Countrywide Financial

Bank of America Home Loans
	File:Bank of America logo.svg
Company type	Division of Bank of America
Founded	March 14, 1969 (Countrywide); April 2009 (Bank of America Home Loans)
Headquarters	Calabasas, California, USA (Countrywide Financial); Charlotte, North Carolina, USA (Bank of America)
Key people	Barbara J. Desoer, President of Bank of America Home Loans and Insurance
Revenue	$6,061,437,000 US$ (2007)
Operating income	Template:Loss$1,310,274,000 US$ (2007)
Net income	Template:Loss$703,538,000 US$ (2007)
Parent	Bank of America
Website	Bank of America Home Loans

Bank of America Home Loans serves as the mortgage lending division within Bank of America. Its origins trace back to Countrywide Financial, which was founded in 1969 and later acquired by Bank of America in 2008 for $4.1 billion. At its height in 2006, Countrywide was responsible for financing one-fifth of all U.S. mortgages, equating to approximately 3.5% of the nation’s GDP—a market dominance unmatched by any other single lender.

History

Countrywide was launched in 1969 by business partners David S. Loeb and Angelo Mozilo. Initially trading over the counter with shares priced under $1, the company went public on the New York Stock Exchange in 1985 under the symbol CFC. From 1982 through 2003, it achieved an extraordinary return on investment of 23,000%, outperforming prominent corporations such as Washington Mutual, Walmart, and Berkshire Hathaway.

On January 11, 2008, Bank of America revealed its intention to purchase Countrywide for $4.1 billion in stock. After receiving approval from the Federal Reserve and securing shareholder consent—with 69% voting in favor by June 25—the transaction was completed on July 1, 2008.

In 1997, Countrywide separated its mortgage investment division into a standalone company called IndyMac Bank. However, IndyMac succumbed to severe financial distress during the economic crisis and was taken over by federal regulators in July 2008 following a bank run.

Businesses

The operations of Bank of America Home Loans are organized into four principal areas:

Mortgage Banking: Responsible for loan origination, acquisition, securitization, and servicing. This segment accounted for 59% of pre-tax profits in 2005.
Banking: Runs a federally chartered thrift institution focused mainly on mortgage loans and home equity lines sourced through its mortgage banking channel.
Capital Markets: Acts as an institutional broker-dealer engaged in trading and underwriting mortgage-backed securities.
Global Operations: Handles processing of mortgage applications and loan servicing functions.

Mortgage banking

This division generates mortgage loans across the United States, with nearly all loans sold into secondary markets primarily as mortgage-backed securities. In 2006, conventional non-conforming loans exceeding Fannie Mae limits comprised 45% of originations. The company generally services the loans it originates and provides closing services that include title insurance, escrow management, and appraisals.

Mortgage Banking is segmented into Loan Production, Loan Servicing, and Loan Closing Services.

Loan Origination

Loan Origination encompasses the creation and funding of new loans, as well as the acquisition of already funded loans from other lenders, managed through four key divisions: Consumer Markets, Full Spectrum Lending, Wholesale Lending, and Correspondent Lending.

Both Consumer Markets and Full Spectrum Lending directly handle loan origination, funding, and subsequent sale—Full Spectrum specializes in subprime credit offerings. Wholesale Lending finances and markets loans produced by external brokers. Correspondent Lending acquires loans from various originators such as mortgage bankers and credit unions; these loans are externally originated and funded before being sold to investors in the secondary market.

Loan Servicing

Loan servicing includes the collection of borrower payments, administration of escrow accounts for taxes and insurance, and remittance of advances to investors as outlined in the Pooling and Servicing Agreement (PSA). The servicing compensation typically ranges between 25 and 75 basis points based on the outstanding principal balance.

Additional revenue sources comprise interest earned on funds held prior to advances, fees for late payments, force-placed insurance charges, document handling fees, legal expenses, and payoff statement fees.

Loan Closing Services

LandSafe and its subsidiaries deliver loan closing solutions such as real estate appraisals, automated credit reports, flood zone determinations, and residential title services throughout six principal counties in Southern California.

Banking

The Banking division includes Countrywide Bank, FSB, and Countrywide Warehouse Lending. Countrywide Bank transitioned from a national bank charter to a federally chartered savings institution regulated by the Office of Thrift Supervision. It ranks as the third-largest Savings and Loan association in the United States with assets approaching $125 billion.

Countrywide Bank primarily focuses on originating and acquiring mortgage loans along with home equity lines of credit, predominantly sourced through its mortgage banking subsidiary, Countrywide Home Loans. It also attracts retail deposits via certificates of deposit offered through online platforms, call centers, and a network exceeding 200 financial centers connected to its retail branches.

