by Azmat Khan

Before the 2008 financial meltdown, mortgage industry insiders were sounding the alarm bells. Outside contractors known as due diligence underwriters, responsible for examining the quality of loans for major investment banks, and even high ranking officials at the big banks, say they discovered a ticking time-bomb in the industry that went up to the very top of Wall Street.

What did they find? Who did they warn? And what happened to their warnings? FRONTLINE correspondent Martin Smith spoke with four insiders. Excerpts from their conversations are below.

Due Diligence Underwriting

Tom Leonard

He was a due diligence underwriter and supervisor from 2002-2007. He passed away from pulmonary fibrosis in late 2012. He was a due diligence underwriter and supervisor from 2002-2007. He passed away from pulmonary fibrosis in late 2012.

We would travel to the location where the loans were stored. And we’d have a room, either a hotel room, or a conference room or some work room where we could set up tables and our laptop computers. And we would process those loans.

We would, in effect, re-underwrite that loan. Underwriting is the process of obtaining all of the information about the borrower and seeing if they qualify, if they fit the mortgage guidelines, or the criteria for whatever their particular mortgage is. …

Usually a mortgage file started with the application that the borrower completed. And then everything that’s added to that file — credit reports, property appraisals — all of that ends up going into that loan file. After the mortgage has been funded, those loan files are supposedly reviewed a final time, and then, sent to a warehouse, where they usually take everything from that mortgage file and save it electronically. …

These loans would come in bankers boxes?

Yes. And there could be anywhere from 10 to 20 loans more, separate mortgages within each bankers box. … Depending on the size of the sample that we were looking at, [there] could be several hundred of those boxes. When we would have them delivered to the room that we were in, they could be stacks all the way up to the ceiling. …

A lot of times, we worked in hotel room conference rooms, if there was no place. And we’d be sure that when we rented cars, [we got] some vans so that we could bring the loans to us to the conference room. A lot of times, we were doing the manual labor of moving the boxes of loans back and forth. … We’d go to wherever they were, load a cart, load all these boxes on carts, and take ’em out to the vans and load ’em in the vans, and drive ’em to the hotel, unload ’em at the hotel, into the room where the due diligence underwriters were working. And we’d be putting boxes in. I’d say we, because, you know, as a QC [quality control] lead, I needed to be supervising a lot of that kind of stuff.

What kind of training did the underwriters who worked for you have?

Back in 2002 when I started, there were a lot of people at that time that had experience in the mortgage industry. We didn’t require as much training back at that time. They made kind of special provisions for me since I came in without a lot of direct consumer mortgage background. But with my CPA [certified public accountant] and merger and acquisition background, I came into it very quickly.

As this industry expanded, as we were doing more and more jobs, and having to hire more and more people, we ran out of people with experience in the mortgage industry. … We were hiring people that had no experience whatsoever in not only mortgages, but anything financial. So, they would set up a one-week training class where they would train these people in how to do the underwriting before they sent them out on the road. But I found that when we got them out on the road, that one-week training basically just got ’em started. So, a lot of it was OJT, on-the-job training.

And that’s where the leads, the QC leads, Quality control leads and whatnot came in. What we would do is try to make it a learning experience for that underwriter so that the mistakes that they made, they knew what they were, they corrected them themselves. And that became part of the on-the-job training. …

[What were some of the pressures of the job?]

We would usually work a lot more than eight hours a day. It depends on the underwriter, their experience, and it also depends on the type of loan that it is. But usually the target was one loan per hour. …

As 2002 moved into 2003, and then 2004, the volume of these mortgage-backed securities was just growing at a geometric rate. We were having more jobs, bigger jobs, and hiring more and more people. … Lots of overtime. Of course, we were working under a number of constraints. The more people that you have on the job, the more travel and lodging expenses that you had. So, you needed to keep the teams as small as you could to keep your overhead down so the company could make money.

So that required that we work a lot of hours. It wasn’t unusual to have 14, 16-hour days. People by the end of the week were so tired that most everyone slept on the plane going home. In fact, sometimes we were kind of worried about the drive to the airport, and mak[ing] sure the driver was awake.

Chico Morton

He was a due diligence underwriter from 2006-2010. He is now doing frontline mortgage underwriting and is also in the process of starting “Mile In My Shoes,” a company that educates at-risk teens and about personal finance and financial opportunities. He was a due diligence underwriter from 2006-2010. He is now doing frontline mortgage underwriting and is also in the process of starting “Mile In My Shoes,” a company that educates at-risk teens and about personal finance and financial opportunities.

