Countrywide Mortgage Caught Up in Slump, Too
Countrywide grew from a two-man startup in 1969 to the nation’s leading mortgage lender by deftly riding out housing boom-and-bust cycles.
This time around, however, the ride has been a lot rougher, leaving the mortgage company in a scramble to regain footing as the housing market turns from boom to bust.
“In an absolute level sense, this is the biggest challenge” Countrywide has faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.
Several analysts believe Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.
But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.
“At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo,” Cannon said.
Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders drastically shift the focus on prime home loans, a sector once dominated by Countrywide.
“It’s going to take time, and I think their cutbacks are going to be greater than perhaps we anticipate,” Ross said.
Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.
The mortgage company didn’t lead the charge to make those loans, “but as an industry leader, they were right there,” said Robert Napoli, analyst with Piper Jaffray. “They have an effect on the market. They have to, being the biggest.”
The company’s home mortgage loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to mortgage industry sources.
Countrywide and the rest of the mortgage industry also got caught up in the frenzy to make non-traditional home loans then resell the mortgages for hefty profits to Wall Street banks.
A report in The New York Times cited unnamed former Countrywide employees saying the company used financial incentives to encourage employees to steer borrowers into subprime loans to boost profits.
Countrywide has strongly refuted the report, noting its business processes are designed to prohibit pushing customers who qualify for prime rate loans into subprime loans, and that its home loan officers do not receive higher commissions for selling subprime loans.
Its rise was part of a broader trend in which banks and traditional savings and loans lost market share as borrowers turned to more market-savvy home mortgage firms offering a wider variety of loan programs.
Countrywide’s expansion was also fueled by its move to sell conventional mortgage loans that were then resold to government-sponsored mortgage companies Fannie Mae and Freddie Mac.
The strategy helped Countrywide weather the crash of the high-flying market at the end of the 1980s. In 1990 the company reported its loan production totaled more than $3 billion.
The mortgage interest rate upheaval during the 1990s had a mixed impact on the company. Low rates at the start of the decade helped boost business amid a surge in mortgage refinancing.
But when rates eventually kicked back up, the company and other mortgage lenders saw loan production fall. Countrywide coped by diversifying into more financial services, eventually opening its retail bank.
When interest rates plunged at the start of this decade, Countrywide joined the rest of the industry in rushing to feed an unprecedented demand on Wall Street for home loans.
Last fall, most Wall Street investors began to sour on mortgage loans in general, but particularly subprime home loans.
While Countrywide was less exposed to subprime home loans than the rest of the market, it had stepped up high-yield loan products such as pay option loans, which give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance.
In recent weeks, the company has drawn down on an $11.5 billion line of credit and raised $2 billion by selling a stake to Bank of America.
This week, Countrywide Mortgage boosted its borrowing capacity by another $12 billion through new or existing credit agreements.
To further help reassure investors of the company’s stability, management has implemented layoffs and shifted production through its banking arm.
It’s also closed the door to all subprime (bad credit home loans) except for those it can sell back to U.S. government-backed lenders.
SOURCE: Associated Press