Bank of America Home Loans

Based on Wikipedia: Bank of America Home Loans

In 2006, a single company financed one out of every five mortgages in America. The value of those loans equaled three and a half percent of the entire United States economy—more than any other mortgage lender in history. That company was Countrywide Financial, and within two years it would become synonymous with the worst financial crisis since the Great Depression.

This is the story of how a penny stock became a Wall Street darling, how it imploded spectacularly, and how its remains were absorbed into Bank of America—leaving behind a trail of lawsuits, broken promises, and fundamental questions about how Americans finance their homes.

The 23,000 Percent Stock

David Loeb and Angelo Mozilo founded Countrywide in 1969. The beginning was humble, almost forgettable. When the company first went public, its shares traded over the counter for less than a dollar. This wasn't the stuff of Wall Street legend.

But something changed.

Between 1982 and 2003, Countrywide delivered its investors a return of twenty-three thousand percent. Fortune magazine gave it a nickname: "the 23,000% stock." To put that in perspective, this performance beat Washington Mutual, beat Walmart, and even beat Warren Buffett's Berkshire Hathaway—three names that represent very different kinds of American business success.

In 1985, the company graduated from over-the-counter trading to a listing on the New York Stock Exchange under the ticker symbol CFC. The arc from penny stock to exchange-listed company to industry titan seemed to vindicate the American dream of business success built from nothing.

What investors didn't fully appreciate was how that growth was being achieved, and what risks were accumulating beneath the surface.

The Mortgage Machine

To understand Countrywide, you need to understand how modern mortgages work—or rather, how they worked before the 2008 crisis forced everyone to pay attention.

When you get a mortgage to buy a house, you might think you're simply borrowing money from a bank, which you'll pay back over thirty years with interest. That's the simple version. The reality is more complicated and more interesting.

Countrywide operated what's called a mortgage origination business. This means they created new mortgages—processing applications, evaluating borrowers, and funding loans. But they didn't typically hold onto those mortgages. Instead, they sold them into what's called the secondary market.

Here's how that works. Countrywide would bundle thousands of individual mortgages together and sell them as mortgage-backed securities. Investors—pension funds, insurance companies, other banks—would buy these securities. The investors received the stream of monthly payments from all those homeowners. Countrywide got an immediate lump sum and could use that money to make more mortgages.

This system allows mortgage companies to grow much faster than they could if they had to wait thirty years for each loan to be repaid. It also spreads risk across the financial system. In theory.

By 2005, Countrywide's mortgage banking segment generated fifty-nine percent of the company's pre-tax earnings. They had become a mortgage factory, with multiple production lines feeding the insatiable demand for mortgage-backed securities.

Four Ways to Make a Mortgage

Countrywide didn't just have one way of creating mortgages. They had four distinct channels, each targeting different parts of the market.

The first was Consumer Markets, which dealt directly with people who wanted to buy homes. You'd call Countrywide, speak to a loan officer, and apply for a mortgage. This is the straightforward approach most people imagine when they think about getting a home loan.

The second was Full Spectrum Lending, which also dealt directly with consumers but focused on a particular type of borrower: people with "less than prime-quality credit." In plain language, these were customers whose credit histories suggested they might have trouble repaying loans. The mortgage industry called these subprime borrowers, and loans to them carried higher interest rates to compensate for the elevated risk of default. This division would become central to Countrywide's eventual troubles.

The third channel was Wholesale Lending. Here, Countrywide worked with independent mortgage brokers—small businesses that helped homebuyers find loans. The broker would work with the customer and originate the loan, but Countrywide would fund it and sell it on the secondary market. This allowed Countrywide to reach customers they'd never meet directly.

The fourth was Correspondent Lending, which worked differently still. Rather than originating loans at all, Countrywide simply purchased mortgages that other lenders had already created. These other lenders might be commercial banks, savings and loans, home builders, or credit unions. They'd make the loans, then sell them to Countrywide, who would repackage them and sell them again to investors.

