All the Devils Are Here [142]
In fact, Countrywide was originating huge numbers of pay option ARMs. In 2005 and 2006, Countrywide originated more than $160 billion worth of pay option ARMs—between 17 percent and 21 percent of its total loan originations, prime and subprime combined, according to a lawsuit later filed against the company. In 2007, with the market on the verge of collapse, Countrywide originated another $160 billion of these loans, according to Inside Mortgage Finance. The Los Angeles Times reported that Countrywide made one-quarter of all the option ARM loans in the country in 2007.
Although a high percentage of Countrywide’s pay option ARMs went to borrowers with high FICO scores—something Countrywide bragged about to its investors—that was a misleading statistic. The majority of the loans went to borrowers on a low- or no-documentation basis. And according to the Center for Responsible Lending, more than 80 percent of the option ARMs Countrywide originated in 2005 and 2006, totaling $138 billion, did not meet the new voluntary guidelines regulators had published in late 2006. In a letter to regulators, which was leaked to the Los Angeles Times, Countrywide admitted that it often judged whether borrowers could qualify for a loan based on the teaser rate, not the full rate, and that in the fourth quarter of 2006 about 60 percent of Countrywide’s adjustable-rate borrowers would not have qualified at the higher rate. (This appeared to contradict claims by Mozilo that the company’s policies required that borrowers be able to pay the higher rate.)
On July 10, Mozilo sent another e-mail to his top executives. “If I am reading these numbers correctly,” he wrote, “it appears to me that the loans (pay options) with neg am have a higher delinquency than our standard book of business. If this is the case, this is quite alarming, because of the very low payment requirements of a neg am loan.” He added in another e-mail, “I would like Gissinger and Hale to make certain that a letter, in BOLD TYPE, is included in every new pay option loan that clearly indicates the consequences of negative amort and encourage them to make full payment....”
And then there were home equity lines of credit, a product that was growing geometrically at Countrywide. As early as April 2005, John McMurray reported that the risk that home equity loans would default had doubled over the past year, mainly due to lack of documentation. That warning did nothing to slow the growth, nor tame the risk. Countrywide would later admit that a big chunk of its home equity lines resulted in the homeowner having debt that was close to 100 percent of the value of the property.
Back in the fall of 2006, with Sambol in charge and Countrywide’s market share hovering at just above 15 percent, the company put on a conference for investors. On the surface, at least, it was a high moment for the company. It would soon report 2006 revenues of $24.4 billion, up nearly $6 billion from 2005. Profits hit an all-time high of nearly $2.7 billion. Its ranking on the Fortune 500 rose from 122 to 91. So seemingly confident was the company in its financial strength that instead of conserving capital it announced a $2.5 billion stock buyback. In February 2007, Countrywide’s stock hit an all-time high of over $45 a share. What few at Countrywide seemed to understand was that it wasn’t just Countrywide’s customers who were assuming a great deal of risk. So was the company itself.
Like other mortgage originators, Countrywide kept the riskiest piece of a securitization, the residuals, on its own balance sheet. Kurland’s policy had been to presell subprime loans, the argument being that if you couldn’t sell the whole thing, then you shouldn’t make the loan. But a former executive says that changed. Another former executive recalls arguing to Drew Gissinger that these assets were risky and that the value at which Countrywide was booking them was inflated. Gissinger disagreed; these were high-quality assets, he said. “But that’s if everyone pays!” this executive responded. By the end of