Not To Blame — Joni Mitchell
Here are a few fragmented excerpts on Countrywide’s thirst for quantity and increasing lack of quality.
As for Countrywide being a great place to work — as Jonas Roth
(the head of the trading desk at Countrywide) and others might testify
to — Betsy Bayer (VP of compliance at Countrywide) wasn’t so sure. “It
was a sweatshop,” she said. “They had these posters all over the
office. They were ‘work/life balance’ posters, like they were concerned
about our well being. What a load of Bullsh*t. It was a sweatshop.”
Even though many of Mozilo’s senior executives had been with the
company 20 years or more, the Countrywide she worked for had a high
turnover rate where many employees would leave before two years was
out. “That’s a fact that never gets published,” she said.
Managing wholesale compliance, she — and others — learned the
idea was to produce as many loans as humanly possible. Bayer, being the
company’s “rules person” for loans brought in through its broker
network, didn’t think compliance was being taken all that seriously by
Mozilo and his senior management.
Mozilo, for his thirst for market share, had followed Arnall’s
company (Ameriquest and Argent) into the business of originating
stated-income loans (where home buyers state their incomes and the
lender believes them as long as their FICO score checks out).
Stated-income loans came in two types: prime and subprime. But when it
came to the “A” paper credit quality stated-income loans, Fannie Mae
and Freddie Mac (for the most part) wouldn’t touch them because of the
lack underwriting. Countrywide also followed the crowd in originating
another popular loan of the 2004 to 2007 period: payment option ARMs
(adjustable-rate mortgages) (POAs), a product where the consumer was
offered four different payment plans each month. One of these payments
artificially low by delaying large interest payments each month, thus
adding new debt onto the loan amount. It was what some lenders called
an “I’ll worry about it tomorrow” option. By 2006 Countrywide was the
largest pay option ARM lender in the nation, originating $11 billion
worth a quarter.
“When you go for quantity, quality is what you give up,” said
Bayer. “To get volume, you lose quality — that’s what they did.” When
she arrived in 2004, the company’s compliance department was in what
she called “complete turmoil.” When pressed further, she said
Countrywide wasn’t doing its homework when it came to underwriting.
“They were relaxing credit guidelines.”
She said that inside the company compliance staffers had a word
for stated-income loans: “liar loans.” Bayer said the only ones in the
company who called them that were members of the compliance staff. No
one in the firm used the phrase, at least not within earshot of the
production chiefs.
Matt Padilla, from the OC Register, has a book out on the mortgage mess. It was co-written with Paul Moulo of National Mortgage News, but I can tell from the writing and the content that Matt did the majority of the work for book. I had previously mentioned the book in blog post and quite a bit on the forums, and since then many other MSM sources have written some stellar reviews. Many of the reviews are mentioned on the book’s website, as well as my hat tip to the book. Also, the WSJ recently reviewed it along with Mark Zandi’s new book. Now that I have finished the book, I can finally do my own review.
I promised Matt that I would be honest on what I thought about the book, and I have to say… I loved it. I am not sure what I liked best about the book; whether it was the both deep and broad historical perspectives it covered, or the way that that he made some of the more complex issues of the mortgage world easy to understand. The book’s central theme is Angelo “The Tan Man” Mozilo, and the rise and fall of Countrywide. However, it goes into detail of the beginning of subprime and Peter Cugno’s rise in Beneficial Finance in the 60s. Back then they would loan people a couple hundred bucks, and if you didn’t pay, Peter would be at your office asking where his payment is. Back then loan officers, like Peter, not only orginated the loan, but they serviced it and collected on it. That and they wouldn’t lend money on a house above 60% LTV.
Matt goes into detail of the failed subprime shops of the late 90s, during the Russian currency crisis and Long Term Capital Management’s failure, and how they were using “gain on sale” accounting rules, that ultimately lead to their failure. New Century was around then too, but they were bailed out by US Bank. US Bank made a good bet then, and it’s a good thing no one, like US Bank, was willing to make a bet like that in this bubble. He also goes into how Countrywide survived that time, and how the Tan Man had some choice expletives about the poor performance of those years. It comes to light, how the Tan Man liked to drop the f-bomb, as any true Bronx native would, and how he was not shy to tell people how he felt about his competition. About this time is when the Tan Man decided to expand the use of mortgage brokers. He touches on the death of the banks keeping loans on their books during the S&L crisis, and how this became the birth of the use of mortgage brokers. He brings to light some of the early subprime shops of the early 90s, and how many people from that era became some of the leaders of what subprime was to become. He has an entire chapter on Roland Arnall of Ameriquest and Argent, and how the Tan Man was forced to compete with him. He shows how Arnall was the opposite of Mozilo, in trying his best to remain under the radar.
