The Countrywide Credit Crisis
The Countrywide Credit Crisis
The summer of 2007 proved to be a dark time for mortgage loaners and borrowers as the
secondary housing marketing hit an extreme low and foreclosures were on the rise. On
August 16, 2007, Countrywide Financial Corporation, the country‟s well-respected
number one home lender, asked for a $11.5 billion loan from 40 banks revealing its dire
situation created by the housing crisis.
Subsequently Countrywide received loads of negative press due to its
questionable subprime lending practices and its actions during the market‟s downward
spiral. Their stock price plummeted 50 percent from May to June, and the company
experienced a $1.2 billion loss in the third quarter, its first quarterly loss in 25 years. The
corporation‟s image was further damaged due to an SEC investigation into its CEO,
Angelo Mozilo, for releasing millions of dollars of Countrywide‟s stock before and
during the credit crisis.
Ups and Downs
Between 1982 and 2003 Countrywide Financial Corporation delivered a holding period
return of 23,000 percent to its investors, according to Fortune Magazine. This stock,
which once traded at less than one dollar per share, reached a peak value of $45.03 per
share on February 2, 2007. Nine months later, on November 26, 2007, Countrywide
closed at a dismal $8.64. What happened and will Countrywide recover?
Countrywide Financial Corporation Today
In 2006, Countrywide Financial Corporation was deemed America‟s number one home 1loan lender by Inside Mortgage Finance and was ranked number 91 in the Fortune 500.
Headquartered in Calabasas, California, Countrywide is a diversified financial services
company primarily involved with real estate finance. Its family of diversified operations
includes: mortgage banking, loan closing services, capital markets, insurance services,
banking, and global operations. Countrywide prides itself on its mission to “help 2individuals and families achieve and preserve the dream of homeownership.”
The History of Countrywide
Countrywide was founded in 1969 by current CEO and Chairman Angelo R. Mozilo and
the late David Loeb as Countrywide Credit Industries. Within six months, the company 3went public, trading “over the counter at less than one dollar per share.” Operating in
California, Mozilo and Loeb opened mortgage banking locations called “company stores”
designed like banks with tellers. Through this platform and heavy advertising, the
company expanded greatly throughout the 1970s and 1980s; the company also began to
diversify in the 1980s.
Countrywide reached $1 billion in loan servicing in 1984. Then, in 1985,
Countrywide was listed on the New York Stock Exchange at two dollars per share and
rose to twelve within a year. The company continued to grow to be the number one
American mortgage lender in 1993 as the mortgage industry as a whole reached a record
Pushing Countrywide to the top, Mozilo and Loeb knew early the advantage of
technology: in 1984, Countrywide was the first mortgage lender to use computers for
home loaning, dramatically shortening processing time. By the 1990s, advanced
computers were in all branch offices and putting Countrywide ahead of the game.
In 1992, living up to its mission of helping homeowners, Countrywide launched
“House America,” a program designed to allow affordable lending and homeownership in 4“minority and moderate-income communities.”
The late 1990s marked the development of Countrywide into the financial
services company we know today as Mozilo and Loeb diversified the company adding all
of the corporation‟s current parts: home equity lending division, loan closing services
(through subsidiary LandSafe, Inc.), insurance services, capital markets, and global
operations officially beginning in 2001 by taking on Global Home Loans as a U.K.
subsidiary. Finally in 2001, Countrywide added its banking division, Countrywide Bank, thFSB, and by 2006 Countrywide Bank became “the nation‟s 11 largest bank and fastest 5growing major bank.”
Mozilo and Loeb‟s creation, Countrywide Credit Industries, officially became Countrywide Financial Corporation in 2002. The name change was cited by the company
to “more closely match our business definition: Countrywide is a diversified financial
services company serving consumers and institutions, with mortgage origination and 6servicing at its core.”
Countrywide continued to grow into 2006‟s number one American mortgage
lender and number one lender to minorities with no signs of stopping – until the
secondary housing market crash in the summer of 2007.