This four-channel approach gave Countrywide extraordinary reach into the American housing market. It also meant they were exposed to risks coming from multiple directions.

The Business of Servicing

Creating mortgages was only part of Countrywide's operation. They also ran a massive loan servicing business, which is less glamorous but generates steady income.

When you make your monthly mortgage payment, you might assume that money goes directly to whoever owns your loan. It doesn't. It goes to a loan servicer—a company that handles the administrative work of collecting payments, managing escrow accounts, paying property taxes and insurance on your behalf, and forwarding what's owed to investors.

Countrywide serviced mortgages for a fee, typically between twenty-five and seventy-five basis points of the outstanding loan balance. A basis point is one hundredth of a percent, so on a three hundred thousand dollar mortgage, the annual servicing fee might be between seven hundred fifty and two thousand two hundred fifty dollars. Multiply that by millions of mortgages, and you have a substantial business.

Loan servicing also generated income in less obvious ways. Servicers earn interest on the money they hold between collecting payments and forwarding them to investors. They charge fees for late payments. They collect money for document requests, payoff statements, and legal proceedings. They even place insurance on properties when homeowners let their coverage lapse—force-placed insurance, which is typically more expensive and generates commissions for the servicer.

This servicing business created an important structural incentive. Countrywide made money whether homeowners paid their mortgages on time or struggled to pay them at all. Late fees, default proceedings, and force-placed insurance all generated revenue. The company profited from the system working as designed, and it profited from the system breaking down.

The Banking Operation

Countrywide wasn't just a mortgage company. It also operated Countrywide Bank, which became the third-largest savings and loan institution in the United States and, by some measures, the fastest-growing bank in American history.

The distinction matters because banks and mortgage companies operate under different rules. A mortgage company like Countrywide Home Loans was in the business of creating and selling mortgages. A bank like Countrywide Bank could actually hold onto mortgages as investments, funding them with customer deposits.

Countrywide Bank gathered deposits—primarily certificates of deposit—through the internet, call centers, and more than two hundred financial centers. By 2007, assets from deposits were approaching one hundred twenty-five billion dollars. The bank invested these deposits primarily in mortgage loans and home equity lines of credit, most of which came from Countrywide's mortgage banking operation.

This created a neat circular system. Countrywide originated mortgages, sold many of them to investors, but kept some on its own bank's books, funded by customer deposits. The company was simultaneously manufacturer, wholesaler, and retailer of mortgage products.

Countrywide Bank also operated Countrywide Warehouse Lending, which provided credit lines to smaller mortgage bankers. These smaller operators would borrow money from Countrywide to fund the mortgages they originated, then sell those mortgages back to Countrywide through its correspondent lending division. Countrywide was financing its own competition, then buying their product.

The Capital Markets Connection

The mortgage-backed securities that Countrywide created needed buyers. The company's Capital Markets segment operated as a registered securities broker-dealer, meaning it could trade and underwrite securities in the financial markets.

Underwriting is the process of buying newly issued securities from whoever created them and then reselling those securities to investors. The underwriter takes on the risk that they might not be able to sell the securities at a profit. In exchange for bearing that risk, they earn a fee.

Countrywide's Capital Markets division primarily underwrote mortgage-related debt securities—the very securities that Countrywide's mortgage banking division was creating. Again, the vertical integration was striking. Countrywide originated mortgages, packaged them into securities, underwrote those securities, and sold them to institutional investors.

The customers for these securities weren't ordinary individuals. They were banks, insurance companies, pension funds, mutual funds, and government agencies. These sophisticated investors were supposed to understand the risks they were taking. In retrospect, many of them didn't.

The Insurance Angle

When you buy a house with less than twenty percent down, your lender typically requires you to purchase private mortgage insurance, known as PMI. This insurance protects the lender—not you—if you default on your loan.

Countrywide found a way to profit from this requirement through its Balboa Reinsurance Company. When other insurance companies wrote private mortgage insurance policies on loans in Countrywide's servicing portfolio, Balboa provided reinsurance coverage—essentially insurance for the insurance companies.

