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Not Worth The Weight
Bank of America had big plans when it bought Countrywide, the Calabasas mortgage lender that helped create the foreclosure crisis. Then reality sank in
Concertgoers walking into the lobby of the Fred Kavli Theatre for the Performing Arts in Thousand Oaks will notice a donors wall near the entryway that’s filled with the names of corporations, foundations, and individual philanthropists who helped underwrite the venue. Near the top is Bank of America, which routinely contributes hundreds of millions of dollars to community organizations throughout the United States. Except that this sponsorship wasn’t BofA’s idea. Underneath the bank’s familiar nameplate is the faded but recognizable lettering of the company whose name used to be on the wall: Countrywide Financial Corporation, a major player in getting the theater off the ground. Three years after Bank of America purchased Countrywide for $4 billion, it hasn’t been able to brush off the old name—and the juxtaposition couldn’t be more awkward. About the last thing the bank wants to do is remind people that it wound up with Countrywide, the mortgage giant that was based in Calabasas.
Looking back, I remember the deal actually making some sense. BofA had visions of being the Walmart of banking, but that could only happen by bulking up on the mortgage business, an industry that Countrywide had pretty much cornered. With this single purchase Bank of America would go from 4 million mortgages to 14 million and inherit a new customer base that could be persuaded to open BofA checking accounts and CDs. “Countrywide presents a rare opportunity for Bank of America,” said former BofA chief executive Kenneth Lewis at the time the acquisition was announced in 2008—and despite growing signs of delinquency problems among Countrywide home buyers, many in the banking industry agreed. This was before the failures of Bear Stearns and Lehman Brothers, and expectations were for no more than a rough couple of years, followed by smooth sailing.
Instead the purchase has been a disaster, arguably the most expensive, ill-advised deal in the history of banking. Once BofA took over, it discovered a rat’s maze of bad loans, many of them resulting from Countrywide having given mortgages to people whose financial conditions weren’t adequately reviewed. After the first few months of teaser rates and other come-ons, a good percentage of the new borrowers couldn’t pay. Suddenly the bank’s servicing arm, which until then was mainly responsible for taking checks out of envelopes, had to arrange complicated loan modifications and foreclosures. This was done poorly—people complained of long waits for customer service, or lost paperwork, or receiving incorrect information that created more trouble. BofA was even sued for improperly foreclosing on active duty soldiers, including some who had suffered severe injuries (the bank has since stopped foreclosing on those properties).
Today Bank of America has 1.3 million customers who are delinquent by 60 days or more on their loans (81 percent of those come from the Countrywide acquisition). Its mortgage division lost $8.9 billion in 2010, and a recent settlement with investors will result in a $20.4 billion charge for the second quarter of 2011. Influential bank analyst Dick Bove expects BofA’s mortgage side to lose billions more during the next three years because of loan problems, although the bank as a whole will still make money. “Every time they turn over a rock, there’s another snake,” says Tony Plath, associate professor of finance at the University of North Carolina at Charlotte and a longtime BofA watcher. “It’s going to take them five years to get through the bottom of the snake pit. You just have to slug your way through it a loan at a time.”
From its earliest days as a San Francisco-based institution, Bank of America has been a huge player in the L.A. area. There are 350 banking centers, 1,500 ATMs, $200 billion in retail deposits, and 16,000 employees in Southern California. The Countrywide deal places BofA among the region’s largest employers (along with Northrop Grumman, Ralphs, and Boeing). Not that the company is advertising its expanded presence—mortgage operations are located in a gated Mediterranean-style office complex off the Ventura Freeway, formerly the headquarters of Countrywide (and before that, Lockheed). The place has the look of an exclusive club, with a guard stationed in front and only a small plaque to indicate that it’s a Bank of America office. I found the same restraint at the much larger BofA compound in Simi Valley, where thousands of employees take calls from often desperate mortgage holders hoping to prevent foreclosure. After driving up a narrow road, I turned onto 450 American Way, where dozens of people with badges around their necks were walking in and out of the massive two-story building that once served as a warehouse for Bugle Boy jeans. I tried approaching a couple of folks, but they had been instructed to avoid reporters. When I got back in my car and pulled into a visitors’ parking space, a young man in a blazer and earpiece came up to me to ask what I was doing there. Leaving, I noticed he was speaking into his shirtsleeve, which was most likely hiding a transmission device.
Countrywide, you see, remains a sore subject. Current CEO Brian Moynihan couldn’t escape shareholder grousing during the company’s annual meeting last May (“I can’t revisit that decision,” he told the Financial Times. “I have to figure out what to do with the company now.”) At the bank’s headquarters in Charlotte bad news often gets telegraphed with a single word: “Calabasas.” To be fair, the current Calabasas executives didn’t orchestrate the Countrywide purchase (Kenneth Lewis left the bank under fire in late 2009). In fact, the BofA executives charged with untangling the mortgage problems “have been accessible and willing to listen and made a decent effort of reaching out to stakeholders,” says Barry Zigas, director of housing policy for the Consumer Federation of America. “But it’s just been a very difficult process.”