REITs? They’re like pigs with lipstick. – Angelo Mozilo. One of the greatest things about this book, is that it separates the difference between a banking institution (like WAMU), and a non-banking institution (like New Century). One of the main reasons for the numerous failures of non-banking institutions is the fact that they were set up to be a REIT. The problem with this is that a REIT must pay out most of all of its profits in the form of dividends, and not save any of their profits for the bad times. Ironically, they drank their own Kool-Aid, in not saving for the future like most of their borrowers. Friedman Billings Ramsey (FBR) was main player preacher of converting these non-banking institutions into REITs, and taking them public or converting them if they were public. Many of the non-banking institutions FBR convinced conned into converting into a REIT, has gone BK, including New Century. Or, one could say that in a Ponzi scheme like industry, when there is no more money, they also have the least amount of liability, and can and will be shut down very quickly. This is where it leads to the beginning of New Century, and some of the players from the 90s of Guardian Savings, Plaza Mortgage, and Long Beach Mortgage from the previous chapters. This is when (the 90s), and where (Irvine) subprime truly began.
It dives into the conspiracy of Merrill, David Einhorn, and Bear Stearns’ rise and eventual fallout from the mortgage world. The details of Bill Dallas’ sale of First Franklin, to the funding of warehouse lines and 20% ownership from Merrill in Dallas’ OwnIt mortgage, shows how it comes full circle. Then, the message from Lewie Ranieri, the co-creator of the MBS security, comes to fruition. Anyone who has read Liars Poker, will know who Lewie Ranieri is, and his personality. The details of the underwriters, of the firms (like Bear Stearns) buying the mortgages from New Century, are downright frightening. Amazingly, when the book went to print, it had intimate knowledge of Ralph Cioffi (the manager of the Bear Stearns hedge funds that went broke) and the details of the failures of his hedge funds before the indictment. The fallout of Bear Stearns can be traced to this one big screw up.
The details of the interviews, er non-interviews from the Tan Man during the collapse of Countrywide are just a great reminder of how slick he thought he was. His arrogance shines through even brighter than his bright tan by some of the things he said during financial reporting conference calls. Then, the details of how Ameriquest and Argent screwed over a suburb of Cleveland show how the lawsuits start rolling. This is where the rating agencies start getting blamed, and how they denied any wrong doing. The excuses really begin flying now.
I highly recommend this book. This book is for anyone who is an industry insider that, like myself, that has intimate knowledge of it and even know some of the people quoted. This is also a book for anyone who wants to understand WTF happened, and who, when, why, and what they did to make all of this happen. No matter whom you are or what you know of the industry, you will end up learning something from this book. The only other book I recommend as highly on how we got into this mess, and for a more economic fundamental and psychological perspective, is The Great Housing Bubble by IrvineRenter. So, go get your copy at Amazon now, and let me know what you think. I have a thread in the forums up to discuss the book, so feel free to chime in.
Today’s featured property is a typical victim of the mortgage game. The owner bought at the peak with a toxic mortgage with the hope that these “innovative” products would always be around. They aren’t. Therefore, they next buyer could not leverage up as much as buyers could in 2006, and prices fall — a lot.
Income Requirement: $223,750
Downpayment Needed: $179,000
Monthly Equity Burn: $7,458
Purchase Price: $1,300,000
Purchase Date: 10/31/2006
Address: 11 Santa Rida, Irvine, CA 92606
Beds: 5
Baths: 3
Sq. Ft.: 2,420
$/Sq. Ft.: $370
Lot Size: 5,800 Sq. Ft.
Property Type: Single Family Residence
Style: Mediterranean
Year Built: 1995
Stories: 2 Levels
Area: Westpark
County: Orange
MLS#: S538971
Source: SoCalMLS
Status: Backup Offers Accepted
On Redfin: 8 days
lovely Westpark, rarely on market! Vaulted ceilings! Spacious home has
downstairs bedroom with full bath. Gorgous marble flooring and generous
use of marble in bathrooms & on fireplace. Custom moldings, new
carpet and new paint. Inviting backyard with covered patio is
professionally landscaped.
