Depressing News – Part 2

In Part 1 of this series, I discussed the acquisition of Countrywide by Bank of America, a deal which was announced a few months ago and is to take place later this year. I stated that the value of the servicing portfolio of almost $1.5 trillion was probably the most valuable asset of the company. The lingering questions are what the other assets are worth and what hidden liabilities might yet be uncovered.  You always wonder about when the next shoe is going to drop.

We can now say that another shoe has dropped. A lingering issue has been that of the precipitous decline in the value of Countrywide's stock. It reached a high of $45 per share last year and is now less than $5 per share. Particularly distressing were management's continuing reassuring public statements about the health of the company while they themselves were systematically unloading shares that they owned.

Angelo Mozilo had filed with the SEC a planned liquidation of stock. Indeed, the purpose of these filings is to establish a long-term liquidation plan that is not tied to performance that the executive would know about as an insider. However, Mr. Mozilo kept modifying his plan so as to increase the rate of liquidation of his stock. You'd have to have come to town on a turnip truck not to believe that he increased his sales rate due to the mounting evidence of bad news. Ultimately Mr. Mozilo sold $474 million during a period when his fellow shareholders were getting virtually wiped out.

It should come as no surprise that executives would enrich themselves at the expense of shareholders. That is deplorable but not uncommon practice these days. Those of us on the sidelines in the mortgage business certainly believed it was worse than was being admitted.

However, the Countrywide executives are in a state of denial. Only last week a senior executive admitted that some loan officers may have erred "from time to time." There is a great difference between "from time to time" and "all the time" and "we were encouraging them to cheat." What is more depressing is the extent to which executives seem to have not only condoned but encouraged widespread and ongoing disregard of underwriting standards that resulted in billions of dollars of losses and bringing the nation's largest mortgage lender to its knees.

In a suit filed previously by irate shareholders, a Federal judge ruled yesterday that the executives must answer charges. A report in The New York Times on May 15, 2008 quoted the judge as saying, "It defies reason, given the entirety of the allegations, that these committee members could be blind to widespread deviations from the underwriting policies and standards being committed by employees at all levels."

This is not what has been said in the media. Indeed the politically expedient thing to do is to accuse mortgage brokers. Indeed current legislation being discussed in Congress focuses many additional requirements on mortgage brokers. 

Indeed, malfeasance among mortgage brokers occurred in large part because they were being encouraged by the lenders. The lender's sales people were out beating the bushes telling brokers of lax standards. The brokers knew that the lender would approve most packages they submitted regardless of quality.

My belief is that non-broker entities were at least as culpable. Lenders like Countrywide were just as quick to approve bad packages submitted by their own employees as they were loans submitted by brokers.

This demonstration of the lack of ethical conduct at the nation's largest lender should serve to tell both the public and Congress that new regulations need to apply to everyone in the industry, large and small, brokers and lenders alike.

They and borrowers also need to know that there always have been a large number of mortgage brokers whose ethical standards were never compromised, regardless of temptation. Those people are still in business and are still trustworthy advisors to borrowers who seek them out. A good place to start is http://upfrontmortgagebrokers.org

Comments

[Josh Benson]

The lack of ethical standards in the mortgage industry has been apparent for many years. However, with the lack of regulation, ease of entry into this business, the refinance boom, and the explosion of housing; we quickly saw the "get rich quick" want to bes writing mortgages. The truth of the matter is that all it takes to promote and place people into mortgages is a pulse and a few relationships. Therefore, last week you could have been flip'n burgers at Burger King for $5.25 and this week you could be a well respected mortgage consultant making $10,000 guiding someone through the most important transaction of their life. Buying a home is not a joke and one can really be effected by being sold and placed into a loan that only benefits that bottom line of the mortgage originator. The cold hard fact is this industry is not regulated enough, there is not an ethical standard that one has to adhere to, and any Tom, Dick, or Harry off the street can help you finance the home of your dreams.
Now, who's fault is this? Is it the mortgage broker? Is it the banker? Is it the bank? or, Is it Wall Street? I believe that the problem lies with all the above. While the mortgage loan officer does not have to be individually licensed, the broker does. Therefore, brokers should have a little more pride in who they hire and associate with, rather than the fast talker who can sell an option ARM to anyone. However, the bankers, the banks, and Wall Street are not off the hook. They are the ones that created the guidelines, created the "lier loans", and they are the ones that completed the underwriting. The mortgage broker did not have the final say in whether Mr. & Mrs. Smith got the keys to the house that they can't afford, it was the banks and secondary markets guidelines that determined that. So, now that our country's biggest mortgage lender is being handed a get out of jail free card by Bank of America, I completely agree that the management team of Country Wide should have to explain their actions and why they are jumping ship. If the executives do not have to answer any questions then this only hurts the little guy once again.
In closing, who should be saved in the time of need? While normally I would say you made your own bed now you have to lay in it. However, this situations calls for the dreaded governmental interaction. Not to complete absolve those who have bought a home that is way too much home for their budget or the investor that has 7 homes in hopes of being a millionaire; but rather the hard working individual who is just trying to make ends meat. The person that has their one home and just not enough income coming in to pay a higher monthly mortgage payment and does not meet the guidelines for FHA financing. FHA loans are our salvation if and only if congress can stop worrying about "Spy Gate" and Steroids long enough to figure our housing market is in dire need of repair. Stop the foreclosures by increasing debt to income ratios and allow for 105% LTV; but only for the people that it makes sense for. The hard working individual that has a job with a steady paycheck and needs just a little budgeting help.