Due diligence is a numbers-driven environment. They put a lot of pressure on the underwriters to get the volume out. A lot of times, they understaff the projects and they’ll have a lot less underwriters than they need. … It’s 30 underwriters crammed at a table bumping shoulders. And you know, sometimes, we were in there 6:30, sometimes, 7:30 [in the morning]. Sometimes, we were out at 5:00 and sometimes, we were out at 10:00, 11:00 [at night]. …

The work environment itself wasn’t particularly fun. But the travel was definitely fun. Bein’ able to go to Chicago for a couple of weeks and tell them, “Instead of flying me home to L.A., fly me to Miami because I want to stay down there for the weekend. And then on Sunday, you can fly me to my next job.” That was fun. Being able to party in different cities and stuff. For a young person, it was definitely fun.

Eileen Loiacono

She was a due diligence contract underwriter from 2003-2007. She is now a manual claims processor for Optum RX, a mail order pharmacy. She was a due diligence contract underwriter from 2003-2007. She is now a manual claims processor for Optum RX, a mail order pharmacy.

The more loans you got done, the more jobs you could then move onto. … As a due diligence company, you didn’t want to lose this buyout to another diligence company, so time was of the essence. Getting ’em done, getting ’em bought and sold. They would bring people in from everywhere and they’d set up folding chairs and tables all over the offices. They’d bring in food so we’d never even have to leave and we could just keep underwriting. If we could do 20 in a day, they were happy about it. And if we worked overtime, that would be good for us, ’cause we were gettin’ time and a half.

What was the atmosphere like?

It was like a party. I hate to say that because–

Generally, at parties, I don’t see people underwriting loans.

No. But they were underwriting. We were all in hotels together, so it was definitely a party atmosphere. We were getting through these loans as quick as we can. They were not being looked at like they should’ve been looked at. And when we did look at them correctly, we were scolded to not do that or not point that out. And you couldn’t say the word “fraud” because we couldn’t prove that it was fraud. …

The Warning Signs

Eileen Loiacono

[What was it that concerned you?]

There were times that everything in the file was made up, paycheck stubs, they were cut and paste. You could see it. Bank statements were not real. Nothing was real. Why would anyone want a loan on their books that is not real at all?

I would say a good 25 percent of the loans, 30 percent of the loans, shouldn’t have never even been there, should have never come across my desk. They should have been stopped before they even got into underwriting. And then, you’ve got a percentage of loans, people that didn’t quite make the right amount of money, and they’d state their loans and they [are] struggling every month to make their payments. …

Were you receiving instructions from your supervisor, through the lead, from the bank, to not kick them out?

When we showed up for a job and we’d get in the conference room, everybody was given guidelines for the specific deal, what the buyer was looking at, the pool of loans that they were buying.

So they might say, “We don’t want any non-owner-occupied properties at all in this deal. And we don’t want DTIs [debt to income ratios] to be over 45.” So, we’d pay attention to this. … But I never had the final say. They may still take it. They had the final say. …

If you saw something that was a misrepresentation, such as a stated income that was double what the W-2 showed in a person that was an employee, you earlier called that fraud. You called that a misrepresentation. You were expressly told, “Don’t write ‘fraud’ or use the word ‘fraud’?”

All the time. Even in frontline underwriting, if we suspected, we had to say, “This appears to be misrepresented or appears to be incorrect.” You would never say, “This looks funny or fraudulent.”

How was that explained to you?

It would upset the salesmen, for one thing, if you said that. Because now, you’re calling their client a cheater, a liar. Or their mortgage brokers. …

I thought the supervisors … just maybe didn’t know. But then I got the chance to talk to one of the guys from the Wall Street firms. They knew. They knew exactly what was going on. They didn’t care. They just wanted the loans. …

What was your interaction with the banks, where you got that message?

One of the jobs that we were on, and I’d like to think I remember which lender it was, I found something that was fraudulent. It was a stated income deal. It was a car wash guy [who] said he made $280,000 a year driving around his mobile car wash. Well, I didn’t believe that for one minute. The file, all his credit didn’t support it.

