A federal probe of Countrywide, the nation's largest mortgage lender, is turning up evidence that sales executives at the company deliberately overlooked inflated income figures for many borrowers, people with knowledge of the investigation say.

Some of the problems are surfacing in a mortgage program called "Fast and Easy," in which borrowers were asked to provide little or no documentation of their finances, according to these people and to former Countrywide employees. Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as "prime," meaning low-risk.

Fast and Easy borrowers aren't required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn't even require loan officers to verify employment, according to an October 2006 presentation by Countrywide's consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.


A Fannie Mae spokesman says that the performance of Fast and Easy loans originated by independent mortgage brokers has deteriorated, and that Fannie is phasing out the purchase of such loans.

A spokesman for Countrywide says that Fast and Easy loans are not plagued by defaults. As of March 31, about 3% of Fast and Easy loans were 30 days or more overdue, compared with 3.5% for Countrywide's fully documented prime loans, he says. Fast and Easy borrowers, he says, had to meet credit standards that were tougher than those for prime loans requiring full documentation.

In recent years, about one-third of all Countrywide prime mortgages eligible for sale to Fannie Mae were Fast and Easy.

During a conference call with investors last July, Countrywide acknowledged that Fast and Easy loans were riskier than fully documented prime loans. A chart provided to investors showed that a borrower who wasn't required to document income would be at least 50% more likely to fall behind on payments than a similar borrower who did provide documentation.

50% more likely to fail, but hey, only 3% are delinquent so far! What could possibly go wrong?

We wonder if that figure includes what happens when some of these borrowers end up underwater and tempted to walk away. See below regarding LTVs:

By the time Countrywide began a push in 2003 to expand loan volume, say two former executives, it had relaxed its lending standards, including for Fast and Easy. The minimum credit score for Fast and Easy borrowers fell to 680 from the original 700. And the loans could now be made for as much as 95% of the estimated value of the home, up from the original 90%.

Hmmm... 95% and what is the national price decline so far? -10%? And what are we already past in bubble zones? -20%? We would love to get a peek at the equity position of "fast and easy" borrowers.

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