All the Devils Are Here [90]
There was always friction at Countrywide between those who worried about risk and controls and those who wanted to sell more loans. But for a long time, the friction was manageable, maybe even healthy. “Really great organizations have friction,” says another former executive. “But friction can become cancerous.”
For Countrywide, the friction started to become a sickness in 2004, when the Federal Reserve began to raise interest rates. Normally, rate increases signal that it’s time for mortgage originators to pull back on loan production. But in this new world, loan production did not decline. Those, like Kurland, who worried that higher rates brought increased risks of default felt as though they were trying to hold back a flood. In lighter moments, they began to joke that they were becoming the CNOs—the chief nuisance officers. Kurland complained to confidants that on some days he felt his role was increasingly being relegated to that of the “no” guy. “The people who are propelled upward in many cases in corporate America are the guys who said yes to an idea that worked,” he later told a friend. “The guys who said no to a big failure—there’s no list for that. That’s why we end up with bubbles.”
When Countrywide had first moved into subprime lending back in the late 1990s, Kurland and Mozilo had both believed that the market was moving toward risk-based pricing, and the lines between prime and subprime were going to go away. And they convinced themselves that Countrywide would establish standards that would keep the truly troubled borrowers away, while capturing the more creditworthy subprime borrowers, those who were just a step below prime. Initially, the company was very careful.
Kurland issued three rules for subprime lending at Countrywide, according to several former executives. First, all of its subprime loans had to be sold, by which he meant the entire thing, including the residuals that most subprime companies held on their books. Second, the borrowers had to either make a 20 percent down payment or get mortgage insurance to cover the first 20 percent of the loan. Finally, Countrywide couldn’t offer any subprime loan products that had a higher probability of default than an FHA or VA loan.
These rules, however, seemed to constrain the company less and less as time went on—and whatever reservations Mozilo had about subprime lending seemed to fade the bigger the market got. Within a few years of making subprime loans, Countrywide could offer an astonishing 180 different products. In 2004, the American Banker accused Mozilo of sounding like a “carnival barker” as he listed some of them: “We have ARMs, one-year ARMs, three-year, five-year, seven- and ten-year. We have interest-only loans, pay option loans, zero-down programs, low or no-doc programs, fast and easy programs, and subprime loans.” Sambol told investors that “it’s our intent to carry every product or program for which there is reasonable demand.... [I]f your customer can legitimately qualify for a loan anywhere else in the U.S., they’ll qualify at Countrywide.” In a complaint the SEC later filed against Mozilo, Sambol, and former CFO Eric Sieracki, the agency alleged that Countrywide referred to this as its “matching” strategy: if a competitor offered a loan product, Countrywide would match it.4
Besides, with Wall Street willing to buy anything, mortgage issuers willing to guarantee anything, and estimates about the probability of default open to assumptions, Kurland’s rules