So, my supervisor, at that time, the lead, said: “You can ask him. He’ll be here today, the guy from the Wall Street firm.” And I asked him. And he said: “We’ll take it. His credit’s good, so we’ll take it.” It didn’t matter that the credit didn’t support his income. It’s just that he had decent credit going in. So, he was happy to take the fraudulent deal. …

Chico Morton

… When it comes to income, we’ve heard stories about people making income that made no sense. Can you give me some examples of what you remember seeing?

School teacher making $10,000 a month. Or a waitress making $12,000 a month.

You saw that?

Yeah.

And so, when you would see that, what would you think? Other than, “Maybe I should become a school teacher.”

You’re supposed to exercise some common sense. Like, say, “Okay, well, is it reasonable for this job title and this area, that they could make XYZ a month?” But a lot of times, we didn’t do that.

You didn’t do that, on the instruction of your supervisor, your lead?

Right.

So, the lead would say what?

“Looks reasonable to me.”

That waitress making $12,000 a month “looks reasonable to me?”

Yeah.

You’re kidding.

Well, depending on the area.

In what area does a waitress make $12,000 a month?

Las Vegas. You know, if it’s Vegas, then possibly with tips and all that stuff.

I can’t do the math, but that sounds pretty high.

Right. It is high.

… What were your instructions when stated income loans seemed unreasonable?

Depends on the job, and some of it depended on the lead, too. You had some leads that would bend and fold more for the client than others. All in all, they were trying to make the client happy, doing whatever they could to make ’em happy.

But I’ve been on some jobs where the lead has said, “Okay, well, no, that’s crazy. That’s just not reasonable at all.” But I’ll say, for the most part you just keep it going, where you wouldn’t even write it up.

… You would see these loans go through that you knew made no sense. And did you ever say to the lead, “I don’t get it?”

Yeah. When I first started, I came from frontline underwriting [or originator underwriting]. You’re making the decision on whether this person is going to get the loan for this house. So, when I started looking at loans on the back end, or doing due diligence-type work, when I first started, I used to get told a lot that I was looking too closely in the file, that I had to take my frontline underwriting cap off.

… Were those instructions sometimes coming down from the bank? Like Bear Stearns or Bank of America?

… We had to make our client happy, basically. So a lot of times, I think the leads were in between a rock and a hard place themselves because they’re doing whatever they can to try to make this client happy. And that’s pretty much it. …

What did you think when Bear Stearns went down?

I couldn’t believe it. I really thought it was going to impact America worse than it did. Like, I thought the whole banking system was about to go down. I mean, they’re huge. I was, like, OK, if they go down, like, I mean, shoot. Like they’re the biggest name out there.

Tom Leonard

By 2006, you were starting to have real concerns about what you were seeing? How did that begin?

Yes. It was a combination of things. We were working on subprime mortgages mostly. And it was so obvious that many of those subprime mortgages were being made to people who didn’t have a snowball’s chance of ever paying that mortgage back. …

It wasn’t uncommon to have an underwriter on one side of the room start to laugh and say, you know: “Hey, get a load of this. Here’s a guy that’s moving from $500 a month in rent to a $650,000 house, and he’s an electrician, and his wife is a waitress, and they make combined $240,000 a year.” Everybody in the room laughing. Somebody else would have another story. …

I was having concerns that yes, we were sitting in the room laughing about a lot of these things that we found on these loans. But it really wasn’t a laughing matter. … Initially, I kind of accepted it by saying, “Well, I told ’em what we were doing.” I told the investment bank. They acknowledged the fact that they were on the same guidelines that we were.

Several times, I’d get in trouble by calling one of the portfolio managers and going over my concerns with the loans. … [Headquarters] would view that as me being a troublemaker. And sometimes, I’d have instructions not to contact the portfolio manager, but all the contact would go through [headquarters]. They knew I was very good at my job, so, I was important. But at the same time, they knew that I had some shortcomings. One of which was I suppose to be blunt about it, one of ’em was my integrity.

Were you told to ignore loans that you clearly knew contained fraud?

Well, fraud in the due diligence world [was the] F-word, or the F-bomb. You didn’t use that word.

Who said so? Who told you not to use the word?

… Several of the people at the corporate headquarters. You just knew that you didn’t use that word.

Even if a stated income loan that made no sense, there was no support for–

Yeah, but you didn’t use the word fraud when you—

But it was fraud. You saw loans that–

By your terms and my terms, yes, it was fraud. By the due diligence terms, it was something else. It didn’t meet the criteria. It wasn’t referred to as fraud. To you and I, yeah, it was fraud. Sometimes it was flagrant, and sometimes it was just accepted. …

What was the highest defect rate you ever saw on a job?

