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.