When Donald Trump announced his choice for Treasury secretary last month, he called Steven Mnuchin a “world-class financier,” citing business successes like his profitable turnaround of a California bank.
But soon after Mnuchin sold OneWest Bank last year, problems emerged that may tarnish his record there. The U.S. Department of Housing and Urban Development opened an investigation into foreclosure practices in a division that handles loans to senior citizens. Accountants determined the unit’s books were a mess. Eventually, the bank’s new owner, CIT Group Inc., discovered a shortfall of more than $230 million.
“I want to express our disappointment,” CIT Chief Executive Officer Ellen Alemany told investors in July. “We have a new management team in place, and they’re making good progress in implementing practices to strengthen the controls and procedures.”
The old management team had included Mnuchin. He stepped down as CIT’s vice chairman in March. When he left, less than a year into a three-year employment contract, he received about $10.9 million in severance, according to public filings — an amount consistent with what he would have been entitled to if he had been fired. He remained on the board until this month.
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Three people with knowledge of the departure say it wasn’t related to the troubled unit, Financial Freedom. Rather, they say, Mnuchin was part of a group of more than a dozen executives who left as Alemany prepared to take over and install her own team.
Mnuchin, who declined to comment through a spokesman, may have personally received about $380 million in sale proceeds and dividends from OneWest, according to Bloomberg calculations.
CIT said last month that the accounting issue probably won’t be cleaned up by the end of the year and that it has begun talks to resolve the HUD investigation. Meanwhile, it has been trying to sell the unit. Matt Klein, a spokesman for the New York-based company, said CIT “will continue to implement enhancements to strengthen controls and practices of the legacy Financial Freedom business.” A HUD spokesman declined to comment.
While Mnuchin can count on the support of the Republican majority in the Senate for confirmation, Democrats have signaled a tough fight. Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee in charge of vetting and confirming Treasury Department appointments, described Mnuchin’s leadership at OneWest as “profiting off the victims of predatory lending.”
During the go-go years of the mortgage boom, Financial Freedom was one of the country’s biggest providers of reverse mortgages. These government-backed loans allow Americans over 62 to borrow against the value of their homes. Borrowers don’t have to pay interest and can stay in the homes until they die. Then a sale of the property can be used to repay the debt.
The loans were often marketed aggressively, especially before the housing collapse. Financial Freedom commercials featured celebrity pitchman James Garner. Sometimes, lenders encouraged a borrower to remove a spouse under the age of 62 from the home’s title, setting the stage for a potential foreclosure on an elderly widow or widower when the borrower died, according to 2012 report by the Consumer Financial Protection Bureau.
“The reverse mortgage is an icky business,” said Christopher Whalen, head of research at Kroll Bond Rating Agency in New York, noting that big banks like Wells Fargo & Co. stopped selling the product in recent years.
Financial Freedom was part of Pasadena, California-based IndyMac Bancorp, one of the most reckless lenders in the housing bubble a decade ago. IndyMac collapsed and was seized by the Federal Deposit Insurance Corp. in 2008.
Enter Mnuchin, 53, a former Goldman Sachs Group Inc. executive who later ran a hedge fund and financed Hollywood blockbusters. He led a team of investors, including George Soros and John Paulson, that bought the remains of IndyMac in 2009 with the help of billions of dollars’ worth of government incentives.
Mnuchin renamed the bank OneWest. He slowed reverse-mortgage lending and completely stopped making new loans in 2011. From then on, Financial Freedom operated as a servicer, working on behalf of investors like Fannie Mae that owned the loans.