Ethics Newsline®

Among the ripples from subprime collapse: outrage over severance pay for head of troubled mortgage lender, new accreditation for mortgage lenders who complete ethics training, and plummeting stocks overseas linked to subprime meltdown

NEW YORK
The subprime mortgage collapse, which continues to be one of the most pressing economic and ethical issues in the new year, was again the focus of financial news last week.

Late in the week, it was revealed that authorities in New York State were launching an investigation into whether Wall Street banks withheld information on risks posed by investments linked to subprime loans.

The New York Times reports that although studies commissioned by the banks raised questions about highly risky loans that were used as the basis for complex investment vehicles, the banks did not disclose that information to credit rating agencies or investors.

In related news, a deal appeared near involving the acquisition of Countrywide Financial, a huge mortgage lender rocked by defaults in its many subprime loans, by Bank of America, reports the Financial Times.

But that deal raised protests from some who say that Countrywide’s founder, Angelo Mozilo, will receive $115 million in severance-related pay, along with free rides on the company jet and dues at a country club until 2011, according to the Los Angeles Times.

The deal benefits “a failed executive — a failed and overpaid chief executive — who has driven his company to the brink of bankruptcy,” Daniel Pedrotty, director of the office of investment for the AFL-CIO, told the Times. “I think shareholders are going to be especially outraged if he walks away with another pay-for-failure package.”

Mozilo and other Countrywide officials did not immediately return phone calls from the Times.

Mortgage brokers, who have come under increasing fire for their role in the subprime meltdown, last week mounted an effort to reassure the public of their integrity. A report carried by the San Francisco Chronicle notes that the National Association of Mortgage Brokers, which represents about 20 percent of brokers nationwide, has created an updated credential.

The association will grant brokers a seal of approval if they meet the association’s code of ethics, attend classes on ethics and other topics, and pass a criminal background check.

The move comes as various U.S. states move to crack down on lending practices. Last week, Missouri state legislators said they will file a bill to prohibit lenders from making loans to people with little chance of repaying, reports the St. Louis Post-Dispatch.

Missouri’s bill is modeled after similar legislation in Minnesota and Illinois.

As the week drew to a close, the subprime crisis continued to echo worldwide, with Asian stocks falling sharply on fears that losses from subprime loans will widen, Bloomberg reported.

Subprime loans — essentially, loans made to individuals with weak credit or low income or both — reached a crisis point in recent months after falling home prices drained the collateral that would have guaranteed payback in the event of default.

Compounding the problem is the fact that subprime mortgages were sold and resold to various investors, often being sliced up and repackaged into a variety of complex vehicles that are traded on world markets.

Sources: New York Times, Jan. 12 — Los Angeles Times, Jan. 11 — St. Louis Post-Dispatch, Jan. 11 — Bloomberg, Jan. 11 — Financial Times, Jan. 11 — San Francisco Chronicle, Jan. 6.

For more information, see: Related Newsline story, Dec. 11, 2007 — Related Newsline story, Nov. 5, 2007 — Related Newsline story, Sep. 17, 2007 — Related Newsline story, Sep. 4, 2007 — Related Newsline Commentary, Aug. 27, 2007.