Countrywide Crisis Cast of Characters
Angelo R. Mozilo
Born and raised as a butcher‟s son in the Bronx, New York, Mozilo went on to receive a
BS from Fordham University and an honorary Doctor of Laws degree from Pepperdine 7University. He co-founded Countrywide Credit Industries in 1969 with friend and
colleague David Loeb; he is current CEO and Chairman of Countrywide Financial
He served as the President of Mortgage Bankers Association of American from
1991-1992 and has held (and holds) many other important positions in the financial and
mortgage banking worlds. He has also received many distinguished awards over the years.
He is known for starting Countrywide from scratch and helping citizens live the
American Dream through owning a home.
For the past three years, Mozilo was listed by Barron‟s as one of the top 30 most 8respected CEOs. In 2006, he was the seventh-highest paid American chief executive 9with a salary of $142 million.
Currently, Mozilo is under SEC investigation for dumping $138 million of
Countrywide stock between November 2006 and August 2007, the months before and
10 However, Mozilo and Countrywide claim he was during the housing market crash.
preparing for retirement.
Sambol is the current President and Chief Operating Officer of Countrywide Financial
Corporation and the Chairman and CEO of Countrywide Home Loans, Inc. He started
working with Countrywide in 1985 and previously served as CEO of Countrywide‟s Capital Markets business. He was appointed to his current position in 2006.
Sambol received a Bachelor‟s degree in Business Administration and Accounting 11from California State University, Northridge.
Andrew “Drew” Gissinger III
Former San Diego Chargers offensive lineman, Gissinger is the Countrywide executive
managing director of residential lending and the President and Chief Operating Officer of 12Countrywide Home Loans, Inc. Gissinger is working directly with the Burston-Marsteller team on the “Protect Our House” campaign.
Founded in 1953, Burson-Marsteller is a well-known and distinguished global public
relations and public affairs firm.
Countrywide hired Burson-Marsteller in September of 2007 to head its public
relations campaign, “Protect Our House,” designed to defend Countrywide‟s actions post-
housing marketing crash that summer. A group of six Burson-Marsteller employees and
25 Countrywide employees formed an internal and external communications team at 13Countrywide headquarters in Calabasas, CA.
Simon is Countrywide‟s spokesperson and has made various comments for Mozilo and
the company in the wake of the summer housing market meltdown.
Morgenson is an assistant business and financial editor and columnist at The New York
Times. She has been with The Times since 1998 and won the Pulitzer Prize in 2002 for 14her “trenchant and incisive coverage of Wall Street.” Morgenson is a self-proclaimed
defender of shareholder rights.
Her previous employment includes: Forbes, Worth, Money, Vogue, and a
stockbroker for Dean Witter Reynolds.
Morgenson has written several articles on Countrywide, its subprime lending
practices, CEO Mozilo, dissatisfied Countrywide borrowers, and the housing market
meltdown; one such article (Aug. 26, 2007) Countrywide responded directly to with a
statement on its website.
Moore is the North Carolina State Treasurer who asked the SEC to investigate CEO
Mozilo‟s dumping of Countrywide stocks in the months preceding the housing market crisis. Moore is also the trustee of a pension that holds 500,000 Countrywide shares, at a 15 value of approximately $9.6 million.
A credit crisis occurs when investors fear a large borrower; a bank in this case, will not
be able to meet its debt obligation. The bank‟s consumers take their money out,
exacerbating the bank‟s desperate need for cash. Other banks refuse to loan to the
insolvent bank or do so with accordingly high interest rates.
Credit Crisis History
Such a credit crisis occurred in December 1907, when heavy insurance company losses
from the 1906 San Francisco earthquake and the heavy demand for cash at harvest time
dried two of America‟s largest trust companies to the brink of insolvency. The
Knickerbocker Trust declared bankruptcy. Fifty bankers and steel executives led by
robber baron J.P. Morgan each agreed to loan today‟s equivalent of approximately $800
million to bail out The Trust Company of America. During this time, banks were 16charging 100% interest on loans; in August 2007 banks were groveling over 7%. Six
years later, in the United States‟ abandonment of the gold standard for controls of
monetary policy, a central bank was put into place. The Federal Reserve System in the
United State‟s capitalist economy is today‟s last resort.
