All the Devils Are Here [140]
It’s hard to know when the turning point took place at Countrywide. Risky loans were undoubtedly made on Kurland’s watch: he too pushed Countrywide’s market share ambitions. A shareholder lawsuit would later charge that Mozilo, Sambol, and Kurland were “principally responsible for [Countrywide’s] ‘culture change’ and concerted foray into leveraged and high risk lending practices.” According to this lawsuit, Kurland sold $192 million of stock from March 2004 to March 2008. But there were a few signals that lending wasn’t completely out of control. Eliot Spitzer had launched an investigation into whether Countrywide’s 2004 loans reflected racial bias. This was around the same time that Ameriquest was being investigated. In the end, Countrywide agreed to commit $3 million to consumer education—a far cry from the $325 million Ameriquest paid to settle the charges against it. One former executive says that Spitzer’s staff was crawling all over Countrywide; surely if they had discovered deeper problems, Spitzer would have come down harder on the company. (Countrywide cooperated with Spitzer, unlike J.P. Morgan, HSBC, and Wells Fargo, which took refuge in preemption.)
And at Countrywide, as with other mortgage originators, there had been a brief moment of sanity right before the Ameriquest settlement was announced. According to the Wall Street Journal, Countrywide was going to make it “tougher for borrowers to qualify for a 1 percent teaser rate on its option ARMs.” Internally, Kurland was pushing for that, according to a former executive; the company also issued a “no exceptions” policy in early 2006, meaning that there would be no more exceptions to underwriting policies. Besides, the government was going to issue that guidance on nontraditional loans, and Countrywide wanted to be on the right side of that. But as it became clear that any new guidance would have no teeth—and perhaps as Kurland lost power—the moment passed.
Once Kurland was officially out the door, Sambol began taking control of Countrywide. One of the first things he did was sideline some of the company’s governance structures, such as its executive risk committee, according to a former executive. Under Kurland, the protocol had always been to meet roughly a half dozen times a year. Under Sambol, it met once. Every meeting after that was canceled. “They devalued operational excellence and overvalued their own intellect,” says another former executive.
What’s more, no sooner had Kurland left than Sambol and Mozilo decided to switch regulators, shedding the OCC and the Fed for the OTS. “This move is one of the places where they made a terrible mistake,” says a former executive. Having the Fed and the OCC regulate the company gave it a bit of a halo effect that disappeared when it moved to the OTS. And really, insulting the Fed by cutting the regulatory cord was hardly a smart move.
By the end of 2006, Countrywide’s underwriting guidelines were “wider and more aggressive than they had ever been,” the SEC later charged. In a memo Mozilo sent to the board and all the top executives on December 7, 2006, he wrote that “subprime has evolved from a sector largely comprised of borrowers with impaired credit... to a sector offering very high leverage and reduced documentation.” And he noted the following shocking facts: In 2001, Countrywide’s maximum loan size in subprime was $400,000, with a maximum loan-to-value ratio of 90 percent (meaning a 10 percent down payment). You could do a stated-documentation loan only if you were self-employed. Countrywide did not have either interest-only loans or 80/20 loans in its product line. By 2006, however, subprime borrowers could get a loan up to $1 million. The maximum loan-to-value ratio was by then 100 percent. The only qualification for doing a stated-income loan was that you were a “wage earner.” Countrywide now offered interest-only loans to borrowers whose FICO scores were as low as 560, and 80/20 loans to borrowers