Countrywide's boiler room

How else do you describe the goings on at the Calabasas-based mortgage lender, at least based on Gretchen Morgenson's Sunday story in the NYT? Up until recently, Countrywide Financial has been portrayed more as a victim than a perpetrator of the subprime abuses that have led to the current mortgage meltdown. Not anymore. Here's how her piece opens:

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 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.

Topping that list of executives is CEO Angelo Mozilo, who hasn’t bought a single share of his company's stock in 20 years - but who has sold $406 million since Countrywide began trading on the NYSE. Certainly, lots of investors got rich on Countrywide, especially during the recent housing boom, but they were probably unaware of the company's scummy methods for attracting borrowers. “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,” Ira Rheingold, executive director of the National Association of Consumer Advocates, told the NY Times. “And anytime states tried to pass responsible lending laws, Countrywide was fighting it tooth and nail.”

In a mid-March interview on CNBC, Mr. Mozilo said Countrywide was poised to benefit from the spreading crisis in the mortgage lending industry. “This will be great for Countrywide,” he said, “because at the end of the day, all of the irrational competitors will be gone.” 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. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home’s appraised value and required no documentation of a borrower’s income. 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.)

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One reason these loans were so lucrative for Countrywide is that investors who bought securities backed by the mortgages were willing to pay more for loans with prepayment penalties and those whose interest rates were going to reset at higher levels. Investors ponied up because pools of subprime loans were likely to generate a larger cash flow than prime loans that carried lower fixed rates. As a result, former employees said, the company’s commission structure rewarded sales representatives for making risky, high-cost loans. For example, according to another mortgage sales representative affiliated with Countrywide, adding a three-year prepayment penalty to a loan would generate an extra 1 percent of the loan’s value in a commission. While mortgage brokers’ commissions would vary on loans that reset after a short period with a low teaser rate, the higher the rate at reset, the greater the commission earned, these people said.

Mozilo is quickly turning into the poster boy for the debt crisis (wonder if he has any regrets about not stepping down last year, as he had considered). During an interview last week on CNBC (his preferred means of communications given the softball treatment he receives), Mozilo put the blame on the Merrill Lynch analyst who not only downgraded Countrywide stock, but raised the specter of bankruptcy (this was before Bank of America came to the rescue late last week). I mean, what nerve! Barron's columnist Alan Abelson isn't impressed with B of A's $2 billion investment, which will return a much heftier yield - 7.25 percent - than what the schmos who bought in a few months back will be getting. Plus, writes Abelson, "$2 billion is kind of like two bucks in Bank of America's scheme of things and, more than likely, it got a heck of a deal for being kind."