In my last blog, I briefly explained what I thought may have led to the mortgage mess we are in presently. I try to keep things as simple as possible so if it seems I'm talking too basic here, please bear with me.
Countrywide Financial Corp., as large as it is, was not immune to the latest mortgage troubles. Here is one of, if not, the largest independent mortgage lenders in the country and a very large mortgage servicer. A mortgage servicing company simply takes care of loans already originated and being paid upon. They collect payments, administer tax and insurance payments, counsel clients, provide customer service and administer foreclosure processes when necessary. Countrywide serviced not only their own loans, but purchased blocks of other loans to service. They also signed servicing contracts with other mortgage companies to service loans for them for a fee. Countrywide also had its fingers in many other areas. They had a bank, could provide insurance for home, auto, and life, could provide mortgage reinsurance, property appraisals and flood determination reports, etc. Even in lending they had retail storefronts, provided wholesale loans to mortgage brokers (like me), and could provide lines of credit to other lending institutions to allow them to continue to lend. There was hardly any facet of residential mortgage lending for which they did not have a department.
Unfortunately, this may have been its demise. Residential property values have fallen dramatically over the past few years. Countrywide was one of the most liberal lenders during the peak of real estate values. They were one of the leaders in the subprime two and three year fixed, then turn adjustable mortgages. Couple the short term fuse with 100% financing and all of a sudden there is no where for a borrower to go except to bankruptcy court. With falling values and a rising mortgage payment, foreclosure is a foregone conclusion for many. You would think that a corporation with so many smart people would have thought of that some time ago. Why didn't someone ask, "Is it smart to continue to lend 100% of the value of a property with an adjustable rate loan when we know values will eventually fall?" If all of these loans were 30 year fixed rate loans and values fell, most homeowners would continue to make their payments until the values began to rise again.
We have seen real estate values cycle up and down for decades. Never has there been a continuous climb without a correction of some type. Here is where Countrywide failed. They originated very risky loans because, at the time, it was very profitable. They made money at the origination of the loan and servicing the loan. There was never the long term view. I suppose they might have thought they were so large that they could absorb any loss declining values might have caused. But why plan for loss? Why not wait for the next cycle? The "bigness" of the corporation would have certainly pulled them through to the next cycle of rising values had they stopped risky lending somewhere around 2004.
So what happened to Countrywide? The same as my last blog; greed! Being too greedy for too long. So now Bank of America will absorb Countrywide Financial Corp. But while it is buying Countrywide, BofA is changing its lending practices also. Last month, they stopped wholesale lending (meaning they no longer will lend through brokers like me) and they have said they will not originate sub prime loans with its purchase of Countrywide. But since Countrywide is still a wholesaler, will that continue? They have also said they will not change the Countrywide name so I suppose it will keep the storefronts Countrywide still maintains. All of this will eventually fall out and sometime in the 3rd quarter of this year we will see the result.
Maybe it's a life lesson. "Too greedy for too long". I suppose that's why we're still hanging on here while most mortgage brokers in town have closed their doors. Everyone likes making money but it should be done the right way. Proper counseling and advice and the right product. In 2004, as I saw the coming decrease in the number of loans, I started initiate the ability for our office to do reverse mortgages and Cal Vet loans. We have been FHA and VA lenders for many years and they are now coming back. These are things many lenders are just now trying to catch up on, sort of like a Countrywide. If I can see the writing on the wall from my small desk, it seems like Countrywide and their experts should have been way ahead of the game.