Monday, August 27, 2007

They’re Bad, They’re Countrywide

For those folks who would like to place blame for the mortgage meltdown on irresponsible, greedy borrowers who just couldn’t control their wild spending, the look at Countrywide Financial in Sunday’s New York Times is a dose of cold water on that fairy tale.

While I’m sure there were a few greedy, irresponsible borrowers (human nature being what it is), there were also greedy, irresponsible lenders:
... [P]otential 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.

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. 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.

So excuse me if I don’t cry a river for Countrywide as it teeters on the brink of bankruptcy.

Sadly, nearly one-fourth of those with Countrywide subprime loans are delinquent--10% are behind 90 days or more. Meanwhile, Countrywide founder and chief executive Angelo R. Mozilo has made $129 million from Countrywide stock sales during the last 12 months. No, I don’t feel sorry at all.

There are those who claim that Countrywide is an innocent bystander in this trainwreck, having the misfortunte to purchase subprime lenders who had made these bad loans. Uh-uh, I ain’t buying it:

“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.”
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 percent 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.)

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.

Why would Countrywide do this? Because, silly, these subprime loans are so much more profitable than the regular kind.

Countrywide even avoided offering eligible borrowers less-risky FHA loans because they are less profitable:

The monthly payment on the F.H.A. loan would have been $1,829, while Countrywide’s subprime loan generated a $2,387 monthly payment. That amounts to a difference of $558 a month, or $6,696 a year — no small sum for a low-income homeowner.

“F.H.A. loans are the best source of financing for low-income borrowers,” the former sales representative said. So Countrywide’s subprime lending program “is not living up to the promise of providing the best loan programs to its clients,” he said.

Er, no. That’s the understatement of the year.

The article also reveals Countrywide’s usurious practice of overcharging for things like credit checks and flood certifications. Perhaps the most outrageous fees: e-mailing documents ($100) and overnighting documents ($45). Free hand of the market will screw you every time.

What I don’t understand is why it takes something like the collapse of the mortgage industry for the predatory behavior of companies like Countrywide Financial to come to light.