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NEWS ANALYSIS

Countrywide's confident tone turned to crisis

CEO forecast the lender would 'shine' as the industry changed. Later, he said the firm knew the bubble would burst.

September 03, 2007|Michael A. Hiltzik | Times Staff Writer

A year ago, Countrywide Financial Corp. Chairman and Chief Executive Angelo R. Mozilo was boasting that the looming shakeout in home prices and hike in mortgage interest rates would usher in a period of remarkable prosperity for his company.

"I have 53 years of experience. . . and this is nothing compared to 25% prime and 17.5% mortgage rates and 10% unemployment," he told a conference of bond investors last September, pooh-poohing the effect of rising rates.

He assured his audience that Countrywide's "proprietary technology" would help it meet its goal "to avoid any foreclosure." Countrywide invariably kept to "prudent underwriting guidelines," he said, to ensure that its adjustable-rate borrowers could handle the highest interest rates that might kick in during the life of their mortgage.

"This is when we shine," he said, calling Calabasas-based Countrywide "an industry leader" and "a role model to others in terms of responsible lending."

Today, the picture looks much different. Countrywide's financial reports and recent comments by Mozilo and other executives show that the company, the nation's largest mortgage lender, has been less a role model in the home-loan market than a prisoner of competitive trends.

Delinquency and foreclosure rates have soared on many Countrywide loans, including mortgages that were thought to be relatively sound, such as home-equity lines of credit.

The tone of executives' comments has gone from complacent to almost apocalyptic. "We are experiencing home price depreciation almost like never before, with the exception of the Great Depression," Mozilo said in a July 24 conference call with securities analysts.

The company's traditional frames of reference for the performance of its loan portfolio, he added, may no longer be "a fair comparison in light of what is happening to real estate values."

As for his claims that Countrywide's broad mix of revenue-producing activities would allow it to beat back competition from investment banks and other rivals -- "we had them surrounded," he said last year -- more recently the company has been in the role of supplicant.

On Aug. 22, it accepted a $2-billion infusion from Bank of America Corp. on terms that will allow the bank to acquire as much as a 16% stake in Countrywide at a cut-rate price of $18 a share. Analysts are still debating whether the investment in preferred stock -- paying BofA a dividend of 7.25% until it is converted into common stock -- is a vote of confidence or a sign of Countrywide's weakness.

BofA "wasn't willing to own it now at $18," said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods. "That would have been a much greater vote of confidence." He acknowledged, however, that BofA hadn't received approval from federal regulators to make such a purchase.

One reason Countrywide finds itself in a predicament is that it needed to offer the same variety and pricing of mortgage products as the overall market.

Asked during the July conference call if Countrywide would have done anything differently had it known a year or two ago what would happen to home prices, Mozilo replied that the firm knew the housing bubble would soon burst, but could not have made different choices.

"Our whole place in the industry would have changed dramatically because we would have arbitrarily made a decision that was contrary to what everything appeared to be," he said. Among other problems, mortgage brokers would have stopped offering the company high-grade or prime mortgages if it would not also accept lower-quality sub-primes.

Countrywide suggests that mortgage pricing and underwriting standards during the housing boom were set by the most aggressive -- that is, least rigorous -- lenders, and that it was all but powerless to impose its own standards.

"Most of the large bank lenders, as well as Countrywide, were limited, slow, reluctant followers behind the lenders who most aggressively relaxed underwriting guidelines," the company said in a written response to a question from The Times.

If Countrywide had set its own mortgage rates higher to reflect its judgments of risk, it said, "borrowers would simply have chosen one of a myriad of other lenders offering more competitively priced products."

Mortgages "are a commodity business," said Cannon, the banking analyst. "You have to pretty much accept what the market gives you."

Countrywide, consequently, chased the same kinds of loans as other lenders. Beginning in 2004, it stepped up its origination of two products: sub-prime mortgages (made to borrowers with poor credit, minimal down payments or both) and home-equity lines of credit.

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