All the Devils Are Here [91]
“We had meetings where I would say, ‘Are you sure you’re comfortable with that?’” says this person. “And they would bring in the quants!” And so, the matching strategy came to mean that Countrywide repeatedly loosened its guidelines for both the loans its own sales force originated and the loans it purchased from others, according to the SEC. Other subprime companies, for instance, adopted a loan strategy called risk layering, in which two or three different risks—no-doc, adjustable-rate, credit-impaired borrower—were wrapped together in one loan. These were risks that were never meant to coexist, and blending them greatly increased the chances of default. Yet since Countrywide’s competitors were making risk-layered loans, Countrywide made them, too. It was madness. “Subprime one was just really high rates for borrowers with bad credit,” says Josh Rosner. “That’s different than the loan itself being a bad product.”
“When you are the biggest, you have a responsibility to not give credibility to bad products—whether you’re Countrywide, Fannie, Freddie, or any of the big mortgage lenders out there that were doing this,” says a former Countrywide executive. Countrywide did just the opposite: by mimicking the products of competitors, no matter how dangerous, it gave them an imprimatur they didn’t deserve.
There was a final problem with the company’s subprime guidelines. If a borrower couldn’t meet the guidelines, Countrywide would try to make the loan work anyway. This was not some rogue effort by aggressive branch managers to sidestep the rules. It was the rule: Countrywide called it the exception pricing system. Every lender had some version of this, but, according to the SEC, Countrywide “liberally” used its exception policy for loans that didn’t fit into even the loosened guidelines. One former Countrywide executive says that Mozilo told the sales force to listen to Sambol, not Kurland; in its complaint, the SEC corroborates that in part, saying the company’s rules about a kind of subprime loan known as an 80/20—the customer took out two loans in order to borrow 100 percent of the money needed to purchase a home—“were ignored by the production division.”
In 2005, John McMurray, Countrywide’s chief risk officer, wrote in an e-mail to Sambol, “As a consequence of [Countrywide’s] strategy to have the widest product line in the industry, we are clearly out on the ‘frontier’ in many areas.” The “frontier,” McMurray added, had “high expected default rates and losses.”
Those in the industry could see the change, even if Mozilo still refused to acknowledge it. Says a former industry executive: “Roland [Arnall] thought he [Angelo] was a hypocrite. It was an odd thing, Countrywide acting holier than thou. Countrywide was in the same game.”
But to the outside world, the picture couldn’t have seemed more glorious. By the end of 2004, Countrywide had leaped in front of Wells Fargo to be the nation’s largest mortgage company. It originated a stunning $363 billion in mortgages that year. A year later, Countrywide originated almost $500 billion in mortgages. Sambol and other executives had taken to telling investors that Countrywide expected to originate $1 trillion worth of mortgages by 2010. They were halfway there.
It was pointless to expect Washington to do anything to stop the abuses that characterized subprime two. In addition to Ned Gramlich, the only people in Washington who seemed to care about the issue were Senator Paul Sarbanes and Sheila Bair, the assistant secretary of the Treasury for financial institutions during the first few years of the Bush administration. But as a Democratic senator, Sarbanes had no leverage in the Republican-dominated Senate. And Bair, a moderate Republican from Kansas, didn’t have much leverage, either. Realizing that pushing for new regulation was futile,