On a conference call, Lewis acknowledged "near-term challenges" in mortgages, with expectations that volumes will fall amid "continued weakness in housing throughout Still, he said Bank of America conducted "extensive due diligence" on Calabasas, California-based Countrywide, calling the purchase a "one-time opportunity" to buy "when the value is very attractive.
The bank expects a third-quarter closing, and said the purchase should add 3 percent to earnings per share in , excluding items. It wasn't immediately clear how many jobs might be lost. Countrywide ended December with 50, employees, after eliminating about 11, in the previous five months.
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Mozilo, a butcher's son from Bronx, New York who co-founded Countrywide in , has been a lightning rod for critics who say he encouraged loose lending practices that contributed heavily to the housing crisis. Lewis said he wants to retain "a number" of senior Countrywide officials who are "very, very good operators. He also said he would like the year-old Mozilo to stay with Countrywide until the merger closes, after which "I would guess he would want to go have some fun.
Nevertheless, Countrywide on Wednesday said defaults and late payments in its servicing portfolio reached the highest on record. Asked about the prospect of further credit losses, Lewis said: "That would be embedded in the purchase price, and in our assumptions on earnings going forward. Bank of America has not offered subprime mortgages since , and said the combined company won't make them either.
Moody's Investors Service nevertheless said it may downgrade Bank of America's ratings, citing the need for the bank to raise capital, and risks from integrating Countrywide and potential write-downs and lawsuits.
In , the Federal Reserve began cutting interest rates dramatically, bringing them to their lowest point in forty years and fuelling a boom cycle, particularly for mortgage lenders. Mozilo replied that he believed thirty per cent was a realistic goal. Why did you announce it? I had said that he should announce about twenty per cent less than his goal actually was. This way, there was no slack. He had joined Countrywide in and become the head of production in , when he was forty.
Extremely smart, dogged, determined, just a relentless negotiator, driven to make money. As Countrywide widened its guidelines, and because of the intensity of competition with other lenders, Krsnich argued, the company was not being adequately compensated for the risks it was taking. In executive-committee meetings, Krsnich challenged the thirty-per-cent market-share goal.
Why, he asked, was it so important to dominate every other lender in the market—what more did they have to prove? He invited Krsnich to attend. According to several former executives, Krsnich became frustrated, feeling that Sambol was exceeding his authority. The exchange grew heated. By , Krsnich, a student of boom-and-bust cycles, was telling colleagues that he thought the company should prepare for a possible collapse in the mortgage market. As homes kept rising in value, owners could refinance their mortgages or take out home-equity loans.
Some refinanced a few times a year, taking cash out of their homes to keep making mortgage payments, or to pay down other debts. Investors, meanwhile, were paying more for mortgage-backed securities and C.
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The rating agencies were paid for their appraisals by the banks that issued the securities, and the entire construct was based on the assumption that home prices would continue to rise. Some financial analysts outside Countrywide were also warning of a housing bubble, but Mozilo was not persuaded. Through and , home prices continued to increase, driven in part by the unprecedented access to financing.
Some loan types were supposed to be offered only to borrowers with high credit scores; but often credit scores were inflated, because people had avoided defaulting on their credit cards or other debt by refinancing their homes. As the S. Mozilo now saw the sales force as key to gaining market share, and it became increasingly powerful.
Stationed across the country, salespeople would see products and prices offered by other lenders, and notify their superiors that they needed to offer them, too.go to site
Angelo Mozilo and his doomed mortgage machine
Subprime loans were especially lucrative for Countrywide, because Wall Street wanted the riskier, higher-yielding loans, and salespeople were paid larger commissions for originating them. There were no ceilings to these commissions, and many salespeople were making millions of dollars each year. According to a former Countrywide compliance officer, some borrowers who could have qualified for prime loans were steered into the more expensive subprime loans instead.
Stan Kurland was to succeed Mozilo asC.
Like Mozilo, Kurland had been waiting a long time to gain control of the company. But now that his ascension was set, his influence seemed to wane. In early , with interest rates steadily rising, Kurland sent a memo to senior managers, saying that the boom was plainly over, and that it was time for the company to tighten its guidelines and plan for reduced volume. His memo was ignored. The two men were very different. Kurland was mild-mannered and analytical, with a laconic demeanor that masked strong emotions; Sambol was arrogant, volatile, and uninhibited.
Under the existing system, banks may choose their own regulators, which in turn are funded by the fees that the banks pay; the O. Last week, the Obama Administration proposed several regulatory reforms, including the elimination of the O. About six weeks later, Kurland sent Mozilo an emotional memo.
