In charging former Countrywide CEO Angelo Mozilo with fraud, the Securities and Exchange Commission (SEC) is zeroing in on the lender's payment option ARM business, a controversial product that Mozilo initially embraced and then later cursed.

According to figures collected by National Mortgage News, Countrywide Financial Corp. was the nation's largest POA lender in 2006, a year in which Mozilo wrote several memos cited by the SEC in its complaint. (CFC was also the largest POA funder in 2007, originating a record $86 billion in these notes which eventually can become negatively amortizing.)

In one memo Mozilo laments that CFC has "no way, with reasonable certainty, to assess the real risk of holding" POAs on its balance sheet. He adds that by putting so many loans on CFC's books "we are flying blind on how these loans will perform in a stressed environment." One loan broker who funded POAs for CFC told this newspaper that the loans were hugely profitable for the company because of all the points it charged on them. When CFC was eventually sold to Bank of America last year it had $80 billion in loans on its balance sheet, including POAs and second liens. The SEC accuses Mozilo of knowing how risky these products were but without sharing his opinions with investors.

"Concealed from shareholders was the true Countrywide, an increasingly reckless lender assuming greater and greater risk," said SEC director of enforcement Robert Khuzami. During CFC's last year of operations, the lender began sending out warning letters to borrowers who were choosing the 'neg am' option on POAs, telling them of the risks.

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