Biggest Financial Crimes: Countrywide Financial Corporation

The opacity of the financial industry and complex business operations allow certain groups of organizations, financial and non-financial institutions, and individuals to profit from crimes. For those groups, crime certainly does pay.

In fact, over the years, various individuals and groups have committed some of the most significant financial crimes in history. 

From bank frauds, stock market manipulations, and Ponzi schemes to insider trading and money laundering, these criminals have stolen billions of dollars from unsuspecting victims.

Countrywide History

Countrywide Financial capitalized on the extended period of expansion in housing credit, construction, and home prices to become the nation’s largest subprime mortgage lender.  

David S. Loeb and Angelo Mozilo founded Countrywide Financial in 1969. The company had a subpar initial public offering (I.P.O.), with its shares started sharing over the counter at less than $1 per share.  

However, at the housing bubble’s peak, the stock traded for as high as $45 per share in February 2007, giving its shareholders a whopping 23,000% return.

Shareholders who had invested a thousand dollars in 1982 would, in 2003, have more than 230,000 dollars. It was the best-performing stock in the financial sector. However, all that growth was due to a business model based on deceit and corruption.

The mortgage company’s reckless lending is often credited for the 207-09 economic crisis, also known as the Great Recession. Over ten million Americans lost their homes to foreclosure, erasing a staggering $16 trillion in net worth.

Countrywide Growth

Countrywide had a vertically integrated operation with in-house appraisals, property maintenance, loan servicing, and title insurance. 

It owned a bank (Countrywide Bank) that took deposits and invested in mortgage loans and home equity lines of credit. It operated as an institutional broker-dealer specializing primarily in trading and underwriting mortgage-backed securities or M.B.S.   However, mortgage loan origination was the firm’s printing-cash machine.

Originating mortgage loans had zero risk since the company sold all its mortgage portfolio to leading investment banks that packaged all the home loans into mortgage-backed securities and collateralized debt obligations or C.D.O. 

A mortgage-backed security is a bond-like financial asset comprised of a bundle of home loans bought from mortgage lenders such as Countrywide Financial Corporation. Collateralized debt obligations or C.D.O.s are collections of M.B.S.

Biggest Financial Crimes: Countrywide

At the housing bubble’s peak, the company wrote four hundred billion dollars in mortgages and sold all the loans to investment bankers. It became one of the largest home-mortgage providers in the country.

Because it did not have to keep the loans it wrote in its book, the firm abandoned all common-sense underwriting practices to find a new pool of consumers.

Countrywide Financial Corporation started taking more risks to maximize profits within its Countrywide Bank and its broker-dealer.   December 31, 2007, held $100.4 billion in loans or security inventory. 

In 2005, two years before unveiling the company’s deceit and corruption, Fortune Magazine placed the firm on its list of “Most Admired Companies.” 

According to the firm’s last official annual report, as of December 31, 2007, it had a workforce of 50,600, including regular and temporary staff. Chief Executive Officer Angelo Mozilo had an annual salary of nearly $35 million with access to the company’s private jet.

Countrywide political loan scandal

The housing boom turned into a bust starting in late 2007. By the third quarter of 2008, housing prices were approximately 25% below their 2006 peak. California, Florida, and Nevada’s housing markets saw their values plummet to as much as 50 percent.

Countrywide Financial Corporation was one of the biggest suppliers of home loans to now failed investment banks like Bear Stearns, Merrill Lynch, and Lehman Brothers, which they needed for complex financial products such as M.B.S., C.D.O.s, and more.

 To maintain its loan production quotas, Countrywide started targeting vulnerable communities and offered predatory mortgage products such as adjustable-rate mortgages (A.R.M.s), interest-only mortgages, and no income, no job, or assets (Ninja) mortgages. 

Biggest Financial Crimes: Countrywide

Countrywide was writing loans to people they knew could not afford them. The newfound customer base was classified as subprime borrowers whose credit profile was not good.  

FICO is the commonly used measure of consumer creditworthiness. The credit score is between 300 (least creditworthy) and 850 (most creditworthy). A FICO score below 640 is often considered subprime.  

Moreover, subprime loans were enormously profitable to mortgage lenders; therefore, minority borrowers with prime credit found themselves with subprime products.

When the mortgage payments reset after the teaser rate expired, millions of homeowners could not make their payments; therefore, M.B.S. and C.D.O. investors started panicking.  

When both homeowners started defaulting on their mortgage by the million, it was clear that Countrywide Financial corporation had been misleading its investors about the qualify of its mortgage products and the consumers who held them.

By mid-2008, the U.S. gross domestic product fell by 4.3, the unemployment rate skyrocketed from 5% to 10%, and millions of American homeowners, including Countrywide’s clients, lost their homes.

Countrywide Financial Corporation Fate 

David S. Loeb retired from Countrywide Financial Corporation in 2000 and died in 2003. Angelo Mozilo ran the company until it was forced to be sold to Bank of America in a fire sale for $4 billion in 2008.

More than 100 civil suits were brought up against Mr. Mozilo, and the government launched a criminal inquiry into his role in the financial crisis. The government later dropped the criminal investigations, but the former Countrywide C.E.O. agreed to a settlement of $67.5 million with the Security & Exchange Commission (S.E.C.)