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.

Asking Price: $895,000

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

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

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