Countrywide Financial: from mortgage leader to accounting fraud

Countrywide Accounting Fraud

In the year 1969, David Loeb moved to NY from Virginia to begin a home loan and advance organization named as "United Mortgage Servicing." He was joined by his trusted aide Angelo Mozilo. Both shared common dreams of big money and making their presence felt across the nation. The sole owner of the firm, David Loeb had to, under pressure of work, circumstances and colleagues part with half of the ownership. David Loeb and Angelo Mozilo became equal partners of the new firm that they formed, "Countrywide." They began their operations from and opened their new office in California. Angelo Mozilo was a very forceful and opportunistic marketer, and began pushing for contracts in the market aggressively. The organization was chipping away at two fundamental boards; David's NY-based credit exercises and Mozilo's home loan plot trades in the city of California. After they attempted to present open share by coasting a stock in stock trade, David needed to move to Los Angeles. For about two years, the two carried on this formation and had a rather localized presence. By the year 1974 organization had begun an alternate eight business locales yet it was still a neighborhood player and much expansion and work needed to be done before their dream of being known across as "Countrywide" would be realized. (Chomsisengphet, & Pennington-Cross, 2006)

Before long, it was David Loeb who understood that some extraordinary measures ought to be taken to make organization to realize the inner desires. He chose to change whole staff and enroll new, highly skilled one with high pay. Mozilo was hesitant to such an extreme move however was persuaded to the imagination of the future possibilities wit a similar depiction of dreams that had brought them to the present from the modest past and upbringing. With, fresh recruits implanted, organization soon made huge benefits with the new thoughts put and actualized by new group. In the year 1978, organization was making astounding profits. It was not sheer hard work. Key to their prosperity was foresight in understanding and anticipating changes in investment rates before it happened accompanied by institutionalizing strategies (Chomsisengphet, & Pennington-Cross, n.d.).

Mozilo effectively snatched the opportunity with refinancing of homes as investment rates fell. Before long numerous property holders began to contribute with Countrywide for refinancing and by mid 1980s within 26 states it had 104 work places. 1984 to 1986 turned out to be the most happening for the organization as it topped a landmark figure of $3.2 billion. For initial 20 years, Countrywide registered development relentlessly and financial analysts were looking forward as the industry was hit by numerous money related and capital embarrassments. Countrywide, because of its clean image and considerable trust component, was favored by many investors and got a cushion of additional funds of over four hundred million dollars in late eighties & early nineties. The organization was sufficiently shrewd to peruse the technologically advancing times and immediately acquainted itself with new technical skills with minimum expense and application handling time for the clients. For 1990, as a matter of example, the association displayed its own state- of-the- art workmanship development start-up organization, EDGE, through which it was proposed to decrease the dangers of deficient credits and affirmation evaluating (Chomsisengphet, & Pennington-Cross, n.d.).

The system had limited, by and large lessened expense by taking care of costs, while stimulating financing time to a period of less than 30 days on standard home loans, by engaging development specialists to enter customer information simply once. Typical information could then be copied to diverse records hence; figures, for instance, credit rates and refund centers could be downloaded similarly. EDGE then printed out completed genuine copies of all chronicles on a laser printer, discarding the prerequisite for preprinted development structures and saving the association $1 million a year (Chomsisengphet, & Pennington-Cross, n.d.).

Countrywide upheld its dedication to this industry by promising to offer $5 billion in House-America kind of credits to the country's two biggest home loan banks, the Federal National Mortgage Association, "Fannie Mae," and the Federal Home Loan Mortgage Corp., "Freddie Mac," both of which were made by Congress to guarantee that moneylenders have a consistent wellspring of cash for home loans. Plans to enter into money market funds, stocks, no-load mutual funds, annuities and in 1996 also contributed to the company's prediction of yearly earnings of more than $300 million by the end of the decade. (Chomsisengphet, & Pennington-Cross, 2006).