We had a job that was, like, 50 percent threes. But then, the word came down, everything got renegotiated and redone, and we worked under a different set of criterias, and got that down to about 10 percent.

In other words, you would come into a job, you’d find 50 percent of the loans were defective?

That was the extreme situation.

Right in one extreme. But then the standards would be loosened so that you could qualify those loans? And mark them as not defective?

Right.

… You were instructed to lower the defect rate?

Yes.

… This is from your affidavit that you gave to Patterson Belnap [Webb and Tyler, a New York law firm that was suing Bear Stearns]. You said, “Team leads were told by … management that the clients wanted a defect rate of not 20 percent but 5 percent. The banks wanted this so they could pass the positive results along to other investors.”

Yes.

Isn’t that fraudulent?

Yes.

But you were instructed to do this?

Yes.

… So, how good was this due diligence given those pressures?

In retrospect, I was naïve and with a public accounting background, I thought my job was more important than it was. In retrospect, I have to say it wasn’t very important at all. …

Richard Bowen

From 2002 through 2005, he was senior vice president and chief underwriter for correspondent and acquisitions for Citigroup’s commercial lending group. He was promoted to business chief underwriter for correspondent lending in 2006, and left the bank in 2009. He now is a senior Lecturer at the University of Texas, Dallas. From 2002 through 2005, he was senior vice president and chief underwriter for correspondent and acquisitions for Citigroup’s commercial lending group. He was promoted to business chief underwriter for correspondent lending in 2006, and left the bank in 2009. He now is a senior Lecturer at the University of Texas, Dallas.

In late 2005, Citigroup consolidated all of their very diverse mortgage operations into one managerial unit. I was given a promotion in early 2006 and named business chief underwriter over the correspondent operations, [which] involved mortgages that Citi did not originate. And the overall operations I had purview over involved about $90 billion a year of mortgages we were purchasing from other mortgage companies.

And what were you to do with those $90 billion worth of mortgages?

I had responsibility to make sure that those mortgages met our credit policy guidelines. I had a staff of underwriters that were divided up among the different channels within my area. They had responsibility to take a look at the different volumes that we were purchasing from correspondent banks because these were supposed to meet our credit policy guidelines.

And as I was getting involved in this area and getting my arms around my new responsibilities, that’s when I made some startling discoveries that, quite frankly, many of these volumes that we were purchasing did not meet our credit policy guidelines.

… So the bank had agreed to buy these loans.

Subject to their meeting our credit policy.

Right. But you found out that the loans that your team was looking at didn’t meet the credit policy.

[In the subprime loan area], we found that [on] large numbers of loans that my underwriters looked at and … issued the decision of “turn down,” someone high up the chain of command, the chief risk officer of the Wall Street channel, was reversing my underwriters’ decisions on these individual loans from “turn down” to “approve.” …

We’re looking at some substantial changes that were made in individual pools, depending upon the size. But he could easily be reversing 10, 15, 20 percent of my underwriters’ decisions that were turned down to “approved.” And thus the execution percentage became greater. And thus it allowed the purchase of these pools of mortgages. …

So you were also responsible for looking not just at subprime loans that Citi was preparing to buy but also for the prime loans that were coming?

Yes. Which was an entirely different channel within my area. … We’re talking predominantly about purchasing one mortgage at a time. … It was my underwriters’ responsibility to actually sample those files and to make a determination if indeed they did meet our credit policy guidelines. …

[We found that] 40, 45 percent of the files were missing critical documents. For example, a file might indicate they have the income required by policy, and establish a debt ratio of, for example, 40 percent. But it was missing the income documentation, so we had no means of verifying that indeed they had the 40 percent debt ratio which was indicated by the originating underwriter.

We found that we were not receiving those files. We did not have the follow up procedures in place to actually request and receive and track all of the documents that were missing. And in fact, we found that most mortgage companies would quickly realize that we would purchase the mortgage and would go forward if they simply left out the documents that indicated it didn’t meet our policy. …

We issued “disagree” opinions on those that blatantly had the documentation that proved that they did not meet our policy.