Countrywide Warehouse Lending provides warehouse credit lines to mortgage bankers—mainly clients of Countrywide Home Loans' Correspondent Lending and Capital Markets units—to finance loan originations that are later sold back to Countrywide.

Capital Markets

The Capital Markets division functions as a registered securities broker-dealer, residential mortgage loan servicer, and commercial mortgage originator. It operates broker-dealers in Japan and the United Kingdom, serves as an introducing broker for futures contracts, acts as an asset manager, and brokers mortgage servicing rights. Its institutional clientele includes banks, insurance firms, asset managers, mutual funds, pension funds, other broker-dealers, and government entities. Commercial real estate financing targets property owners or project sponsors.

Countrywide Asset Management Corporation oversees acquisition and disposition activities involving third-party and originated loans—primarily delinquent FHA and VA loans—with objectives to rehabilitate eligible loans for securitization or manage foreclosure and liquidation proceedings.

Securities trading involves secondary market transactions of debt securities after issuance. Underwriting entails assuming risk by purchasing new securities from issuers for resale. The Capital Markets segment mainly underwrites mortgage-related debt instruments.

Insurance

The Insurance division underwrites and brokers property, casualty, life, and credit insurance products, while also providing reinsurance for primary mortgage insurers through two subsidiaries: Balboa Life and Casualty Operations and Balboa Reinsurance Company.

Balboa Life and Casualty offers nationwide underwriting of various insurance lines, including Lender-Placed Property and Auto insurance, Voluntary Homeowners and Auto coverage, as well as Life and Credit insurance encompassing term life, credit life, and credit disability policies.

Balboa Reinsurance delivers mezzanine reinsurance protection to insurers issuing private mortgage insurance (PMI) on loans within the company’s servicing portfolio. This coverage applies to losses occurring between predetermined minimum and maximum thresholds. It primarily covers conventional loans with original loan-to-value ratios exceeding 80%, in exchange for receiving a share of the PMI premiums.

Global operations

The Global Operations segment was chiefly represented by Global Home Loans (GHL), a UK-based third-party administrator established in 1998 through a joint venture between Countrywide and Woolwich plc. Following Woolwich’s acquisition by Barclays plc, GHL managed loan processing and mortgage subservicing services for Barclays.

By 2005, GHL had processed loans totaling more than £11.3 billion ($20.3 billion), all subserviced on behalf of Barclays. The overall subservicing portfolio reached £59 billion ($102 billion) at the close of 2005. In late 2005, Barclays terminated the third-party contract, internalizing mortgage operations by February 2006 after Countrywide purchased Barclays’ 30% stake in GHL.

Following this acquisition, Global’s UK activities were confined to supporting Barclays and Prudential Assurance via proprietary systems developed by Countrywide Technology Group until these systems were phased out in 2012.

Another UK initiative, Valuation Services, offered early electronic residential property valuation solutions through a majority-owned joint venture but was divested to First American in 2007.

Offshore Services commenced operations in India in 2004 to capitalize on affordable technology talent, providing business process outsourcing and technology support to the parent company and its subsidiaries across the US and UK.

Employee and contract labor disputes

In 2003, Countrywide became subject to a class-action lawsuit alleging unpaid overtime, with employees reportedly working 10 to 15 hours daily, six to seven days a week without receiving overtime compensation. The lawsuit concluded in May 2005 with a $30 million settlement paid to approximately 400 account executives. The company enforces comprehensive background checks on job candidates—including credit reports and public records—with mandatory consent; failure to authorize results in automatic disqualification. This policy has drawn criticism for perceived discrimination and privacy concerns.

Additionally, the company has been reported to neglect filing the IRS Form 1099 for independent brokers as legally required, raising compliance issues.

Minority and subprime borrower concerns

Countrywide reached a settlement with New York State Attorney General Eliot Spitzer following accusations of directing Black and Hispanic borrowers toward higher-cost loan products. As part of the agreement, the company committed to improving loan officer training and oversight while paying $200,000 toward investigative expenses.

Internal documents revealed that Countrywide extended loans to families with disposable incomes as low as $1,000, often placing financial strain on borrowers. Economist Stan Liebowitz noted that the Fannie Mae Foundation recognized Countrywide as a model of nondiscriminatory lending due to its flexible underwriting standards aimed at approving minority applicants. By early 2003, the firm's dedication to low-income lending had reached $600 billion.