Securitization is a process in financial structuring where assets that generate cash flow
are used as collateral on another investment. This other investment is exchanged in the
form of a security and traded among investors at a value respective to the expected cash
flow. When the underlying asset loses its ability to generate the expected cash flow, the
security loses its value. A mortgage is such a cash flow generating asset that has become
popular to securitize in the last ten years. The valuation of asset-backed securities is a
complicated task plagued with inconsistencies between financial analysts.
Investors demand they be rewarded accordingly for the risks they undertake with their
investments. One who takes on a greater risk demands a greater return on his or her
investment. Investors are also inherently optimistic. So when the risk of not being paid
back on a loan increases, a bank will want to increase its required rate of return and
charge a higher rate of interest. A subprime borrower is a high risk borrower who could
have paid past 90 days due in the last 36 months, faced foreclosure in the past 48 months,
bankruptcy in the last seven years, or have a FICO score below 620. A popular subprime
mortgage is one that offers a low, floating interest rate for two years and then a higher
adjustable rate for the remaining 28 years. Approximately 21 percent of all mortgages
issued from 2004- 2006 were subprime, according to Moody‟s.
Countrywide Financial Corporation was highly criticized for continuing to make
subprime loans despite the negative market this summer.
The Real Estate Explosion
With interest rates at record lows throughout the 1990s and into the millennium, millions
of Americans took out mortgages and bought new homes. With speculative lending in
conjunction to such low rates, it became a reality for many who otherwise could not
afford high interest payments to make their dreams of home ownership come true. Others
took opportunity of the low rates by taking out mortgages to buy houses cheaply,
renovate them, and sell them at a profit. Real estate prices sky-rocketed nationwide.
Countrywide Crisis Timeline
April 26, 2007 – Countrywide Financial lowers its 2007 forecasted earnings per share
estimates by 18 percent from $4.30 to $3.50.
May 17, 2007 – Countrywide sells $4 billion of floating debt securities. Scrambling for
liquidity, Countrywide agrees to sell $2 billion in “Floating-A” type debentures and
another $2 billion in “Floating-B” debts. CFC shares close at $40.33 on the New York Stock Exchange.
June 22, 2007 – Bear Stearns pledges $3.2 billion to bail out one of its hedge funds.
Bear Stearns Investment Bank negotiates a $3.2 Billion loan to provide liquidity to its
Bear Stearns High-Grade Structured Credit Fund, a hedge fund that made bad bets on 17asset backed securities with subprime mortgages as the underlying assets. Bear Stearns
scrambles to sell their Collateralized Debt Obligations and Merrill Lynch follows igniting
the fuse on 2007‟s credit crisis. The market for commercial paper comes to a sudden
August 16, 2007 – Countrywide borrows $11.5 billion from bank consortium in a
desperate need for cash. 40 Banks and private equity groups negotiate an agreement to
fund Countrywide‟s desperate situation. CFC shares continue to plunge and close at
$18.45. Mortgage defaults are the root of Countrywide‟s financial distress. The impact of
the sudden increase in mortgage delinquencies and foreclosures continue to devalue
billions of dollars of asset backed securities. Investment banks around the world heavily
exposed to these assets suffer heavy losses. The world‟s largest financial institutions
including UBS, BNP Paribas, and Citigroup were among the worst hit by these subprime
August 23, 2007 – Bank of America loans another $2 billion to offset Countrywide‟s
subprime related losses. While this is a vote of confidence from one major financial 18 Many customers institution, analysts still fear Countrywide‟s potential bankruptcy.
from Countrywide‟s bank unit withdraw their money, exacerbating the credit crisis.
August 24, 2007 – CEO Mozilo comments on dismal economic climate but does not take
any responsibility for adding to the subprime loses and crisis.
August 26, 2007 – Gretchen Morgenson‟s New York Times article reveals
Countrywide‟s questionable subprime business practices and criticizes the corporation‟s
actions before and throughout the housing market meltdown. Countrywide responds
directly with a statement on its website disputing three main points from her article:
Countrywide does not encourage prime borrowers to take subprime loans, Countrywide
employees do not receive higher commission for loans with prepayment penalties, and
that Countrywide does in fact provide great help to those borrowers who are having
trouble making payments.
