The Times’ 'Expose' of Countrywide Lacks Any Evidence

I have enormous admiration for Gretchen Morgenson, and have no doubt that she’s one of the most respected business writers around. But for the life of me, I don’t have a clue what point she’s trying to make in her takedown of Countrywide Financial (CFC) in Sunday’s New York Times.

Morgenson seems to be saying that Countrywide systematically overcharged its customers by putting them in loans that were more expensive than the best deals they qualified for. Her evidence? Um, she doesn’t have any. No actual customers who were put into subprime loans when they qualified for prime, for instance. No employees or ex-employees willing to speak on the record. No incriminating e-mails. Nothing.

Oh, she has gotten her hands on some internal Countrywide documents that show that (shocker!) some Countrywide products are more profitable than others, and that (double shocker!) Countrywide’s salespeople are paid fatter commissions on more-profitable products. Thus Countrywide’s sales compensation practices are in sync with the typical commission-driven sales organization. The company is simply trying to maximize profits for its shareholders. That’s a good thing, not a bad thing.

Besides, if Countrywide really did try to systematically trick borrowers into taking loans that are more expensive than the best deals they qualify for, the company would have been setting itself up for disaster. The mortgage lending business is extraordinarily competitive: it’s incredibly easy for prospective borrowers to rate shop. So easy, in fact, that if Countrywide insisted on withholding its best deal from customers, those customers would walk across the street and do business elsewhere.

(As far as that goes, if Countrywide aims to steer its borrowers into high-fee subprime loans, it’s not doing too good a job. As Morgenson herself reports, subprime originations accounted for just 8.7% of the company’s total last year.)

Morgenson also seems concerned by the step in the sales process that Countrywide calls the “Oasis of Rapport” in its sales manual [Emph. added]:

One marketing manual used in Countrywide’s subprime unit during 2005, for example, walks sales representatives through the steps of a successful call. “Step 3, Borrower Information, is where the Account Executive gets on the Oasis of Rapport,” the manual states. “The Oasis of Rapport is the time spent with the client building rapport and gathering information. At this point in the sales cycle, rates, points, and fees are not discussed. The immediate objective is for the Account Executive to get to know the client and look for points of common interest. Use first names with clients as it facilitates a friendly, helpful tone.”

What’s the problem, again? This “Oasis of Rapport” stuff sounds to me like old-fashioned probing for customer needs. That’s the part where the salesman adds the most value.

I could go on, but you get the idea. Did Countrywide get too lax at the end of the cycle? By the company’s own admission, it did. Why that’s necessarily bad for subprime borrowers isn’t clear, though: Countrywide’s lack of discipline means it lent money to thousands of borrowers that, in retrospect, it shouldn’t have. The vast majority of those borrowers are still current on their loans. As to the ones who aren’t current, Countrywide’s shareholders are paying the price for the company’s lack of prudence.

How this adds up to shady business practices, I don’t understand.

Tom Brown is head of BankStocks.com.

Comments

[eponymousLTC:]

You're assuming that every branch office behaved exactly the same way. I'm willing to bet a basket of tangelos (a homage to one of the nicknames given to CFC's now dubious CEO) that predatory behaviors lurked throughout many of the branches - especially in markets with hotter real estate markets...

2007 Sep 16 10:29 AM

[ILongyou:]

Interesting other side of the coin article but doesn't necessarily make it the correct side either!

"(We’ve included writers’ name and location with permission)"

You seem to have inserted this to try and make YOUR article look a little more reliable to your readers compared to the NY Times article.
Who do you think would be willing to put their name and location on record, someone who is pumping up her employer or someone who is dumping off on the employer? No surprise there that NY Times sources wanted to remain anonymous whereas yours were probably jumping up and down to be fully identified on record for their employer to see (did they also provide their employee id numbers to you?)... especially the employer who is trying to decide which 20,000 to let go :)

BTW, did you also get any responses that were negative on the CW and unsupportive of the defense you have forwarded? I would be surprised if you didn't. Have you also decided to be selective about your facts like that other reporter you are talking about?

And about that lack of evidence, I leave it as a homework to find recent research reports that show CW to be one of the main accused in causing minorities and financially naive borrowers to get rates much higher than their credit history and financial situation would deserve. You see, not everyone is a financial reporter like you, Mr. Brown. Not everyone knows how to... how did you put it?
"it’s incredibly easy for prospective borrowers to rate shop."
No it is not. Have you looked at the forms and tiny disclosure print size? Financially naive portion of the population does not have any idea on what points and ARM mean... they don't know how two mortgage products compare... they just look at the initial monthly payment to make their decision... just like buying a car! Ask around your own family (uncles, aunts, grandpa, ...) and you would know.

2007 Oct 11 02:39 PM