Specifically, Balboa covered a "mezzanine layer" of losses, meaning losses between a minimum and maximum threshold. If homeowners defaulted and the primary insurer had to pay out, Balboa would cover part of those losses. In exchange, Balboa earned a portion of the PMI premiums.

This was clever financial engineering. Countrywide created mortgages that required PMI. Other companies wrote the PMI policies. Countrywide then insured part of the risk those companies were taking. The company was earning fees at multiple points in the same transaction.

Countrywide's insurance segment also included Balboa Life and Casualty Group, which underwrote a range of insurance products including lender-placed property insurance, homeowners insurance, auto insurance, and various life and credit insurance products. The company had built itself into a comprehensive financial services operation, with mortgages at the center but tentacles extending in every direction.

Going Global

Countrywide's ambitions extended beyond American borders. Through Global Home Loans, a joint venture formed in 1998 with Woolwich plc, a British company, Countrywide entered the United Kingdom mortgage market.

This operation worked differently from the American business. Global Home Loans was a third-party administrator, meaning it processed mortgage applications and serviced loans on behalf of other companies rather than originating mortgages itself. The primary client was Barclays, which had acquired Woolwich in 2000.

By 2005, Global Home Loans was processing more than eleven billion pounds—about twenty billion dollars—in loans annually. Its servicing portfolio reached fifty-nine billion pounds, roughly one hundred two billion dollars.

But the relationship soured. In November 2005, Barclays announced it would bring its mortgage operations back in-house, terminating its arrangement with Global Home Loans. Countrywide bought out Barclays' remaining thirty percent stake, but the expansion that had seemed so promising was effectively over.

Countrywide also established operations in India in 2004, exploiting lower labor costs for business process and technology services. This offshore operation supported both the American and British businesses, handling back-office work at a fraction of what it would cost in New York or London.

The Cracks Appear

As Countrywide grew, so did the complaints against it.

In 2003, the company became the subject of a class-action lawsuit over overtime violations. The allegation was stark: Countrywide was working employees ten to fifteen hours a day, six to seven days a week, without paying overtime wages. The lawsuit was settled in 2005 for thirty million dollars, paid to four hundred account executives.

More troubling were allegations about lending practices. Countrywide's subprime lending documents revealed a policy of making loans to families with as little as one thousand dollars in disposable monthly income—often leaving borrowers unable to cover basic living expenses after their mortgage payment.

New York's attorney general, Eliot Spitzer, reached a settlement with Countrywide over allegations that salespeople had improperly steered Black and Hispanic borrowers toward higher-cost loans. The company agreed to improve training and oversight and paid two hundred thousand dollars to cover investigation costs.

The Fannie Mae Foundation had once praised Countrywide as a "paragon" of nondiscriminatory lending for its willingness to work with community activists and apply flexible underwriting standards. Countrywide's chief executive reportedly bragged that to approve minority applications, "lenders have had to stretch the rules a bit." The company's commitment to low-income loans reached six hundred billion dollars by early 2003.

The question, in hindsight, was whether stretching the rules meant expanding opportunity or simply setting up borrowers—and the financial system—to fail.

Hurricane Aftermath

One episode captures the gap between Countrywide's public image and its practices. After Hurricanes Katrina, Gustav, and Rita devastated the Gulf Coast, Countrywide told customers in affected areas they could pause their mortgage payments without late fees, with the missed payments added to the end of their loans.

Customers later reported that Countrywide demanded the missed payments in a lump sum, along with late fees they'd been told wouldn't apply, within thirty days—or face foreclosure.

Whether this was corporate policy, miscommunication, or simply different employees telling customers different things, the result was the same: homeowners who had just survived natural disasters faced losing their homes.

Friends of Angelo

In June 2008, Condé Nast Portfolio magazine reported that numerous Washington politicians had received mortgage financing at noncompetitive rates because Countrywide considered them "Friends of Angelo"—referring to chief executive Angelo Mozilo.