This property has been featured before. It was for sale last summer. It certainly appears to be a huge, high-end loss in Westpark. If this property sells for its asking price, the total loss on the property will be $458,700. This appears to be a corporate relocation, so there is no telling who will ultimately absorb the loss, and it is perhaps even more difficult to figure out who is to blame…
.
The story hit the news
From coast to coast
They said you beat the girl
You loved the most
Your charitable acts
Seemed out of place
With the beauty
With your fist marks on her face
Your buddies all stood by
They bet their fortunes
And their fame
That she was out of line
And you were not to blame
Six hundred thousand doctors
Are putting on rubber gloves
And they’re poking
At the miseries made of love
They say they’re learning
How to spot
The battered wives
Among all the women
They see bleeding through their lives
I bleed–
For your perversity–
These red words that make a stain
On your white-washed claim that
She was out of line
And you were not to blame
I heard your baby say
When he was only three
“Daddy, let’s get some girls
One for you and one for me.”
His mother had the frailty
You despise
And the looks
You love to drive to suicide
Not one wet eye around
Her lonely little grave
Said, “He was out of line girl
You were not to blame.”
Not To Blame — Joni Mitchell
That must be one valuable employee if a company is going to take a half-mil hit for him.
Sadly to say, after nearly half a million $ hit, any knife catcher at this price point will need to endure over $300k loss over the next three years, when the price most likely will roll back to around 2002 of $655k.
By the way, why did they raise the list price by $25k, fearing of giving it away?
Also, it is such a beautiful house so that there is no need for any photo?
I heard in the radio many of these houses are getting trashed inside because there are 8 renters in there. that’s the only way right now to not loose it. true?
invitation has been extended:
http://local.yahoo.com/info-30494691-olson-anne-pacific-legacy-real-estate-villa-park
Any current news on Irvinerenter’s book?? I hope things are proceeding well because I cannot wait to buy it!
I am in the process of performing the final edit. I hope to turn over a final manuscript in August. The final production should take a couple of months after that.
“Betsy Bayer (VP of compliance at Countrywide) wasn’t so sure. “It was a sweatshop,” she said. ”
Granted it’s a bank and at bank’s VP title essentially mean peon, but if Ms Bayer isn’t a peon managing a few other peon, IMHO, she can STFU.
From the tiny quote alone it seems she’s completely abandoned the purpose of her position in pursuit of a paycheck.
So thank you Ms Bayer, you are a big part of the problem.
And No Such Reality…
You can STFU. First off, you need to work in the financial services industry to know what REALLY goes on!!! If you don’t then you have no business trying to decide what Ms Bayer is telling a story of. READ the Book and you’ll get a better picture.
One First Vice President in a company of 55,000 is not going to change the heated up business environment which mortgage companies and banks operated in. First of all she was outspoken… oh, but then you’d have to KNOW HER, wouldn’t you. I did…
I’m a brokerage compliance official myself, and I’m not going to twang on Ms. Bayer for wanting to stay off the unemployment and welfare rolls badly enough to take a job that, at most, paid $80K a year, and where you are regarded as “window dressing” for regulators.
Most people badly need jobs, and unless you have a trust fund or something, I’m sure you do quite a bit of temporiziing to maintain your paycheck.
As a compliance officer, you do your best, and you put your foot down when you know the company is cruising for a bruising.But push come to shove, the Top Producers rule the roost, and when you do put your foot down, you are reminded that you don’t contribute to the firm’s income so shut up. You continue to make the effort because your neck is on the line in the event of regulatory actions against your co., at least at FINRA Member firms like mine. My license is at stake, and any regulatory actions against my firm can blight my U4 and destroy my career such as it is- compliance jobs by and large pay crap, and are taken by people who don’t like the financial risk entailed in the straight commission jobs that pay 6 figures when things are going hot but put you in bankruptcy when things chill as they are now.
This woman probably wishes like hell, as I do, that she had never, never, ever, ever, had entered the financial industry.
Laura is absolutely right. I worked for a major residential lender and saw (and felt) the pressure to do bad deals constantly. I was called on the phone or into the office of a senior producer for a “friendly little chat.” I said “No” again and again but sales people would always come back banging on the door for more exceptions to policy. In the end our institution collapsed and I was actually relieved when it happened.
