consultants to do the job.

After Eileen Loiacono quit working at People’s Choice, she was hired by a consulting firm to review loans for major Wall Street firms like Lehman Brothers and Bear Stearns.

Frequently, she said the due diligence staff would set up shop in a local hotel conference room with long tables and stacks of documents.  She said the pressure was on to get through loans as fast as possible.

“They're crackin' the whip,” Loiacono said.  “And they don't want you to question anything.” 

She said that hampered her ability to examine loans for signs of undue risk or fraud.  When she pointed out red flags, she said, she was sent to the human resources department and reprimanded.

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