Some Thoughts on Conrad, Dodd, and the Friends of Angelo

Some folks are calling yesterday's Ethics Committee hearing as a breaking news. At this hearing, Robert Feinberg, a loan officer at Countrywide, testified that not only did both Dodd and Conrad receive favorable terms on their mortgages under a program known as Friends of Angelo, but they both knew that they were receiving favorable terms not available to the general public. This really isn't news. It was never in doubt that Dodd and Conrad both received favorable terms under this program. The two Senators acknowledged this. They just both claimed that they didn't know they were getting favorable terms.

This is of course absurd. A bank isn't going to give a powerful person favorable terms on their mortgage without telling them. The whole point is a I'll scratch your back and you'll scratch mine transaction. There's no point to giving a powerful person better deals if they don't know they're getting the better deal. Obviously, the bank wants the powerful person to know they are taking care of them. That can't happen if the powerful person doesn't know they are being treated well. So, the two Senator's assertions that they didn't know was always absurd. Mr. Feinberg merely confirmed what everyone should have already known.

What's really shocking is what was buried in the story. The first revelation Feinberg says was not accurate. Apparently, it is being reported that Senator Dodd listed both his home in Connecticut and in Washington D.C. as primary residences. Of course, you can't have two primary residences. You can only, according to mortgage rules, primarily live in one home. This property, be it a home, condo, etc., would receive the best rates. All other properties would have slightly worse rates. That's because if things go bad you would stop paying on all secondary properties first. You'd never want to stop paying on your primary residence because if that is foreclosed on you'd have no place to live. If Dodd did in fact list both homes as primary residences that's fraud. More than that, this sort of fraud is known as "occupancy fraud" and it was the second biggest fraud problem in mortgages behind fraud on income and assets. It's important to note that Feinberg, the loan officer, disputes that this occurred.

Conrad's revelation is far more serious. Conrad was attempting to finance an eight unit building. That is a commercial property. The financing on such a building is much more difficult and has significantly worse rates. He was given an exception and was allowed to finance this building as a residential property. If that's the case, that is fraud on a grand scale.

The favoritism shown to Dodd likely saved him a quarter to a half a percent. The favoritism shown to Conrad likely saved him two to three percentage points if it's accurate that he was allowed to finance his commercial property as a residential property. Conrad's people explained it this way.

Conrad's spokesman, Chris Gaddie, said Monday that the senator "never asked for, expected or was aware of loans on any preferential terms" and has "worked overtime to set the record straight."

"He went with Countrywide simply because they already had his financial information," Gaddie said. He added that a Countrywide official had told Conrad that "it is not unusual for them to make exceptions for good customers if they could sell the loan in the secondary market. We now know that they did sell the apartment building loan in the secondary market."

That's just non sense. There's no way a secondary market would buy a residential loan on a commercial property. The rules are very clear and cut and dry. Residential properties are four units and less. His property was eight units. So, if he got a residential loan on this property, there's no way it was sold on the secondary market. Secondary market players often buy in bulk. As such, this loan would have either been packaged with other residential loans. In that case, a commercial property would have been included in a portfolio of residential properties. Or, it would have been packaged with other commercial loans. In that case, this particular loan would have had much more favorable terms than the rest of the portfolio. In either case, if what Conrad's people are saying is true, and this was sold in the secondary market, it was done fraudulently.