The Transgressions and the transgressors

Without conventional capital requirements on the scale of home loan loaning exercises, Countrywide's exercises extended quickly from 2000 onwards. The main features of the mortgage loans originated by Countrywide during the boom years also changed. The relative decrease in office credits and increment in non-organisational advances was risky from a profitable management point-of-view in light of the fact that the non-organization advance business was less fluid. Very much in contrast to non-office credits, the agency advances must meet certain criteria, for example, most extreme advance to home value proportion, greatest obligation to salary degree, and a certain level of home loan documentation. To expand the capital accessible for home advances, the business sector for office credits is supported by government supported infrastructure by way of norms, and regulations. This manifested in decrease in credit quality of Countrywide mortgage activity. This actually added a huge risk factor and contained within it a likely cause for downslide of the organization (Freeman, Wells, & Wyatt, 2013)

This possibility of increasing danger being taken by Countrywide was possibly understood in the financial media sector as possibly early as 2004, when Countrywide was recognized as a forceful loan specialist in the more hazardous domains of the home loan market, and the media expressed worries about the helplessness of Countrywide to provide the much needed strength to the U.S. home-loan market. Thus came into being first major alteration that Countrywide undertook . Countrywide had entered into riskier domains of initializing mortgages and subsequently securitization. Although, this possibly, was the main cause of the shipwreck. The second major and consequent (to the first) was that the financial statements did not explicitly state the risk the company was exposed to. Lastly, it was apparent that the CEO of the company was privy to information that he should have divulged, ad he failed at that. (Tam, Q, 2012).

It was also noted that the Equal Credit opportunity Act (ECOA) was also violated by Countrywide. ("USDOJ: U.S. Attorney's Office - Central District of California,")

The market was on an upswing beginning 2000 through 2006 and hence was oblivious to the undercurrents as also some obvious facets of the mortgage market. Real estate market was exceeding its limits and government was largely ignorant about manipulations of its credit rating policy. Borrowers were given a free hand to declare their state of difficulty and sell their property to make profits. The Problem was realized quite late when average market cost of the property fell by a whopping twenty six percentage points and the obvious result was that these defaulting borrowers were stuck deeply into the debt-cycle, unable to find a way out of the rut. The most significant time in the default context was in the year subsequent to origination, and across the nation, the foreclosure rate on subprime mortgage loans originated during 2006 was more than 10 per cent in during the entire year and upto September 2007, and in some states (such as California) it topped 20 per cent (Chomsisengphet and Pennington-Cross, 2006; Demyanyk and Hemert, 2008).

This led to Countrywide's mortgage originations falling 11.2 per cent in 2007 (from $468.17 billion to $415.63 billion). (Michael Hudson, 2011) As if it was not sufficient, Countrywide made a recourse to its mortgage loan policy and started writing lower yielding agency loans GSEs would securitize and purchased it. This had the result that Countrywide's avenues and even caps of the "higher default risk" non-agency mortgage originations fell 42 per cent in just one year, from a holding of $305.98 billion in 2006 to $176.42 billion in 2007. With the increasing reduction in investor appetite for higher yield, mortgage securitized bonds (arising from the securitization of non-agency mortgages loans), liquidity soon started posing problems for Countrywide. (Michael Hudson, 2011). Situation soon became untenable for Countrywide and they chose to seek a bailout by yielding to Bank of America 7.25% of its shares. All this happened in August 2007 and by October 2007, its subprime transactions were under the investigations of SEC. In January 2008, Bank of America offered rescue deal that Countrywide had to accept to avoid bankruptcy.

The role of CEO

Angelo Mozilo was with the company as one of its founder member, and had risen to become its CEO. As such, he had the most of the more intricate workings within and influence on the path the company eventually traced. He was among the most highly paid, in fact sixth, executive in the country according to Corporate Library LLC. He was obviously deeply involved and had probably influenced or at least given a go-ahead to the 'risked' loans portfolios but chose not to make the matters explicit in the financial statements and balance sheets.

It is unnerving to note that when the company was under duress, Mozilo got a huge compensation amount. The intentional side-stepping resorted to by the CEO in the face of fact hiding tactics adopted by Countrywide are indicative of the possibility that the huge returns that he personally was to gain were causative of his dereliction of duties and thereby ethics of business. It was only right then, that he was brought to book and put on trial in 2009 but was surprisingly acquitted and even a formal charge was not framed against him. The fine he was supposed to pay amounted to a few million dollars that he paid readily to avoid a more damaging in-depth inquiry into the dealings of the company that would have bared open the multitudes of financial over-stepping and even transgressions of ethical business practices.