Complaints Following Hurricanes Katrina, Gustav, and Rita

In the aftermath of hurricanes Katrina, Gustav, and Rita, certain Countrywide borrowers in impacted regions reported being informed that they could temporarily halt payments without incurring late charges, with any missed installments added to the loan’s maturity date. However, these customers later asserted that Countrywide required them to repay missed payments plus late fees in a single lump sum within 30 days, under threat of foreclosure.

"Friends of Angelo" VIP Program

In June 2008, Conde Nast Portfolio disclosed that numerous politicians from Washington D.C. received preferential mortgage terms from Countrywide as part of the "FOA" ("Friends of Angelo") program—named after CEO Angelo Mozilo. Among the recipients were Senate Banking Committee Chairman Christopher Dodd and Senate Budget Committee Chairman Kent Conrad. Additionally, Countrywide’s political action committee had made substantial contributions to Dodd’s campaign.

Senator Dodd introduced a proposal for the federal government to purchase up to $400 billion in defaulted mortgages. The advocacy organization CREW called for investigations into both Senators Conrad and Dodd regarding these advantageous loans.

James Johnson, former CEO of Fannie Mae and advisor to Barack Obama’s presidential campaign, was also a recipient of FOA loans and withdrew from consideration as a vice-presidential candidate in June 2008 to prevent distractions for the campaign.

Likewise, Franklin Raines, another former Fannie Mae CEO and FOA loan beneficiary, secured below-market loans exceeding $3 million. Mid-2008 reports connected Raines to Obama’s campaign as a housing policy advisor; however, The Washington Post later characterized these links as tenuous.

Litigation

On June 25, 2008, Illinois Attorney General Lisa Madigan initiated a civil lawsuit against Countrywide Financial Corporation in Cook County Circuit Court, accusing the company of engaging in "unfair and deceptive" practices aimed at steering homeowners into unaffordable risky mortgages. This suit was based on evidence obtained through a subpoena in 2007.

That same day, California Attorney General Jerry Brown filed a comparable lawsuit alleging violations of state laws concerning false advertising and unfair business conduct. The complaint asserts that Countrywide misrepresented adjustable-rate mortgages, interest-only loans, low-documentation loans, and home-equity loans by falsely assuring borrowers they could refinance before interest rate adjustments.

In August 2008, Connecticut Attorney General Richard Blumenthal also brought legal action against Countrywide for deceptive lending practices affecting homeowners.

After Bank of America acquired Countrywide, these lawsuits were resolved in October 2008 through an $8.4 billion settlement aimed at modifying problematic predatory loans. States participating include Arizona, California, Connecticut, Florida, Iowa, Michigan, North Carolina, Ohio, Texas, and Washington; additional states may join the agreement.

Moreover, a shareholder class action lawsuit has been filed targeting investors in Countrywide asset-backed securities.

Disruption in the Secondary Market

Countrywide generally bundled mortgage loans into mortgage-backed securities (MBS) for sale to institutional investors. Government-sponsored enterprises such as Fannie Mae and Freddie Mac purchase only conforming loans; non-conforming mortgage securities are traded within the private secondary market. On August 3, 2007, trading of most non-conforming securities in this secondary market largely ceased.

This disruption was unprecedented in both scope and severity. Alt-A mortgages—loans extended to borrowers with apparently strong credit but limited documentation—halted trading below AAA ratings; even many AAA-rated securities experienced difficulties. Only securities backed by conforming mortgages continued active trading. Countrywide announced it had nearly $50 billion available to support its mortgage operations during this period.

The collapse of American Home Mortgage on August 6, 2007 intensified scrutiny on Countrywide, which at that time originated approximately 17% of U.S. mortgages. Shortly thereafter, Countrywide informed the SEC that interruptions in secondary mortgage markets could negatively impact its financial health due to its dependence on credit availability. It cautioned that rising borrowing costs and diminished liquidity might reduce profitability.

This announcement fueled speculation about potential bankruptcy risks for Countrywide. Beginning August 10, concerns over the secondary mortgage market shutdown led to a funding run on the company as new mortgage financing dried up. Credit rating agencies Fitch, Moody’s, and Standard & Poor’s downgraded Countrywide by one or two notches—some ratings nearing junk status—resulting in a 22% overnight surge in bond insurance costs and restricted access to commercial paper markets. Institutional investors reportedly sought to offload Countrywide debt instruments.

By mid-August, fifty other mortgage lenders had filed for Chapter 11 bankruptcy protection; Merrill Lynch identified Countrywide as a possible bankruptcy candidate. These developments exerted downward pressure on Countrywide's stock price, which declined $3.17 to $21.29—the largest single-day drop since 1987—and was down 50% year-to-date. On August 15, Merrill Lynch recommended clients sell their shares in Countrywide.

