Business Blog: Hoover’s Business Insight Zone

Is Countrywide Financial fundamentally dishonest? That was the flavor of many of the news stories that came out earlier this week when Countrywide announced that it would not inflict devastating mortgage-rate resets on financially strapped borrowers. The basic message: Countrywide is selling this as a good turn they’re doing for borrowers, but in fact . . . it’s secretly designed to keep the company from financial disaster. As though this would be news about a profit-seeking enterprise that’s facing hard times.

[Sound effect: curmudgeonly writer mutters something about the state of the media.]

But. We have enough facts in hand at this point to surmise that Countrywide is not exactly the Red Cross when it comes to helping people out. A few weeks ago I put out an appeal to Countrywide employees to give their views on the company. One anonymous commenter (”low level insider”) wrote this fascinating bit, the details of which are worth wading through:

I am writing to you as a low level stiff toiling away in what was once the subprime division of Countrywide. We do mostly EA [Expanded Approval] and Prime now, although for some reason we are .50% to 1.75% higher than Countrywide retail on the same conforming loans. I wanted to tell you about a little know loophole that exists in Expanded Approval underwriting guidelines. You don’t need a verification of deposit to prove assets. Why is this a big deal you may ask? In Expanded Approval underwriting, assets are a huge determining factor when it comes to getting an approval through DU. [DU = Fannie Mae's Desktop Underwriter program.] The more assets you can show the better your chances are of getting a better loan even with shaky credit. What does this mean? Get a customer’s bank statements and fax them to your efax. Open them up in something as simple as Microsoft Paint and you can magically get someone from 500.00 in assets to 5,000.00 without much effort. You now have yourself an EA approval for your customer, we neatly package the loan for Fannie and away the customer goes. Did I mention the customer had a 63% BACK END DEBT RATIO! Doesn’t matter to DU because they have 3 months of assets which the loan officer submitted with the file. Oh wait…no they don’t. But it doesn’t matter because Countrywide doesn’t ask for a verification of deposit from the customers bank to make sure the assets are real, only the bank statements. It goes on daily over and over again.

Now, with the usual caveats that no one knows you’re a dog on the Internet, it’s possible that this commenter doesn’t actually work for Countrywide, or does work for Countrywide but is disgruntled with the company for unrelated reasons, or is describing a fringe practice that most of Countrywide would reject outright. All of these interpretations are possible.

But the commenter’s depiction seems highly plausible if you then read this long (long!) Gretchen Morgenson article from the August 26 edition of the New York Times.

Inside the Countrywide Lending Spree

If you’re looking for just one detailed read to bring you up to speed on Countrywide’s problems, this is the piece I would recommend. Some highlights:

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.

. . .

“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 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.

Morgenson’s article is overflowing with little gems like this, but one in particular reminded me of the comment above by “low level insider”:

The company’s incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan’s value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide’s subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower’s cash reserves, a former employee said.

A borrower who has more assets poses less risk to a lender, and will typically get a better rate on a loan as a result. But, this sales representative said, Countrywide’s software prevented the input of cash reserves so borrowers would have to be pitched on pricier loans. It was not until last September that the company changed this practice, as part of what was called in an internal memo the “Do the Right Thing” campaign.

I decline to speculate about whether Countrywide broke the law, because I’m sure that in the long run the Justice Department, the Treasury Department, and the state attorneys general will provide far better informed assessments on that score. But at the very least, it’s clear that the company has engaged routinely in business practices that a disinterested observer would call — pardon the technical term — “shady.”