So between the “disagrees” and the agree contingent, when I became involved and fully understood what was going on by visiting with the staff and truly understanding the processes and their individual frustrations, we found that approximately 60 percent of the loans, we either flatly disagreed and knew that it did not meet our policy. Or it didn’t meet our policy because the file conveniently left out the documents that might indicate that it would not meet our policy.

Sixty percent?

Sixty percent, yes.

Sixty percent of the loans didn’t meet the–

Our policy.

Your policy?

Yes.

Blowing the Whistle

Richard Bowen

In June 2006, I started issuing warnings. … I honestly could not believe what I found. And I asked for a special investigation by the area of Citi that is over internal controls. I asked for an investigation by that management unit. And they assigned people to investigate. They said, “yes,” they investigated. “Yes. You have very, very serious problems and you are out of compliance with policy. And we have been out of compliance with policy for some time.”

And what was the result of that?

My warnings kept continuing, and the volumes increased and the percentage of defective mortgages increased. … The loans were being sold to Fannie Mae, Freddie Mac, other investors. And Citi was making representations on these mortgages that they met our credit policy guidelines.

… What’s it like being inside and having and making all these warnings and having nobody pay much attention to them?

Very frustrating.

And how did you handle that frustration?

I escalated my warnings as best I could. I was trying to get this fixed. That was my job. … My complaints, as they were echoed and reinforced and sent on by my boss, the chief underwriter, went to the highest levels of the Consumer Lending Group.

And you never heard through your boss or through any other channel what kind of response your complaints were getting?

Promises that there were going to be some changes made. … I had identified some big gaps. We can’t do our process. We don’t have the tools to do it, nor the manpower. And promises were made that, “Yes, you will have automation” and “Yes, we’re putting people on this.”

And did the bank deliver?

We received some automation that I had been requesting originally back in the mid-2006. We did start receiving some automation, for example, identifying if truly the performance of the mortgages that were the agreed contingent, if that performance was actually worse. …

And so that improvement in your monitoring ability showed you what about those contingent loans?

The concerns that I expressed were absolutely founded because they had a significantly higher percentage of delinquency. The specific report did not measure actual foreclosure and default, but it did measure delinquency, which is an indicator of performance. …

What prompted you to write to [Robert] Rubin?

I had been issuing warnings through beginning in June 2006. And these warnings continued through 2007. The volumes increased through 2007 and the rate of defective mortgages increased from 60 percent to in excess of 80 percent. I had already pretty well saturated the management of my business unit with regard to my warnings. …

They announced an emergency board meeting for Citigroup which was going to take place on Sunday, Nov. 4. I had been struggling with, how do I convey this message? How do I get a warning effectively to the Board of Directors? …

It was widely speculated in the press that [former Treasury Secretary] Robert Rubin was going to be named chairman of the board at the board meeting on Sunday. And I made a determination I had to get warnings to him and the executive officers. So I actually drafted that e-mail that you referenced which was a part of the submission to the congressional commission and addressed it to Robert Rubin as well as the senior risk officer, the chief auditor and the chief financial officer. And I emphasized the breakdowns of internal controls. And I emphasized the potential unrecognized losses that existed in our company, trying to get their attention. …

I sent the e-mail (PDF) on Saturday, Nov. 3. I heard nothing. I actually included in that e-mail my cell phone, told them I was available this weekend, to please call me. And in that e-mail, I also requested an outside investigation. I requested, in essence, that the board come in from the outside and investigate what was going on. …

I received no response until a very brief phone call that I received on Tuesday. This was from one of the general counsels of the corporation, and he said: “We got your e-mail and we take it seriously. And we’re going to look into it.” And in essence he said:, “Don’t call us. We’ll call you. Bye.” …

Later in November, I still hadn’t heard anything as a follow up on that phone call that I’d received… So I sent…an e-mail. I said, “Please contact me. You need to know the details behind this e-mail because there’s extreme risk to the company.” And I didn’t hear anything. In December, I sent another e-mail and I forwarded the previous pleading I had sent to him from November. And I said, “Please contact me. You need to know the details behind this. There are risks to the company.” And I didn’t hear anything from anyone until after the end of the year.

And then?