September 2007 – Countrywide cut nearly 12,000 employees (approximately 20% of the 19company‟s total workforce) in the wake of the housing finance crisis. Rumors continue that Countrywide‟s financial problems have led to this and that bankruptcy could be
around the corner.
September 26, 2007 – Countrywide holds a motivational conference call between
Andrew Gissinger, Burston-Marsteller account leader Jason Schechter and 250 other
Countrywide employees to reveal the company‟s plan to fight back against critics. The
campaign is dubbed the “Protect Our House” Campaign and is a confrontational offensive attack; it includes both internal and external communication elements. As part
of the campaign, Countrywide employees are encouraged to sign a “Protect Our House
Pledge” and to wear green wristbands reading “Protect Our House.” The transcript of the 20conference call is then sent to all Countrywide employees.
October 26, 2007 – Countrywide announces a third quarter loss of $1.2 billion, but
remains positive and projects a “return to profit” in the fourth quarter with less jobs and 21the end of the housing crisis. This “upbeat outlook pushed the company‟s shares up 32 22percent yesterday, to $17.30. Nevertheless, the stock is down 60 percent this year.” Dan
Tarman, former Countrywide managing director of Corporate Communications, says it‟s
important to remember that Countrywide is a publicly traded company and shareholders
were demanding growth; therefore, if Countrywide had pulled back over the summer, 23they would have been punished for not meeting gross targets.
Communication During the Crisis
During the summer of 2007, mortgage companies took serious hits due to the failing
housing market. Countrywide‟s position as the market leader caused its financial
struggles to become very publicized. Despite a crumbling stock price, bankruptcy rumors,
and news articles questioning the integrity of its lending practices, Countrywide was slow
to react, issuing very little public comment or explanation. In several prepared statements
to the press Countrywide blamed its financial problems on the poor housing market.
Eventually in late August, CEO Anthony Mozilo agreed to do interviews, where he
consistently commented on the terrible state of the housing market and defended his
company‟s ethics and strength. “We‟re demonized something fierce,” Mozilo said in an 24 interview.
Furthermore, Countrywide released a statement on its website refuting all of
Gretchen Morgenson‟s major claims and focusing on its long and positive history, its dedication to its borrowers and employees, and its role in helping borrowers live the
American Dream. The response also highlighted Countrywide‟s commitment to slowing
subprime loans and tightening requirements for giving them.
Image Restoration Strategies
Denial: Countrywide took no direct responsibility, blaming the poor housing market for
its financial struggles and media attacks for the damage to the company‟s reputation.
Diminishment: Countrywide dismisses bankruptcy accusations by stressing its long
history of financial success and by citing a positive outlook for the future.
Excuses/Good Intent: Countrywide asserts defaulting subprime loans were not given with any ill-intent, but rather to help borrowers with poor credit histories and assist them
toward the American dream of owning their own home.
Bolstering/Rebuilding: Countrywide made strong attempts to repair and rebuild its reputation by bringing in outside crisis managers, implementing a strong internal public
relations campaign, and taking corrective actions.
“Protect Our House”
In order to deal with the attacks on its reputation, Countrywide brought in Burson-
Marsteller, a major public relations firm with over 50 years of experience, to structure
and organize an internal and external communication game plan. Burson-Marsteller
placed six people on site in Calabasas and formed a team of 25 others throughout the
organization to work on the campaign. Their goal was to create a PR campaign that
reached across all key publics (employees, business partners, realtors and brokers, and
In late September, Countrywide and Burson-Marsteller announced the “Protect
Our House” campaign to encourage employees to stand strong in the face of adversity.
Drew Gissinger, executive managing director at Countrywide, and Jason Schechter of
Burson-Marsteller announced the plan over a conference call with 250 opinion leaders
within Countrywide. A transcript of the call was then sent to all Countrywide employees.
Along with describing the plan, Gissinger also announced he would be holding town hall
meetings in Calabasas and across the country to discuss these efforts.
The “Protect Our House” campaign attempts to improve employee morale and
dedication through emphasizing Countrywide‟s social and business missions.