I have left senior level positions at two regional financial institutions in the last 5 years due largely to the fact that I couldn’t stomach the risk tolerance level, even though it was largely my responsible to ensure those banks did not take on too much risk on the lending side. I was judgmental of employees who would put up with it even though they disagreed, and I saw others who justified risky business decisions, strategies, etc. because the dollar signs in their eyes left them almost blind to reality. But here’s the other reality – it really is difficult for many people to risk their career due to differences of opinion about risk because they have personal financial responsibilites. And in the last 8 years, if you disagreed with one bank’s lending culture, you were almost disagreeing with all banks, because there were very few out there not trying to remain competitive and pushing the limits…so it’s not as if moving to another company would solve the problem. I could walk away because I didn’t need the $ to feed my family (I have also discovered that $ is not as important to me as it is to alot of people.) Not to sound trite, but if the Board and CEO do not believe there’s a problem with lending practices, there is no problem. And why would Boards think there’s a problem when analysts continued to support the high risk strategies of alot of financial institutions by touting them recommended ‘buys’, when more conservative institutions (who understandably had lower returns due to lower risk profile) were rated as lower performing ? I don’t think the IB analysts understand risk at all. Their blindness helped alot of Boards and CEO’s ‘justify’ the high risk strategies they pursued.
What is happening to Freddie and Fannie is a direct result of all the fraud that happened in the mortgage industry. Now the Fed is make new rules and tightening the existing ones. Great stunt Fed, when all the crooks have left the building, you are now trying to act like you are doing something worthwhile.
[b]This trouble with F1 & F2 will definitely drive home prices down faster and deeper.[/b] š
I was in IT at New Century and had to work with the VP of compliance on a number of projects. I found her to be knowledgeable and professional. Her job is to make sure to make sure the loans comply with the laws and guidelines given.
The bad loans were not her fault in that the vast majority held to the letter of the law and the ridiculous guidelines of the buyers of the loans. When you do the volume NCen did, a few will end up in the scratch and dent file.
Also keep in mind that at one point the sub-primers provided a useful product to a segment of the population. Slowly over the years it changed in to a blood sport where the love of money ruled leaving the support staff (IT, HR, compliance, etc.) in the odd position of quiting a job because you work in an industry where a few out of the main stream voices are saying something is amiss.
By the time it was clear there were problems, the hole industry collapsed in a heartbeat.
I myself did not drink the kool-aide and did not buy and have been saving for years.
Just waiting for IR to give the green light.
The Green Light could be 5-6 years away. [b]Things are looking very bad. Indy Mac, gone[/b], more banks getting ready to fail, even the bank counts Berkshire Hathaway Inc. among its largest shareholders slumped.
By end of the year we will have several bank failures and more carnage in the home market and to top it off, we are looking at $9/gallon gas.
I think the gas prices will be looked at as a bubble not unlike the housing bubble.
The price for oil futures is not based in economic fundamentals. It’s based on speculation.
How much could someone have made shorting Indy Mac, its down to 15c today.
none, last time i checked the FED – yes, they are everywhere you conspiracy buffs – regulates the margin account on short sale positions, as a rule they allow up to 50% margin on stocks over $5, (your broker does not have to follow this maximum and could require more equity),
but the fed allows you to short down to $3 per share, with more margin equity,
under $3 no new positions,
anyway, that was it the last time i read the rules about 2 years ago, perhaps you can hold your short position below $3, if you are 100% covered with other assets in your account, don’t know, never had a short that i held to zero,
some of you traders know?
I have a basic mortgage/lending institution question for all of you.
Currently, I send my monthly mortage payments to WaMu. What would happen if they were to go under?
Would my mortgage be ‘sold’ to another entity, and I would simply have to mail them my monthly check?
And thanks to everyone – IrvineRenter and all the posters – who make this a worthwhile site to visit daily.
You will continue to send payments to Wamu. You will only send to someone else when Wamu or soon to be Washington Mutual Federal Bank instructs your to do so.
