Get out your hatchets: Part 1, the chaff
So powerful is our emotional desire for causality that should anything bad befall us, someone must have done so with malice aforethought — it’s only a question of who.
That, as best as I can figure it, is the unstated premise of a recent New York Times tut-tut hatchet job on Countrywide Financial, the nation’s largest independent mortgage broker.
Got your thinking cap on?
Countrywide makes an obvious target — the biggest, most successful such lender, and therefore worth smearing.
[Minor personal disclosure: Two years ago, as part of Rockefeller's week-long Bellagio Housing Conference, I met and for a few days worked with Angelo Mozilo, Countrywide's founder and chief executive. I liked him then … but of course, that proves precisely nothing when it comes to whether any part of Countrywide behaved badly, whether the company as a whole, a business unit, a few offices, or some dubious individuals.]
The fate of the tall guy: I’m back row, fourth from the left, and Angelo Mozilo is sitting (second from right, next to Amos Kimunya)
Fortunately for readers, the Times wastes little time declaring its perspective, from the article’s title, Inside the Countrywide Lending Spree, with its tone of breathless expose, and its nut graf:
Lattrell on a dunking
Few companies benefited more from the mortgage mania ['Mania' -- another value-neutral word -- Ed.] than Countrywide, among the most aggressive home lenders in the nation. As such, the company is Exhibit A for the lax and, until recently, highly lucrative lending that has turned a once-hot business ice cold and has touched off a housing crisis of historic proportions.
For balanced commentary, let’s go get a disinterested observer, shall we?
“In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender,” said Ira Rheingold, executive director of the National Association of Consumer Advocates. “And anytime states tried to pass responsible lending laws, Countrywide was fighting it tooth and nail.”
In case you’re wondering, NACA is a trade association of class-action consumer-protection attorneys trolling for business:
To learn more about the problems faced by American consumers and how you can help and be helped, please explore our website to find an attorney and join our fight!
As I previously pointed out, NACA’s perspective appears to be of litigation as panacea:
Ira Rheingold, executive director of the National Association of Consumer Advocates, says companies in the chain should be held responsible.
Gosh, who’s going to hold them responsible? Perhaps — crusading trial attorneys!
The National Association of Consumer Advocates (NACA) is a nationwide organization of more than 1000 attorneys who represent and have represented hundreds of thousands of consumers victimized by fraudulent, abusive and predatory business practices
Send the attorneys, that’ll solve the problem.
“Because Wall Street is responsible for the mess we are in, they need to bear some of that burden,” Mr. Rheingold said. “Why should people who have been funding these bad loans get a free pass?”
Mr. Rheingold, here’s a secret, sophisticated tip from a professional financier: Nobody makes money buying bad loans at par.
Don’t buy loans from crooks, okay?
A more self-interested group, it would be hard to find, but the Times does it, with that old standby, the faceless former employee who may or may not have a grudge:
A former sales representative and several brokers interviewed for this article were granted anonymity because they feared retribution from Countrywide.
So the editorial commentary is virtually worthless, and Countrywide ducked the Times entirely:
Mr. Mozilo and other top Countrywide executives were not available for interviews. The spokesman declined to answer a list of questions [None of which were loaded, I'm sure -- Ed.], saying that he and his staff were too busy.
Setting aside the self-serving and unverifiable commentaries, I find a rough half-dozen thematic arguments woven together by the Times. Interestingly, none of them are explicitly voiced — perhaps that was deemed too raw — but all are clearly signaled. Ranging upward in severity — from petty envy to the vicinity
- Countrywide is large and successful.
- Countrywide’s selling was slick and effective.
- Mr. Mozilo has been selling his stock.
- Countrywide’s compensation systems created perverse incentives.
- Countrywide was lax and profligate.
- Countrywide exploited inexperienced borrowers.
Telling the story in logical order
Rearranged them and placed in context, we can examine each to see how much wheat lies within the blowing chaff — and as you read, remember Larry Niven’s aphorism, Any damn fool can predict the past.
1. Countrywide is large and successful
When it comes to exposes, size matters.
Money may not increase the number of your friends but it certainly improves the caliber and variety of your enemies.
– Auric Goldfinger
So you need an Oddjob man around the house
Why not start, therefore, with accusing Countrywide of being successful?
Started as Countrywide Credit Industries in New York 38 years ago by Angelo R. Mozilo, a butcher’s son from the Bronx, and David Loeb, a founder of a mortgage banking firm in New York, who died in 2003, the company has become a $500 billion home loan machine with 62,000 employees, 900 offices and assets of $200 billion. Countrywide’s stock price was up 561% over the 10 years ended last December.
