From Homescape

The Wall Street Journal reported on Saturday that the FBI is looking into fraud allegation against Countrywide Financial Corporation. The Calabasas, Calif.-based Countrywide is the nation’s largest home lender, responsible for roughly one-fifth of the mortgages in the United States.

The probe will examine underwriting and mortgage-origination practices, and whether the company misrepresented losses related to subprime loans, theJournal said. Investigators are also looking at possible accounting fraud or insider trading, according to Reuters.

Countrywide is among 14 companies whose business practices in the troubled mortgage industry are being investigated by the FBI. In 2006, the bureau documented 35,600 reports of suspected mortgage fraud, up from 22,000 the year before and 7,000 in 2003. The subprime mortgage crisis, which stemmed from loose underwriting of home loans given to borrowers with poor credit history, has played a leading role in devastating the housing market and has catapulted the country’s economy towards the edge of recession.

Catching a falling knife
As part of the investigation, the FBI is cooperating with the Securities and Exchange Commission, which is conducting about three dozen civil investigations into how the subprime loans were made and packaged and how securities backed by those packages were valued, according to the Atlantic Journal-Constitution.

CNNMoney.com reported on Monday that when the housing crash began, Countrywide was faced with an increasing number of subprime customers who were delinquent with their mortgage payments. The company was forced to essentially shut down its subprime lending operations last year to focus on originating loans that conform to Fannie Mae and Freddie Mac guidelines, which are considered to be safe investments.

In January, Bank of America (BofA) agreed to acquire Countrywide for $4 billion in stock, but the plans have yet to be finalized. And with the recent FBI investigation, the acquisition could quickly be derailed. With possible fines, legal judgments and a whole onslaught of other liabilities the company may be facing, BofA may need to rethink their decision. You’re talking about loses in the billion dollar range.

On Friday, Countrywide’s founder and CEO, Angelo Mozilo, was among a trio of lending-company CEOs that testified before the House Committee on Government and Oversight Reform. He joined Charles Prince of Citigroup and Stanley O’Neal of Merrill Lynch, who both resigned from their post during the wake of the mortgage crisis. All three defended their lavish compensation packages, despite the loss of billions to their companies and shareholders, CNN.com reported.

The Feds and state prosecutors had previously focused their investigations on local fraud rings that involved speculators, loan officers and other industry insiders, but now it looks like they’re going after the queen bees.

Got hot local housing tips or a story you want to share? Contact Amy Le at openingdoorsblog@homescape.com.