There were a series of conference calls. And over many hours, I explained to them what had gone on and the circumstances underlying the warnings that I’d been sending for a year-and-a-half. And then I was no longer physically with the bank. …

Editor’s Note: During Financial Crisis Inquiry Commission’s hearings, Robert Rubin told chairman Phil Angelides about the e-mail, “I do recollect this and that either I or somebody else, and I truly do not remember who, but either I or somebody else sent it to the appropriate people.” He said actions were taken to improve the bank’s due diligence operations. Read the FCIC’s report with Rubin’s responses here (PDF). In this letter from Citigroup (PDF), the bank said it had responded to Bowen’s claims by undertaking an investigation and revising the system of underwriting reviews. Citigroup later admitted wrongdoing in a 2012 civil fraud suit for failing to perform basic due diligence.

How do you and the SEC meet up in mid-2008?

I testified before the SEC.

They invited you?

Yes. … I didn’t directly talk to the SEC. They found my Rubin e-mail and they wanted to pursue the background on that. … And I gave them a thousand pages of documents.

When I visited with them, they were very enthusiastic in pursuing what they found in those documents. … They were excited about some of the information I had given them, and they wanted to pursue that to whatever legal conclusion they could come to. They indicated to me that yes, they were very interested in having me back and wanted, in fact, me to stay a third day. But my attorney had a conflict. So they said, “We’re going to reschedule this.” … There were vacation schedules and then all of a sudden, I never heard from ’em again.

What do you think about that?

This was late 2008.

Bigger fish to fry? The world economy is in trouble. Citibank is in very bad shape. The government’s bailing them out.

And maybe all of the above. I don’t know.

… Have you ever been contacted by the Justice Department?

Yes. It was 2010, after I had testified before the congressional commission [chaired by Phil Angelides]. …We spoke over the phone. … I gave them some information. I elaborated on the only thing that they had seen which was my commission testimony and I never heard from ’em again. …

Were you disappointed?

Yes.

… Do you think you did enough?

I did what I could. I truly believe that I did everything I could. It was my job. It was a new job and I took it seriously. And I don’t know — [with] the value of hindsight, I don’t think I would have done anything differently.

Does the government have a greater responsibility to now in hindsight go back and find those responsible for making what now appear to be disastrous decisions?

We’re talking generally with regard to the industry, I think overwhelmingly, yes, they do. They have obviously uncovered a large part of the stories that went on in the individual companies. Why they have not gone back and why they have not tried to achieve some degree of accountability for those decisions that were made across the spectrum, I don’t know.

Tom Leonard

What’s the story of your demotion and what prompted it.

The job was what we finally referred to as the undocumented taxpayer loans. … It was a very large job. As I recall, there were, like, 2,500 loans. I had 20-plus underwriters on the job. We had to have a separate room for all the bankers boxes, there were so many. …

These undocumented taxpayer loans were loans that were tailored to illegal immigrants. … The guidelines basically said that all they had to have was a taxpayer ID number. Well, the Internal Revenue Service was kind of generous when it comes to taxpayer ID numbers. … You don’t have to have any documentation to get a taxpayer ID number. The IRS, if you volunteer to pay taxes, they’re going to make it as easy for you as they can. … All they had to have was some documentation that related some income to that taxpayer ID number. … They may have some things in there that have pay stubs or something else with a social security number that’s not their social security number. …

So I called a portfolio manager, this lady at Lehman Brothers, and I said I was making sure that she understood what these guidelines said. And she said, “Oh, yeah.” She says, “Lehman Brothers, we’ve got guidelines just like these in house.”

And I said: “What do you expect us to do on these loans to review? There’s no requirements. These people can have multiple names. There’s no income verification. They have no credit reports. They can substitute a letter from their landlord that they’ve paid rent for all the credit requirements. Or a telephone bill.” I said, “What is it that you expect us to do on these that’s going to make you feel better about these loans, to make you feel like there’s no fraud involved?” I said the F-bomb.

You said any number of these loans could be fraudulent.

Yeah, I did. I said, “Every one of ’em could be.” And I didn’t say what I was really thinking: that every one of ’em probably is. Five minutes later, I get a call from [headquarters] that I will not call the portfolio manager at Lehman Brothers. I’ll have all of my communication directly through [headquarters]. I’ll never again as long as I’m working for [for the company], never again use the word fraud. And that was the last job that I led. I was demoted immediately after that job was finished.

… Before, you had written some internal memos where you expressed your concern about quality of the loans. … Did you ever receive a response?

Just a verbal response. I was basically patted on the back and [told], “Well, we’ll look into it, and take your concerns into account and see what we can do about it.”

Were your concerns, as far as you could tell, taken into account?

No.

… So you wrote you wrote to your congressman?

