Will slow and steady win the race?

Countrywide Financial has not enjoyed the best of publicity in recent weeks. The biggest mortgage lender in the US, led by controversial chief executive Angelo Mozilo, has attracted a series of difficult headlines.

Recently, it has been caught up in reports of sweetheart loans to "friends of Angelo", including former Fannie Mae executives, a story that even dragged in US presidential hopeful Barack Obama.

Ex-Fannie Mae chief executive James Johnson resigned as part of Obama’s team screening potential vice-presidents after the Wall Street Journal reported that he and another former CEO, Franklin Raines, among others, received discounted rates on mortgage loans from Countrywide, a big seller of home loans to Fannie Mae.

This followed on from an incident in May when Mozilo, who the New York Times once described as "the butcher’s son from the Bronx" pressed the wrong key on his computer and inadvertently made public his view that a borrower’s plea for help, prompted by a website, was "disgusting".

Mozilo had intended to forward to colleagues the email from one Daniel Bailey Jr, asking Countrywide to change the terms of his adjustable-rate loan, but instead hit reply and so sent his thoughts into the public domain.

Bailey had used a form letter from www.loansafe.org, which offers advice to struggling borrowers. Countrywide has been flooded with similar emails, giving the company an administrative headache and clearly frustrating Mozilo, whose email said: "This is unbelievable. Most of these letters now have the same wording. Obviously they are being counselled by some other person or by the Internet. Disgusting."

Following the revelation, the company issued a statement saying: "Countrywide and Mr Mozilo regret any misunderstanding caused by his inadvertent response to an email by Mr Bailey. Countrywide is actively working to help borrowers, like Mr Bailey, keep their homes."

Hot debate

Bailey’s email has sparked a heated public debate between those that think borrowers struggling with repayments have every right to ask for help, and those who say they must face up to their responsibilities.

But the debate will be stoked by the concern that well-connected people in positions of power can get preferential treatment over the general public who are struggling to keep their heads above water in the current difficult climate.

Angelo Mozilo, Countrywide Financial's chief executive, was 'disgusted' by pleas for help

And given its rush to the top of the lending volume charts, and the way it got there – pushing just the sort of loans that helped spark the sub-prime crisis – it now has a lot of disgruntled borrowers to deal with, as the market squeezes. Any stories of unfair treatment only stir up further resentment.

Before the mortgage market went belly up, Countrywide was a very flexible lender. Before the crisis broke last year it was offering so-called piggyback loans that permitted borrowers to buy a house without putting down any of their own money. Piggyback loans are now more or less extinct, having been downgraded to junk status and worse by the rating agencies.

Countrywide also sold loans of more than 95% of a home’s value without asking for documentation of a borrower’s income.

Until July 27 last year, it would lend $500,000 to a C-minus rated borrower (the second riskiest). And borrowers could still get a loan, even if they were 90 days late on a mortgage payment twice in 12 months, if they had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on their property.

Everyone turned a blind eye to this sort of hand-over-fist lending while times were good. Countrywide, although now the notorious figurehead for the US sub-prime lending problems, was not alone in touting for business wherever it could.

And while the markets surged everyone was happy. Sub-prime loans were highly lucrative to the lender, and investors paid more for pools of them because they were likely to bring in higher cashflow.

However, after the mother of all parties, the US is now inevitably suffering the mother of all hangovers. The regulators have taken it upon themselves to administer the painkillers and the harsh words.

Legislative deluge

There have been a plethora of bills passing through the legislature in recent months. This reached a head in May when the Senate banking, housing and urban affairs committee approved compromise legislation designed to help homeowners in danger of foreclosure by expanding the availability of government-insured mortgages.

The deal was put together by senator Christopher Dodd, a Democrat, and chairman of the committee, and senator Richard Shelby, the senior Republican on the committee. Dodd has subsequently also been listed by the Wall Street Journal as a "friend of Angelo’s".

The new deal seems to have appeased the objections of president George W Bush, who had threatened to veto legislation to rescue homeowners because of the cost and because it would ultimately help the wrong people. "Laws shouldn’t bail out lenders, laws shouldn’t help speculators. Government ought to be helping creditworthy people stay in their homes," he said. "And one way we can do that – and Congress is making progress on this – is the reform of Fannie Mae and Freddie Mac. That reform will come with a strong independent regulator."

The Bush administration was willing to consider the deal if it removed any direct cost to taxpayers.

The Senate bill seeks to create an affordable-housing fund, financed by the government-sponsored mortgage buyers Fannie Mae and Freddie Mac. That fund would put $500 million towards the foreclosure rescue effort.

Dodd said the aim was to shore up the crumbling foundations of the housing market. "The primary goal here is to keep people in their homes, but also to establish a floor, a bottom to all this," he said on announcing the compromise. The foreclosure aid is tied to legislation creating a new regulatory agency to tighten oversight of Freddie and Fannie.