Disclosure of Financial Difficulties and Government Support

On August 16, 2007, Countrywide revealed concerns about its liquidity position amid a shrinking secondary market for mortgage-backed securities, announcing intentions to utilize its entire $11.5 billion credit facility provided by a group of 40 banks, including JPMorgan Chase. The next day, amid intensifying bankruptcy rumors, depositors rapidly withdrew funds, causing the company’s shares to lose approximately 75% of their highest value. In an effort to stabilize, Countrywide planned to convert 90% of its loan portfolio into conforming loans.

The Federal Reserve responded by reducing the discount rate by half a percentage point and accepting $17.2 billion in repurchase agreements secured by mortgage-backed securities. These measures helped to restore investor trust and support equity markets. Simultaneously, Countrywide was compelled to revise previously reported earnings related to accrued but unpaid interest from complex mortgage products, much of which became uncollectible during 2007.

On August 20, at the request of Citigroup and Bank of America, the Federal Reserve temporarily lifted restrictions on lending limits for federally insured banks to affiliated brokerage firms, enabling increased liquidity assistance. By August 23, Citibank, Bank of America, and two additional banks had obtained $500 million in short-term financing through the Fed’s discount window. On that same date, Bank of America contributed $2 billion in new capital to Countrywide in exchange for convertible preferred shares.

Countrywide’s stock experienced a sharp decline exceeding 10% on November 26, 2007, closing at $8.64 per share—less than half its value from three months prior—following reports that the Atlanta Federal Home Loan Bank had extended substantial credit to mitigate Countrywide's funding difficulties. This development led Senator Chuck Schumer to call for an investigation into the prudence of such assistance.

Between 2005 and 2007, founder Angelo R. Mozilo sold large portions of his Countrywide holdings, generating $291.5 million in proceeds. Subsequently, shareholders initiated a class action lawsuit alleging violations of securities laws.

In September 2008, Countrywide informed its mortgage customers about a data breach involving employee mishandling of social security numbers and birth dates, offering complimentary credit monitoring services for 90 days as part of its remedial actions.

'Protect Our House' Employee Engagement Initiative

In September 2007, facing adverse media coverage and implementing a workforce reduction of approximately 20%, Countrywide launched a public relations campaign aimed at boosting employee morale. Staff members were encouraged to sign a loyalty pledge affirming their commitment to "share the Countrywide narrative," accompanied by distribution of green wristbands as tokens of solidarity. According to a senior executive, employees who declined to sign risked termination.

Acquisition

The acquisition process of Countrywide Financial by Bank of America commenced in December 2007 with discussions between CEOs Angelo Mozilo and Kenneth D. Lewis. On January 11, 2008, Bank of America announced an all-stock acquisition valued at $4 billion. Following this announcement, Countrywide’s share price increased from $4.43 to nearly $5.50 per share. Ultimately, Bank of America completed the purchase in 2008 for $2.5 billion.

Despite receiving a $2 billion capital injection from Bank of America in August 2007, Countrywide’s financial condition deteriorated over the subsequent six months, leading Mozilo to contemplate resignation. Nevertheless, Bank of America leadership recognized strategic value in Countrywide’s expansive U.S. mortgage operations and its evolving business framework.

Lewis remarked, "We factored in ongoing litigation and negative publicity but prioritized long-term shareholder returns over short-term challenges." Prior to extending the offer—priced significantly below Countrywide’s $24 billion market capitalization from the previous year—sixty analysts based in Charlotte were deployed to evaluate the company’s legal exposure and financial status.

Countrywide shareholders voted in favor of the acquisition on June 25, 2008; the transaction was finalized on July 2. Following the merger announcement, Bank of America planned workforce reductions totaling 7,500 positions over two years.

This acquisition held considerable significance amid the housing crisis due to Countrywide’s position as the largest mortgage lender nationwide; however, it proved financially burdensome: by August 2014, Bank of America agreed to settlements approaching $17 billion related largely to problematic mortgage securities originally sold by Countrywide.

SEC allegations

On June 4, 2009, the U.S. Securities and Exchange Commission filed charges against former CEO Angelo Mozilo for insider trading and securities fraud. Additionally, former COO David Sambol and former CFO Eric Sieracki were accused of securities fraud due to their failure to reveal Countrywide's lenient lending practices in the 2006 annual report. Despite these legal actions, Countrywide and its successor Bank of America continued to hold the Property Management agreement with the Veterans Administration (VA) until 2011, as documented in a 2008 VA memorandum.

External links

"Implications of the Countrywide acquisition for your mortgage", CNN Money, January 11, 2008
Chronology of events leading up to Bank of America's acquisition of Countrywide Financial, San Diego Union Tribune, January 11, 2008