Countrywide Financial Corporation Today

By Michele Dunn,2014-05-13 14:50
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Countrywide Financial Corporation Today

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

    high period.

     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.

David Sambol

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.

Rick Simon

Simon is Countrywide‟s spokesperson and has made various comments for Mozilo and

    the company in the wake of the summer housing market meltdown.

Gretchen Morgenson

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.


Richard Moore

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.

    Financial Definitions

Credit Crises

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.

Subprime Loan

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 its

    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.

    Government Regulation

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.

    Looking Forward

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.”

    Discussion Questions

Retrospective Questions

    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?

    Prospective Questions

    1. How will Countrywide meet its forecasted profitability with a continued increase in

    mortgage foreclosures?

    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

    predatory lending?


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