Uh-huh. … The congressional responses were, “Thank you for your letter, and thank you for your interest.” And, “We’ll look into this,” basically.

I also wrote letters to just about every television journalist, and network journalist that I could get my hands on. Sent as e-mail with attachments and never received any response. [I wrote to] CNN and Fox News. ABC News, NBC News, CBS. My daughter was working at that time with one of the network affiliates in Phoenix, and she knew how upset I was about this whole thing. So she put me in contact with their consumer reporter, who does the consumer complaints and that sort of thing. He came out to my house and interviewed me for about 45 minutes. And I gave him documentation, and tried to as best I could to explain the situation to someone that was basically ignorant of the mortgage industry. Never heard another word. …

During the mortgage meltdown, [Fox News host] Bill O’Reilly was having a temper tantrum on his show where he was going off about, “Why didn’t I hear about this? Why didn’t somebody tell me about all this that was going on?” And I almost threw my shoe through the television set. Ask my wife — I was screaming and yelling, “I did try to let you know.” ‘Cause he had been one of the ones that I had sent e-mails and attachments with all of this stuff. …

You heard nothing back?

No. …

After you tried to make this public, were you ever contacted by anybody in law enforcement or the Justice Department?

Not until just recently. Within the last three months.

Who contacted you

A special agent from Fannie Mae. An assistant U.S. attorney in Phoenix working for the U.S. attorney’s office in New York City.

And so this all happened six years ago or more?

Yes

And you were never contacted by anybody in law enforcement, even though you had written to your congressman, to your senator, and to the media?

Yes.

And nobody got in touch with you until it was Patterson Belnap [Webb and Tyler, the New York law firm that was suing Bear Stearns] that first got in touch with you about this?

Yes. They were given my name by another due diligence team lead that said, “Hey, you ought to talk to Tom Leonard,” because he knew the things that I had been put through. And so, he contacted me, and I gave a deposition, etc.

And you told the truth to them about what you had seen?

Yes, sir.

And you were a supervisor?

Yes.

And you saw what your underwriters were doing?

Yes.

And you saw the instructions?

Yes.

Coming down from the banks?

Yes.

Is this something you think is important for the government now to be prosecuting, the kind of fraud that you saw?

Yeah. If it’s still within the statute of limitations, I think it should be prosecuted.

What does it tell you that it hasn’t been prosecuted?

I think we’ve developed in our society an idea that any time we see a problem, we can create a law that’s going to prevent that problem from happening in the future. We don’t need new laws. We need to enforce the laws that have been on the books before.

I’m hoping that by prosecuting some of these fraudulent transactions with laws that existed for decades, not new laws that have just been written and accepted as some kind of a knee-jerk reaction to a situation, we can see that we don’t need new laws. We just need to enforce the laws that were there.

So you’d like to see some bankers pay the price? Be held accountable?

I would. I don’t expect it. I just have seen too many instances where it didn’t happen. But I’d like to see that.

he Department of Justice says that it’s very hard to prosecute these kinds of crimes because you have to prove criminal intent?

Yes, sir.

How do you respond to that?

I think if I was sitting on the jury, and I saw this information, that I could pretty well assure myself that there’d been criminal intent.

… And why have you decided now to speak out publicly?

I’ve been trying to speak out publicly for years. Now is the first time anybody’s shown any interest in what I had to say. I would’ve spoken out publicly seven, eight years ago if anybody had shown any interest. I was trying.

I’m not trying to paint a picture like I’m some kind of white knight. It’s just you know what’s right, and you know what’s wrong. And you try to do what’s right.

Eileen Loiacono

I did get a call from the House Judiciary Committee. And they were interviewing [about] of all these things that happened with these Wall Street firms, and of course, some of the places where I did frontline underwriting. … And they wanted me to come to town and talk to them about this investigation, talk to several lawyers. I was happy to do it.

They were in shock, some of the things that I told them. But I never heard from them again. And you wonder, “Why is that? Why has nobody been arrested? Why has nothing taken place? …

Yes, it was fraud and it was planned way, way up, way above our heads in my opinion. I don’t think they sat down and planned it this way to begin with. But I think some of these men got together and said, “You know with, look at what we can do with this. … They’re going to sign off and then we’re going to do this.” So, these guys at Countrywide, these bigwigs there and the bigwigs at Ameriquest and the bigwigs in the Wall Street firms, they all knew what was going on.