The implication was damning: the company that financed one in five American mortgages was giving special deals to the politicians who made the rules governing the mortgage industry. The foxes weren't just guarding the henhouse; they were getting their mortgages at a discount.

The IndyMac Connection

In 1997, Countrywide spun off a portion of its business as an independent company called IndyMac Bank. This new entity focused on a particular type of mortgage: Alt-A loans, which fell between prime loans (for borrowers with excellent credit) and subprime loans (for borrowers with poor credit).

IndyMac grew rapidly, following a playbook similar to its parent company's. It originated mortgages, packaged them into securities, and sold them to investors.

On July 11, 2008, federal regulators seized IndyMac after a week-long bank run. Customers had withdrawn $1.3 billion in deposits in eleven days. It was one of the largest bank failures in American history.

The company that Countrywide had spun off had collapsed. Soon, Countrywide itself would follow.

The Sale to Bank of America

On January 11, 2008, Bank of America announced it would purchase Countrywide Financial for $4.1 billion in stock. The price was staggering—not for its size, but for how small it was. This was the company that had financed twenty percent of all American mortgages just two years earlier, now being sold for less than the cost of a new football stadium.

The regulatory approvals came quickly. On June 5, the Federal Reserve approved the deal. On June 25, sixty-nine percent of Countrywide shareholders voted in favor. On July 1, Bank of America completed the acquisition.

What Bank of America bought was complicated. It got the mortgage origination machinery, the servicing portfolio, the banking operations, the insurance businesses. It also got the liabilities—the lawsuits, the regulatory scrutiny, the toxic loans still on the books.

The acquisition would prove to be one of the most expensive deals in American corporate history. Bank of America would spend years and tens of billions of dollars resolving claims related to Countrywide's lending practices. The four billion dollar purchase price was just the beginning.

What Remains

Today, Bank of America Home Loans is the mortgage unit of Bank of America. It's what remains of Countrywide Financial after the acquisition, the lawsuits, and the restructuring.

The name Countrywide has disappeared, but the infrastructure persists. The mortgage origination channels—consumer direct, wholesale, correspondent—still exist in some form. The servicing operations continue. The basic business model of creating mortgages and selling them to investors survived the crisis, though with more regulations and restrictions.

David Loeb, who co-founded Countrywide in 1969, died in 2003—before the collapse. Angelo Mozilo, the other co-founder and long-time chief executive, was eventually charged by the Securities and Exchange Commission with securities fraud and insider trading. He settled the charges in 2010, paying sixty-seven million dollars in penalties without admitting wrongdoing.

Lessons and Legacies

The Countrywide story raises questions that remain relevant today.

How should we think about financial innovation that expands access to credit but also increases risk? The secondary mortgage market—the system of packaging loans into securities and selling them to investors—genuinely did make homeownership more accessible. It also distributed risk so widely that nobody felt responsible for ensuring the underlying loans were sound.

What happens when financial companies grow so large and interconnected that their failure threatens the entire system? Countrywide financed twenty percent of American mortgages. Its collapse would have devastating consequences no matter what. Was that level of market concentration a sign of efficiency or a warning sign?

How do we balance the goal of expanding homeownership—a core part of the American dream—with the need to ensure borrowers can actually afford their homes? Countrywide's "flexible underwriting" helped many families buy homes. It also helped many families into loans they couldn't sustain.

The mortgage crisis of 2008 led to significant regulatory changes. The Dodd-Frank Act created new oversight bodies and imposed new requirements on mortgage lenders. The Consumer Financial Protection Bureau took on responsibility for protecting borrowers from predatory practices.

But the fundamental tension remains. Mortgages are how most Americans finance the largest purchase of their lives. The companies that make those mortgages have enormous power over who can achieve homeownership and on what terms. The Countrywide story is a cautionary tale about what happens when that power is wielded without adequate accountability.

The twenty-three thousand percent stock became a four billion dollar fire sale. The company that financed one in five American mortgages left behind a trail of foreclosures, lawsuits, and broken promises. The name Countrywide is gone, absorbed into Bank of America, but the questions it raised about American housing finance are still with us.