Naturally, the Times shows the ten-year runup in stock price that coincided with the expansion of homeownership, and declines to mention that the stock’s been tumbling ever since the home market started visibly stumbling in spring 2007.
Among Countrywide’s operations are:
· A bank, overseen by the Office of Thrift Supervision.
· A broker-dealer that trades
· A mortgage servicing arm.
· A real estate closing services company.
· An insurance company.
· Three special-purpose vehicles that issue short-term commercial paper backed by Countrywide mortgages.
We have six arms of prosperity
All of these businesses touch the same value chain as the home mortgage market, showing that Countrywide has taken advantage of its core assets — underwriting expertise and a very large customer base — to create affiliated companies that offer products and services those customers may need. We should all be so evil.
Last year, Countrywide had revenue of $11.4 billion and pretax income of $4.3 billion. Mortgage banking contributed mightily in 2006, generating $2.06 billion before taxes. In the last 12 months, Countrywide financed almost $500 billion in loans, or around $41 billion a month. It financed 177,000 to 240,000 loans a month during the last 12 months.
My arithmetic says Countrywide’s average loan was in the vicinity of $175,000 to $225,000 —
Now, with the entire mortgage business on tenterhooks and industry practices under scrutiny by securities regulators and banking industry overseers, Countrywide’s money machine is sputtering.
I’m reviewing your industry practices, my dear
Notice the yellow-journalist syntax: “Now, with A and B, C.” A is the slowdown, B is “industry practices under scrutiny,” and C is the sputtering business.
A and C are basically the same thing — the mortgage volume is down. B is a freeloader, thrown in to cause the reader to conclude a linkage.
Just because A’s in front, doesn’t mean I’m not helping too
So far this year, fearful investors have cut its stock [Price -- Ed.] in half.
We’re cutting the dividend
About two weeks ago, the company was forced to draw down its entire $11.5 billion credit line from a consortium of banks because it could no longer sell or borrow against home loans it has made.
This had nothing to do with Countrywide generally, and everything to do with the capital markets’ august swoon.
Brother, I’ve been overcome
And last week, Bank of America invested $2 billion for a 16% stake in Countrywide, a move that came amid speculation that Countrywide’s survival was in question and that it had become a takeover target — notions that Countrywide publicly disputed.
Here’s an important fact: BA valued Countrywide at roughly $12 billion, roughly equivalent to its current (depressed) market cap of $20 per share on 575 million shares outstanding, less than half its $45-per-share, $26-billion-market cap this January.
Countrywide, in other words, has taken a very severe pounding.
2. Countrywide’s selling was slick and effective
In addition to the sin of being large, even worse, apparently, was that Countrywide was — oh, the humanity — professional and systematic:
Not — procedures!
On its way to becoming the nation’s largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied.
I have mastered the seductive pitch that seldom varies
“I want to be sure you are getting the best loan possible,” the sales representatives would say.
But providing “the best loan possible” to customers wasn’t always the bank’s main goal, say some former employees. Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide’s smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.
The best loan possible is the best loan for which the customer will qualify. As I’ve previously explained, the credit conundrum means that those who are more vulnerable pay more.
Who reimburses a lender for losses it suffers on defaulting borrowers? Why, all the borrowers of that credit class who don’t default.
Risk premiums are thus a kind of unwitting insurance pool, where the good pay for the bad.
Who you look like, in credit terms, determines how much of a risk premium you pay.
Do I look like a bad credit risk, you young twerp?
As a borrower, I don’t like being lumped into a risky class of ‘those people’; I want to be lumped in with the good customers, because since the lender’s risk is lower for that class and the risk premium it will charge me will therefore be lower. Key to the foregoing is that in credit decisioning, as in politics, appearance is reality. Who you look like determines what you pay.
And those who most need help grabbing hold of the ownership ladder’s first rung? They seek to lift themselves above the unfinanceable … and hence, they are charged the highest risk premium. So the market’s entirely rational actions have the effect of imposing a barrier, a barrier of cost, between the aspirant and homeownership.
There is the credit conundrum.
I have read from time to time that this is a market failure. It’s no such thing. The market is doing what the market must, and should, do — it is pricing risk as efficiently as possible given the information available.
The Times acknowledges this — grudgingly:
You mean, we have to fake balance?
To be sure, Countrywide was not the only lender that sold questionable loans with enormous fees during the housing bubble. And as real estate prices soared, borrowers themselves proved all too eager to participate, even if it meant paying high costs or signing up for a loan with an interest rate that would jump in coming years.
Countrywide, in other words, helped people get into homes — people who could shop anywhere they wanted for loans (”When lenders compete, you win!”). Countrywide had a standard sales and qualification script? What an outrage.
[Continued tomorrow in Part 2.]
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