Countrywide exec warned on loans at Fed '06 meeting

By Steve Eder
NEW YORK (Reuters) - The chief risk officer of Countrywide Financial Corp, the poster-child company for the loose U.S. home loans that staggered the world economy, was warning against them even when it put him at odds with his own company -- and with Fed chairman Ben Bernanke.
At a time when many in the U.S. home loan industry were offering money to almost anyone who walked in the door, John P. McMurray publicly warned about the risks of such lax lending.
McMurray pointed out the risks at the Federal Reserve Bank of Chicago's annual conference on bank structure and competition on May 18, 2006 -- less than a year before the housing sector and mortgage lending industry began collapsing, leading to a credit crunch that spread around the world.
Such lending practices also eventually collapsed Countrywide into a fire sale takeover and led to charges of fraud and insider trading being brought against company co-founder Angelo Mozilo.
McMurray's presentation on the home lending boom contrasted with comments Federal Reserve Chairman Bernanke had made in the event's keynote address about 90 minutes earlier.
Bernanke said home finance innovation did carry risk but provided significant net benefits.
"Borrowers have more choices and greater access to credit; lenders and investors are better able to measure and manage risk; and, because of the dispersion of financial risks to those more willing and able to bear them, the economy and the financial system are more resilient," Bernanke said, according to a transcript of his speech.
A LOSING BATTLE
McMurray, who was on a panel about home finance innovation, had a different view, highlighting an internal Countrywide study that showed the realities of mortgage delinquency and the dangers of lending to people who couldn't afford to take on their loans.
But even as he cautioned the world, emails show, McMurray was losing a battle in his own office to convince top brass at the largest U.S. mortgage lender to curb its lending practices.
Last week, the Securities and Exchange Commission charged Mozilo with securities fraud and insider trading, and McMurray's emails were a critical element in the lawsuit. Countrywide's former president David Sambol and chief financial officer Eric Sieracki were also charged with fraud.
McMurray has been called a "hero" by at least one advocate for whistleblowers for trying to raise red flags in Countrywide as its lending standards rapidly went downhill.
The deterioration in its credit quality eventually triggered big losses that forced it into the arms of Bank of America (BAC.N), which bought it at a fraction of the price it was once worth.
Some of the same warnings McMurray gave to higher-ups at Countrywide about relaxed lending practices bled into his presentations at the 2006 conferences, which were attended by industry leaders, academics, investors, economists and the media, as well as Fed officials.
"He got it," said Jim Callahan, the executive director of Connecticut-based PentAlpha Capital Group, who moderated a panel that included McMurray at an American Securitization Forum in January 2006 in Las Vegas. "He was not trying to oversell a positive story." Continued...
Source: Reuters