The impact on affected stakeholders

The target of this paper is to give a fleeting insight into the causes for the 2007 -- 2010 money related problems and advice the administrative impartial discussion that ensues. Reporters differently found out faults in the budgetary emergency on money related reporting inconsistencies, securitization and unethical credit practices, unchecked exchange of securities, (for example, OTC exchange mechanisms of home loan backed securities and credit default swaps), and the eventual fall of the land market.

To serve as a guideline to this civil argument we chose to study the problem from many angles and analyze the working style adopted by Countrywide, an organization exhibiting how a large portion of the business practices apparent in monetary establishments in the years leading towards a crash in the market. Due emphasis has been given to investigating Countrywide as it was amongst the first firms to breakdown amid the monetary emergency, yet preceding the emergency had risen metamorphically into the biggest player in the U.S. home loan credit market. To restate emphasis, in the period 2000 -- 06, Countrywide originated $2.21 trillion in home loan credits out of which as much as $2.19 trillion were in securities. From these exercises of securitization, Countrywide created as much as $27.25 billion that formed the dominant part (58.3 every penny) of the income of organization.

The organization's dubious securitization practices also brought about an exponential rise in wages - $2,674.86 million in 2006 from a modest $374.15 million in 2000. However immediately and equally abruptly, in the second half-year of 2007 Countrywide's value crashed evidently without any cautioning and liquidation was just about avoided when the company agreed a four billion merger with Bank of America in January 2008. This study demonstrates that Countrywide embarked on a plan of action of starting and securitizing home loan credits that was, however just about reasonable because the property estimations were encountering value additions. This strategy was also in parts supported by policy approvals that inadvertently paved way to low quality home loan credits.

The organization garnered the better part of its accruals from the originating, start and securitization of home loan advances, which was a very easy way that created liquidity for the organization, however eventually brought about a monetary power emergency. Eventually, U.S. Securities and Exchange Commission (SEC) took cognizance of the faulty depiction in the statement of the company that did not make the investors aware of the real tangible risks it was facing. It is also possible that, this in turn allowed Countrywide to defer a most of the associated default risk of the home loans to the financial players in the home loan aided securities, in spite of the fact that this was risky proposition (Olster, 2013). As an fallout of the clear capacity to exchange default risk, there was almost no motivation to stick to stricter credit norms in home loan beginnings, and Countrywide started home loan credits while ignoring the potential default hazard to the loanee.

Measures that could have been taken to prevent the committed fraud

These falling credit policies were in some part obvious in the different kinds of sources of incomes of Countrywide on the diverse advances that it securitized. Obviously, this spurred Countrywide to formulate many varieties of home loans to the public. While there is surely evidence of the fact that Countrywide's plan of action also accompanied high risks to the organization itself, those risks were not displayed in the accounts and books and financial statements of Countrywide. (Freeman, Wells, & Wyatt, 2013). He earned $285.02 million from the activity of investment opportunities from January 2000 to December 2006. Amongst the main people who were affected adversely by this financial fraud were many; the underwriters in the company, the staff of the company who were quickly phased out, the agents and brokers who had yielded great power over the loans and the most of all the non-African-American who were discriminated against in large measure. Some of the worst features of the fraud were that the secondary home-owners had to let go of the ownership of their homes when their spouses obtained a loan in the sub-prime market. In that sense, racial discrimination and unnatural and aggressive loaning practices were employed by Countrywide at the cost of risk, the borrower and eventually the banks that bought these loans.

Mozilo was an author of Countrywide and a double CEO and Chairman with noteworthy managerial force. Besides, Mozilo because of his long inclusion with the organization and industry ought to have been more discriminatory. The financials also indicate that the industry ignored the massive risks the company was exposed to even through a cursory glance into its figures and it was only when the company crashed that these were taken note of. There was an equal chance that the fraud could have been detected during the 2003-05 period when things had started going out of control, but it went unnoticed owing to two reasons, one, the home market was climbing and the profiteering went unnoticed, and secondly, the regulations were loosened a bit by the government as ownership and home loans needed to be patronized at that time to make the most of the market conditions. Since loans were also offered to low credit score holders, too, many people weren't going to complain, either. ("Understanding the Subprime Mortgage Crisis by (Demyanyk Y.S, Otto Van Hemert, 2008).