How Countrywide Crumbled | The New Yorker
Kurland said that he could not accept this arrangement, and that when Mozilo stepped down as C. Both were told on numerous occasions to be adults. Nick Krsnich, meanwhile, had decided to leave the company. In March, , he went to say goodbye to Mozilo. Krsnich believed that Kurland had failed in his responsibilities as president, by not reining in Sambol. Nevertheless, Krsnich told Mozilo that if the choice were between Kurland and Sambol he would unhesitatingly choose Kurland.
In early September, , the company announced that Sambol would replace Kurland as president and chief operating officer, that Mozilo would stay on as chairman and C. Kurland left the company, where he had worked for twenty-seven years, without even sending an e-mail message to employees.
Last year, along with several other former Countrywide executives, he started a new company, PennyMac, which buys and sells distressed mortgages; many people were outraged that someone who had helped create the mortgage debacle was now scavenging its remains. Mozilo had to negotiate a new contract, and focussed on obtaining his due.
So he was very, very adamant about what his compensation should be.
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Comp Watchers. By early , subprime defaults were rising rapidly. He appeared confident, however, that Countrywide would emerge stronger from this crisis, as it had from every other, while weaker lenders fell away. Meanwhile, he decided that it was important for Countrywide to increase its efforts to diversify; he was interested in building up other divisions, such as capital markets.
The two firms were an odd match.
Dunne was widely known to be risk-averse. After suffering devastating losses in its offices in the World Trade Center on September 11th, Dunne rebuilt the company, and, by December, , it was profitable again. Where was the doubting Thomas? Sambol rejected the idea, and Dunne ended the discussions. Kurland, schooled by Loeb, had believed that Countrywide should make only as many loans as it could promptly sell, but Sambol argued that such a policy was antiquated. As late as July, , Countrywide was originating billions of dollars of loans that one analyst estimated would likely be salable only at a loss.
A month later, Wall Street buyers abandoned most mortgage-backed securities, and the collapse of the mortgage market predicted by Krsnich finally occurred. Mozilo flew to New York to plead with the heads of J. Morgan Chase, Bank of New York, and other Countrywide creditors to continue to fund the short-term debt, known as commercial paper, which the company counted on to finance many of its loans; they refused.
This is unlike anything I even thought three months ago. Sieracki bridled at the price, and pointed out that Golden West—a big California thrift that had been sold in May, , near the top of the market—had brought almost twenty-six billion dollars. But Mozilo was determined to close the deal. On January 11, , Bank of America announced it would buy Countrywide for four billion dollars in stock—a sixth the amount of its market value before the crisis began.
A year earlier, in July, , when ithad become plain that problems in the mortgage market were widespread—affecting prime as well as subprime loans—an analyst asked Mozilo, in a conference call, whether with hindsight he would have done things differently, starting in or It would have been an insight that only, I think, a superior spirit could have had at the time.
What should I have known and when should I have known it, and what should I have done about it? The next month, the market collapsed, and the real damage began to unfold. Since then, Mozilo has had plenty of time for introspection. Unsurprisingly, he takes issue with the notion that all roads in the worldwide financial implosion lead to his doorstep.
It is true that the crisis was greater than the collapse of the subprime-mortgage market. There were many bubbles, and they extended beyond housing in many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans. There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic, and destructive financial instruments. And there were still more bubbles for local government borrowing, leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and credit default swaps.
Taken together, these amounted to the biggest asset and credit bubble in human history. Nonetheless, probably because problems with home mortgages have affected so many people, Countrywide and its C. In May, , when he was still chairman of Countrywide, pending the Bank of America acquisition, he received an e-mail from a borrower, Daniel Bailey, Jr.
Obviously they are being counseled by some other person or by the internet. A number of e-mails indicate that he was disconcerted by the way the company was operating. In the first quarter of , H. Frankly, I consider that product line to be the poison of ours. Nonetheless, it was at about this time that he seems to have decided that he wanted Sambol, not Kurland, to succeed him.
And, in January, , in an e-mail cited in the S. Charges of insider trading may be the most difficult legal issue that Mozilo faces. As he prepared for retirement, he arranged to sell stock through what is known as a 10b plan, under which corporate executives must set the dates of their trades in advance, to protect against allegations of insider trading.
Starting in late , Mozilo made several changes to his stock-trading plans, to increase the number of shares he could sell. According to the S. Last December, Mariana Pfaelzer, the U. Mozilo always saw himself as providing mortgages to many who were like him—disenfranchised.