Countrywide‟s social mission, as mentioned earlier, is to help borrowers live the
American dream and own a home. In the call, Gissinger states, “We‟re dedicated to
helping people buy homes by lowering the barriers to homeownership. Homeownership
has been and will continue to be a bedrock of stability in our country and a path for 25 In addition to a social responsibility to their everyone to achieve the American Dream.”
borrowers, Gissinger also understands the company has a social responsibility to their
employees. “We care deeply about this company, and know that this organization is very,
very special,” Gissinger said. Gissinger and Schechter also understand the importance of
maximizing profits for any business. Gissinger told the opinion leaders, “We‟re
competitive to a fault, intense, passionate about what we do and our work achievements
help define who we are.” They demonstrated a positive outlook for the future by telling
their employees how the company has always emerged stronger from negative shifts in
the market, and that this time would be no different. “Protect Our House” also
incorporates employees by getting them to pledge their loyalty to Countrywide and its
goals. Employees were asked to sign a “Protect Our House” pledge, earning them a green
bracelet demonstrating their commitment.
In addition to the “Protect Our House” campaign, Burson-Marsteller and
Countrywide also launched a sister campaign, “Protect Your House.” “Protect Your
House” targets certain segments of customers and business partners, once again
emphasizing Countrywide‟s business and social goals. Countrywide vowed extensive media outreach efforts and direct communication to partners and shareholders as they 26navigate through the tough financial times.
Corrective External Actions
Along with taking actions within the organization, Countrywide has also taken external
actions to help their borrowers struggling with mortgage payments. Countrywide teamed
up with the National Foundation for Credit Counseling (NFCC) to encourage consumers
to take advantage of the Home Ownership Mortgage Education Program (H.O.M.E).
H.O.M.E. provides consumers “with a convenient and comprehensive means to increase 27knowledge of basic finance, credit, home buying and homeownership.” Countrywide,
along with many other mortgage companies, decided to send letters to their at-risk 28borrowers, encouraging them to seek assistance. In late October, Countrywide also announced an extensive home preservation program, through which up to $16 billion of
their loans will be re-financed or modified. “Countrywide is committed to helping its
customers sustain homeownership,” said David Sambol, President and Chief Operating 29Officer at Countrywide.
On December 3, 2007, U.S. Secretary of Treasury Hank Paulson announced the HOPE
NOW initiative designed to refinance and repackage subprime adjustable loans into a
State Housing Agency with municipal bond rates; this will lower interest rates by
approximately two percentage points. No federal money will be used to bail out defaults
so states will have to bear the costs. Countrywide supports the mission and is a founding
member of the cause. “Countrywide is committed to being a part of the solution and we
strongly support a systemic approach to serving borrowers who may face difficulty in
making mortgage payments,” said Steve Bailey, Countrywide Senior Managing Director 30 of Loan Administration.
Despite heavy second and third quarter losses, Countrywide is expected to “return to
profitability by the end of the year as the housing crisis subsides and it capitalizes on 31disruptions in the home loan market.” The company is hoping the increased profits will thdrive up its once solid stock price, which closed on December 7 at $11.54 per share.
The “Protect Our House” and “Protect Your House” campaigns appear to have stabilized
and strengthened employee and stakeholder morale. Countrywide has endorsed the
government‟s HOPE NOW initiative and its $16 billion home preservation plan is in
accordance with the government initiative. The dreadful third quarter loses should lead to
adjusted business models, as Countrywide and other financial firms learn from their
subprime mistakes. The dark cloud of an SEC investigation still looms over Mozilo,
however. Countrywide‟s efforts to return to profitability are ongoing, but it may take
some time to see fruitful results. Still, Dan Tarman believes “when home prices go back 32up, Countrywide will be on top again.”
1. Who are the key stakeholders in a credit crisis? How does such a crisis occur?
2. How can a corporation find the right balance between its social and business missions?
3. How can a publicly traded company control reactions to negative news headlines when
the headlines have a severely negative impact on the company‟s stock value and
4. Should Countrywide have taken any direct responsibility for the number of
foreclosures on its subprime loans?
5. How should the Fed react to maintain its goal of price stability during a credit
crisis without creating a moral hazard?
1. How will Countrywide meet its forecasted profitability with a continued increase in
2. What long term implications will this have on future homeowner legislation?
3. How will mortgage lenders adjust their business practices to prevent future accusations of