WWAD?
He’ll go …
… from the town that loved him …
… to where the money is …
Last week, I irritatedly deconstructed a three-part New York Times clucking hatchet job on Countrywide Financial, the nation’s largest independent mortgage broker. As I chronicled in Get Out Your Hatchets, Parts 1, 2, and 3, the Times was feverishly accusing Countrywide of doing things that either were unproven or by no means bad:
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.
But what the Times missed, and what less forgivably I missed also, is what Countrywide would do, even though it should have been evident:
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
What will Mr. Mozilo do? As reported by the AP:
LOS ANGELES (AP) -
Any production-oriented business is a mixture of several entities:
We need the engine to make the car go
Every business has a supply chain: a sequence of steps, activities, and actors to create the product or service:
Any supply chain diagram must have at least one wired-up guy clutching a telephone
Efficient businesses — and competitive capitalism forces continuous efficiency — optimize their supply chain, which means driving out cushions and shock absorbers,
We remove them from the company’s body
with the result that when the inventory doesn’t move, the system comes to a grinding halt.
Little problem with the lift, here
In Countrywide’s case, it first faced an inability to move its inventory (finance out the loans it had made), and very swiftly took decisive and effective steps to get that inventory placed:
To deal with the credit crunch, Countrywide took a number of steps last month, including [1] drawing down an $11.5 billion line of credit from a syndicate of 40 banks.
The firm last month outlined a strategy under which it planned [2] to use its Countrywide Bank unit, a federal savings bank, to fund nearly all its loans, up from more than 70% at present. The bank provides a more stable source of funding than the commercial-paper market and other short-term instruments that were the only source of funding for dozens of smaller lenders that have collapsed in recent months. The savings bank also can borrow from the Federal Home Loan Banks, government-sponsored cooperatives.
In addition, Countrywide said last month it would [3] all but stop issuing loans that don’t comply with standards set by government-sponsored entities Fannie Mae (FNM) and Freddie Mac (FRE). The steps are necessary because investors aren’t buying loans which aren’t backed by those entities.
Those three steps, denoted with [brackets], assured the backed-up pipeline would flow.
Your secondary market should be working now, sir
Having thus dealt with the balance sheet (the unsold loans), Countrywide would not have taken long to notice that the engine was now running idle, and thus moved to shut it down, at least for a while.
The company said the cuts, amounting to as much as 20% of its work force, are needed because it expects new mortgages to fall about 25% in 2008 from this year’s levels.
Where will the cuts be? Why, in the engine room:
The job cuts are expected to center primarily on the company’s production divisions and its general and administrative support areas, Countrywide Chief Executive Angelo Mozilo said in a letter distributed to employees Friday.
To be precise, here’s what Countrywide said:
Reductions in workforce … will occur in areas most impacted by lower mortgage market origination volumes. The Company presently estimates a total workforce reduction of 10,000 to 12,000 over the next three months ….
Actual reductions could be lower should the interest rate environment and related market volume outlook improve.
Some of you are cut out of our plans
There can be no doubt some large workforce cuts had to be coming, and should have been foreseeable:
The latest cuts followed the elimination of about 900 positions earlier this week and 500 others last month.
Not enough.
The company employs about 60,000 people, with about 34,000 working in loan production.
The job cuts, therefore, should be seen not so much as 20% of workforce as 30-35% in originators — the engineers.
When the train shuts down, we need fewer of you fellas
[Mr. Mozilo] also called the current market cycle “the most severe in the contemporary history of our industry.”
“During the past two years the growth in home price appreciation has stopped dead in its tracks and in many areas of the country it has turned in the wrong direction,” Mozilo said in the letter.
“As we carry out our plan, the company’s overarching focus is exactly where it has always been: to remain an industry leader in the
Was this the right move?
I think of you all as individuals
The stock market probably thinks so:
Each employee at Countrywide is considered an important member of the Countrywide family,” said David Sambol, President and Chief Operating Officer. “While workforce reductions are therefore always very difficult, these decisions are being made with the utmost attention and sensitivity to the impact they will have on our Company and our people.”
As I implied in the previous post, it’s inevitable that Countrywide will be sued (if it hasn’t been already):
“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.
Class action litigation has its place, particularly in restoring the power imbalance between small individuals and large entities. I found this out first hand when I served as an expert witness, on the plaintiffs’ side, in one very large real estate litigation case, where the plaintiffs prevailed.
Out of ordinary citizens, justice sometimes emerges
Here, the anticipated future plaintiffs undoubtedly will be looking for serious or systematic evidence of misdeeds such as those implied by the Times article, namely that:
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 to the consequences of the perverse incentives of its compensation structure:
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.
Countrywide’s most recent action, laying off 10,000 people, is not without its external risks. Some of those people will be upset, and if they have tales to tell, they will want to tell them. As I wrote before:
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.
Once the employees have been laid off, what retribution is possible?
If there is substance of the Times’ imputations, this most recent event will likely accelerate its surfacing.
If such evidence doesn’t surface, perhaps it was never there in the first place.
Cracks in the story?
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