Countrywide was started in 1969 by two New Yorkers, David Loeb and Angelo Mozilo, who after a few early stumbles recognized that the best way to attract borrowers was through low interest rates and stellar service. Sounds basic, but at the time it was revolutionary; up until then the mortgage business had been dominated by banks and savings and loans. Because it couldn’t accept deposits like a traditional bank, Countrywide had to borrow money to originate loans and then sell those loans to other financial institutions. Almost from the start the two men set their sights on California, the nation’s premier housing market. By the mid-1990s, after the company outgrew its Pasadena headquarters, Mozilo began buying office properties in Calabasas, Simi Valley, and other nearby communities—up to two-and-a-half-million square feet.
Mozilo’s flashy veneer—the elegant suits, carefully coiffed white hair, perpetual tan—was a deliberate counterpoint to his hardscrabble upbringing. A Bronx butcher’s son who worked his way through Fordham University, Mozilo made it a point to remind people how he was rebuffed by Ivy League types on Wall Street. “I must say, it bothered me when I was younger,” he told The New York Times, “their snobbery and their looking down on us.” A reverse snobbery came into play, with several of his senior executives holding degrees from lower-tier institutions (among them Cal State Northridge). Several former employees I spoke to describe a bruising corporate culture: Success was measured strictly by volume, leaving work an hour early was duly noted, and anybody who challenged company policies could be demoted or dismissed (one executive who was fired eventually won $3.8 million in damages). The place was a sweatshop, but the sweatshop made tons of money. During the real estate bubble between 2001 and 2006, Mozilo received $470 million in compensation, raising the ire of shareholder groups and presaging several investigations down the road.
By the summer of 2007, Countrywide hit a wall with its fast-and-loose lending style. Subprime defaults were rising rapidly, home prices were plummeting, and Wall Street bankers—the same ones who had fueled the company’s growth—were no longer willing to purchase Countrywide’s suspect mortgages. Mozilo himself acknowledged that the industry was running wild. Entering the picture around that time was Bank of America, which had gotten out of the subprime market six years earlier because the business had become, according to Lewis, “volatile and risky.” Of course, that was before the housing boom, when anybody who wasn’t bringing in buckets of cash was considered a rube, and before Bank of America executives realized the importance of having a significant mortgage component to its business. With Countrywide short on cash, BofA invested $2 billion; several months later it bought the whole place. In his farewell remarks Mozilo said BofA shareholders would “reap the benefits of what we have sowed.”
As it turned out, Countrywide’s financial hole was much deeper than anyone had imagined. Numerous investigations and lawsuits centered on how the company had allegedly misled borrowers and shareholders. Bank of America didn’t help its case by hiring David Sambol, Mozilo’s number two, to head the combined home loan operations, providing him with an extravagant compensation package totaling $28 million. New York Democratic senator Charles Schumer, a member of the Senate’s committee on banking, strongly objected to Sambol’s selection (“You cannot divorce Countrywide, the company, from the executives who pioneered Countrywide’s predatory practices,” he said), and within five months of his hiring BofA quietly disclosed that Sambol would retire and another executive, Barbara Desoer, would oversee the business. Even so, the bank was stuck with paying Sambol the $28 million, plus country club dues and accounting services. The following year Bank of America killed off the Countrywide name.
When I spoke to Desoer, president of Bank of America Home Loans and a longtime BofA executive, she seemed determined to avoid linking the bank’s mortgage woes with the Countrywide acquisition. What she did say was something only a corporate manager could love: that the loan problems presented “a wonderful development opportunity” for employees because it allowed them to get experience in default servicing. This is no doubt true, though it’s a little like saying that being stuck at the bottom of a mine shaft provides experience in self-sufficiency. Still, Desoer noted many service improvements, including tighter lending practices and easier access to customer representatives. Paperwork isn’t being lost as much, either. “We’re in a good place relative to meeting the needs of the customers,” she said.
I guess I was hoping for a bit more contrition. Then again, it might not matter. As costly and misguided as the Countrywide acquisition has been, Bank of America owns a hugely valuable asset that eventually will start paying off (assuming people begin buying houses again). Mozilo, too, is short on contrition—despite having to settle with the Securities and Exchange Commission for $67.5 million (more than two-thirds of which was paid by others) and being the subject of an intense FBI probe (now closed). “Countrywide was one of the greatest companies in the history of this country,” he told federal investigators looking into the financial crisis, “and probably made more difference to society, to the integrity of our society, than any company in the history of America.” What’s amazing is that the statement is not entirely hogwash—Countrywide did enable millions of home buyers, many of them minorities, to accumulate equity and advance up the economic ladder. That’s no small accomplishment. You just have to overlook all the rest.
Illustration by Richard Mia