One of the enduring puzzles about the fallout from the housing collapse and financial meltdown of 2008 is why only one executive from a big American lender was found guilty of contributing to the mortgage crisis. The US government has yet to explain with any degree of credibility why it singled out Rebecca Mairone for this dubious honour, while others have not been charged.
However, we may get some answers to this question soon because Mairone, 48, a former executive of Bank of America’s troubled Countrywide division, is set to appeal against her 2013 conviction for fraud, which landed her with a $1 million fine and left her reputation in tatters.
The appeal is due to open on December 16. If successful, it will pose awkward questions for banks and prosecutors, notably this one: if Mairone was not to blame for the mortgage meltdown at Countrywide, then who was? It matters because 5.5 million families lost their homes to foreclosure between 2008 and 2015, partly as a result of poor lending practices of the kind that Mairone was accused of perpetuating.
She was hired by Countrywide to help to reorganise part of its mortgage business and was one of the people behind a programme known as the High Speed Swim Lane, or HSSL — later nicknamed The Hustle. Bank of America inherited The Hustle when it bought Countrywide Financial in July 2008.
Prosecutors claimed that under the programme, the emphasis was put on the quantity rather than the quality of loans; mandatory checks on borrowers’ incomes were removed and inexperienced clerks were relied upon to do the job of specialist underwriters. Countrywide knew from the beginning that HSSL would generate high levels of bad loans that would then be sold to the government-sponsored mortgage companies Freddie Mac and Fannie Mae, but continued anyway, prosecutors said.
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The scheme was blown apart when Edward O’Donnell, a former colleague of Mairone, filed a whistleblower lawsuit against Countrywide and Bank of America. The US government joined the case, adding Mairone as the only individual defendant.
In prosecuting her, the government never suggested that she had been a rogue employee who set out to enrich herself at the expense of her employer — or even that she had benefited personally. Nor did it ever explain why Greg Lumsden, the former head of Countrywide’s sub-prime division and her supervisor, was not charged.
It’s a question that Marc Mukasey, one of Mairone’s lawyers, wants answered, arguing that “it’s incredibly unjust that Rebecca took part in a legal, legitimate ethical, commonsense business reorganisation, with the approval and permission of everybody around her, and yet somehow the government chose to prosecute her, a mid-level manager,” and not the people around her.
In fact, Angelo Mozilo, Countrywide’s chief executive, was charged, but for totally different offences — insider trading and securities fraud — and he settled out of court, with Countrywide paying a large part of his penalty.
Mr Mukasey suggests his client was the victim of “a jealous, angry former colleague [Mr O’Donnell]”, adding that her gender may have played a part: “Countrywide was a boys’ club and she was not part of the club.”
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It is for the US Court of Appeals to adjudicate on Mairone, who now uses her maiden name, Steele, and lives outside Philadelphia, where she does consulting and charity work. Yet the case has a wider relevance, providing an uncomfortable reminder of how hard it is to apportion blame to individual actors in highly complex financial dealings and what kind of wrongdoing merits prosecution.
It is no small irony that this month, just after Mairone’s appeal papers were filed, Fannie and Freddie issued new guidelines aimed at simplifying the rules and watering down penalties that mortgage lenders will face for relatively minor errors made when underwriting loans that the mortgage-finance groups buy.
Fannie and Freddie don’t make loans but buy them from lenders, package them into securities and then give guarantees to reimburse investors if borrowers do not repay. After the financial crisis, Fannie and Freddie said that they had found billions of dollars of mortgages containing errors. They subsequently demanded that lenders buy back the loans and scaled back their lending. Mairone’s conviction, justified or not, is a legacy of those times. Now, rather than require lenders to buy back loans with insignificant defects, the new rules would require them to pay Fannie or Freddie what would have been paid to the companies had the details been accurate.
These new guidelines coincide with a U-turn by the Treasury in Britain, which has just abandoned plans to make senior bankers “guilty until proven innocent” of any knowledge of misconduct by staff. The so-called reverse burden of proof rule was created in 2013 to deal with the impression that senior executives seemed to escape blame for wrongdoing at their companies. Banks complained that it was too onerous and would drive the best executives to work overseas.
These American and British reforms may rankle with some, because they could make it even more difficult in future to secure the conviction of people such as Mairone, but we need to hold our noses and take a deep breath because it makes perfect sense to rewrite the rules and practices introduced in the aftermath of the financial crisis if they are found to hurt ordinary consumers by reducing access to mortgages or banking services.
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Alexandra Frean is US Business Editor of The Times