Get out your hatchets: Part 3, the kernels?
So far, in my irritated dissection of the New York Times screed about Countrywide Financial, the nation’s largest independent mortgage broker, seeking to separate chaff, wheat, and just possibly, the kernels of malfeasance claims.
[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.]
Now, finally, we get into the high-protein claims, of which the Times generates two.
5. Countrywide was lax and profligate
To begin with, Countrywide has always been the nation’s most aggressive/ flexible/ innovative lender. I use three adjectives because the same behaviors can be described in any of those ways; it’s all a matter of perspective.
No distortion at all
Countrywide lends to both prime borrowers — those with sterling credit — and so-called subprime, or riskier, borrowers. Among the $470 billion in loans that Countrywide made last year, 45% were conventional nonconforming loans, those that are too big to be sold to government-sponsored enterprises like Fannie Mae or Freddie Mac. Home equity lines of credit given to prime borrowers accounted for 10.2% of the total, while subprime loans were 8.7%.
Thus, of the three variations from the vanilla mortgage, subprime was third largest.
But Countrywide documents show that it, too, was a lax lender. For example, it wasn’t until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money.
In a previous five-part post on the rating agencies’ role in all this, I observed that S&P blew a whistle on itself on piggyback loans in April, 2006, at least in term of raising their default risk. That’s a far cry from eliminating the product, especially for a lender that has a thirty-year track record of innovating successfully at the homeownership frontier.
And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95% of a home’s appraised value and required no documentation of a borrower’s income.
Same comment: with the benefit of hindsight, it may seem obvious that Countrywide should have shut off this pipeline earlier, but any damn fool can predict the past.
Whose first rule was, “never throw shit at an armed man.”
As recently as July 27, Countrywide’s product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade. As long as the loan represented no more than 70% of the underlying property’s value, Countrywide would lend to a borrower even if the person had a credit score as low as 500. (The top score is 850.)
Heck, I’d lend to the devil incarnate if I had a solid first mortgage and only 70% LTV.
Got 70% LTV, honey?
The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.
This is short-sighted stupidity. Would the Times rather all those people were completely excluded from the system? There’s a name for that, red-lining.
6. Countrywide exploited inexperienced borrowers
Here; ultimately, is the principal charge: that in its rapid rushing growth, Countrywide winked at or turned a blind eye
CONSIDER an example provided by a former mortgage broker. Say that a borrower was persuaded to take on a $1 million adjustable-rate loan that required the person to pay only a tiny fraction of the real interest rate and no principal during the first year — a loan known in the trade as a pay option adjustable-rate mortgage. If the loan carried a three-year prepayment penalty requiring the borrower to pay six months’ worth of interest at the much higher reset rate of 3 percentage points over the prevailing market rate, Countrywide would pay the broker a $30,000 commission.
I’ve previously posted that brokers work for themselves, and that there are significant principal-agent risks in brokerage (whether real estate or mortgage). So the possibility of brokers’ mercenary heads being turned by incentives is all too real.
We’ve stayed on the straight and narrow throughout
Did it lead to skewing the rules?
One document, for instance, shows that until last September the computer system in the company’s subprime unit excluded borrowers’ cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.
There it is — a legitimate charge. Was it inappropriate for Countrywide to exclude cash reserves? What do other lenders do? Oh, but that information is missing — no other lenders were quoted in the article.
We’re protecting our sources
What else has the Times got? This:
Few borrowers of any sort, even the most creditworthy, appear to escape Countrywide’s fee machine.
More pushbutton words.
Got emotions?
When borrowers close on their loans, they pay fees for flood and tax certifications, appraisals, document preparation, even charges associated with e-mailing documents or using FedEx to send or receive paperwork, according to Countrywide documents.
Anyone who’s ever gone to a loan closing recalls it as an event where you write a seemingly endless series of checks for small things. It’s all part of our document formalization process, but
It’s a big business: During the last 12 months, Countrywide did 3.5 million flood certifications, conducted 10.8 million credit checks and 1.3 million appraisals, its filings show.
Earlier the Times indicated that Countrywide did about 2,500,000 loans last year. It is obviously doing credit checks on loans it doesn’t make, and perhaps for other lenders.
Many of the fees go to its loan closing services subsidiary, LandSafe Inc.
According to dozens of loan documents, LandSafe routinely charges tax service fees of $60, far above what other lenders charge, for information about any outstanding tax obligations of the borrowers.
I did one Google search for “tax service fee.” It surfaced Lending Tree, which charges $50 to $100.
Credit checks can cost $36 at LandSafe, double what others levy.
The same site lists credit checks at $35 to $75.
Some Countrywide loans even included fees of $100 to e-mail documents or $45 to ship them overnight. LandSafe also charges borrowers $26 for flood certifications, for which other companies typically charge $12 to $14, according to sales representatives and brokers familiar with the fees.
Lending Tree lists $10 to $30.
Are Countrywide’s fees above market? I don’t know, and my sophisticated Googling suggests that LandSafe’s are in the lower end of the reasonable range. Against that, the article asserts roughly a 2x multiplier based on ’sales representatives and brokers familiar with the fees,’ those same stalwarts who were ‘granted anonymity because they feared retribution from Countrywide,’ but those individuals didn’t name any competitor who offers lower fees. In short, it’s hardly proof.
Hence the absolute nullity of information in this overwrought sentence:
Countrywide’s entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided.
Virtually every for-profit business is structured to wring maximum profits out of its customer base, just as every customer is seeking to wring minimum costs out of any vendor with whom she does business. It’s in the tension between buyer and seller objectives, and the multiplicity of each, that capitalism finds efficiency and creates value.
All of those fees may soon be part of what Countrywide comes to consider the good old days.
Preparez vos mouchoirs, runs the movie title: get out your handkerchiefs, and prepare to weep.
Have I been maligning Mr. Mozilo?
The mortgage market has cooled, and so have the company’s fortunes. Mr. Mozilo remains undaunted, however.
In an interview with CNBC on Thursday, he conceded that Countrywide’s balance sheet had to be strengthened. “But at the end of the day we could be doing very substantial volumes for high-quality loans,” he said, “because there is nobody else in town.”
This too shall pass
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