Just a follow up to your reply to Lost_In_Fog as I like Lost have my mortgage serviced by WAMU
– What happens with the escrow balances WAMU is holding for my property tax/property insurance (I’m guessing they are technically deposits of Wamu so should be OK as long as they are less than $100k)
– I’m assuming that any new sucessor to Wamu can’t change the rate/term of my mortgage – have 15 yr fixed near 4.5% so pretty happy with that (took out shorter loan to pay off faster, old fashioned I know)
Newby
Ouch!
Before itās all over we aill all be mailing our payments to:
Barack Osama Obama
The White House
1600 Pennsylvania Avenue NW
Washington, DC 20500
Your money is already going to Osama and Company, compliments of George Bush.
Yes, because the current housing crisis will retroactively be entirely his fault as of January 20, 2009.
As for the lameness of the “Osama/Obama” rhyme, it says a lot more about the (lack of) intelligence of the person who uses it than it does about Obama.
Careful…Your dunce cap may be peeking from under your bed linen.
Get used to it… I sent my economic stimulus check to Obama election campaign. I think that Obama genuinely will get the economy going again. McCain seems to be in the pocket of advisors that tell us we’re just whiners. He can tell that to my stock options.
Mc Cain can’t even operate a computer. Good luck on the economy with a person like that.
Yahoo Interview — Mc Cain’s words: “I am an illiterate…”
Humm…here’s the link.
https://www.youtube.com/watch?v=_R9wnMVZE_Q
Speaking of an idiot who can’t operate a computer. Those are some mighty fine HTML skillz you got there.
Big surprise you’re a lefty.
Yes, John Mc Cain cannot even operate a computer, and he told this to Yahoo! Interviews.
What a maroon.
Are you going to flame me for my spelling, Mr HTML Guy?
what’s the premium on being the 4th best place to live in the US?
http://money.cnn.com/magazines/moneymag/bplive/2008/snapshots/PL0636770.html
if it wasn’t obvious, it’s relevant to our discussions because of the last paragraph:
“A big drawback: the cost of housing. A typical three-bedroom, two-bath house can run about $700,000, says Cesi Pagano, a realtor with Keller Williams Realty. But prices in Irvine have held up better than those elsewhere in Orange County, and foreclosures aren’t nearly as widespread.”
one final observation:
Test scores reading
(% above/below state average) 66.5% 17.3%
Test scores math
(% above/below average) 4.9% 16.4%
(yup, Irvinites definitely can’t do math…)
Chain of Blame is excellent and I highly recommend it too. Im not industry insider and so I fall into the category of “WTF happened”…as Ive been priced out of the market for years now. I have some friends who were loan officers in OC and their stories parallel what is described in this book very accurately. I too am salivating for your book “The Great Housing Bubble”!
One negative of all books being released right now, is that we are only in the 4th inning and so the full picture can’t be captured in one manuscript yet– although it is pretty clear what the future holds!
The Onion, via Krthugman, precedes reality once again:
Recession-Plagued Nation Demands New Bubble To Invest In
Hey IR, I am too lazy to sign up for another forum, but have you considered publishing on the kindle first and then seeing if any regular publishers pick you up for print based on your ebook popularity?
I know amazon makes it very simple for you to publish to the kindle (They just give you 30% of what they sell, I believe) and you could use those sales numbers to show a publisher that you have market appeal.
Plus I only read kindle books these days so I have a vested interest in getting people to publish there. š
I am working with a small publisher, and if it is successful, they may get bought out by a larger publisher. At this point, I just want to get the book out there.
As for the lameness of the āOsama/Obamaā rhyme.
Well said!
I’d buy this property if it falls another $300k.
No need to borrow that much…probably only $200k loan would be fine.
i currently have a large sum of money in one bank. which banks are the safest to put your money in?
just split your money into chunks that are less than $100k each and don’t worry about it. The thing is, lots of them may tank, and all of them that are going to tank are doing their best to hide it right now.
“They had these posters all over the office. They were ‘work/life balance’ posters, like they were concerned about our well being. What a load of Bullsh*t. It was a sweatshop.”
True, true. One reads these things, and then wonders why Republicans without any real power, which probably includes much of OC, continue voting for GOP buffoons who work actively to further enrich the already obscenely rich and replace pensions with 401(k)s that tank in the market and health care that continues to be whittled away. I guess the prevailing sentiment is that they might someday be like those they idolize. As if! Most of the wealth in the USA is inherited, and that money ain’t going nowhere.
Thanks for the suggestion
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