Countrywide Credit Industries, Inc.
Countrywide Credit Industries, Inc.
155 North Lake Avenue
Pasadena, California 91109-1857
Fax: (805) 520-5414
Sales: $860.7 million (1996)
Stock Exchanges: New York
SICs: 6162 Mortgage Bankers & Correspondents; 6719 Holding Companies, Not Elsewhere Classified
Countrywide Credit Industries, Inc. is the nation’s leading independent residential mortgage lender, with approximately five percent of the residential mortgage writing business. The company, with more than 330 offices located throughout the United States, is also the market leader in loan servicing—the collection of payments and the handling of paperwork involved with loans. Known for keeping operating costs down and improving efficiency through the use of state-of-the-art technology, the company commonly known as “the McDonald’s of mortgage banking” has received widespread attention from the national media for its discounted loan fees, rapid growth, and development of affordable lending programs designed to reach low-and moderate-income home buyers.
Countrywide was founded in 1969 by David Loeb, a New Yorker who had moved to Virginia to expand his fledgling mortgage banking business, United Mortgage Servicing, and his top-notch young salesman, Angelo Mozilo, a native of the Bronx who began processing loans at the age of 16. After Loeb was forced to relinquish his original 50 percent stake in United due to pressure from corporate raiders, the two set out to build a new mortgage company they ambitiously named Countrywide. They opened their first office in Anaheim, California. While Mozilo, known for his self-confidence and survival instincts, served as the loan officer, Loeb, whose strength was in holding down costs, performed the underwriting duties from an office in New York City.
In an attempt to speed their progress toward becoming a nationwide company, the partners quickly went public—an unusual move in the industry. Their stock offering, however, proved initially to be a mistake: in exchange for a smaller portion of ownership and an assortment of lawyers, directors, and shareholders to answer to, the founders received only a small portion of new capital, $800,000—not enough to see the company through its first years. To keep Countrywide afloat, Mozilo hit the streets of Los Angeles selling loans, while his wife and their three children stayed with relatives back East. Loeb, meanwhile, closed the New York office and moved to Los Angeles.
The “1974 Equation”
During the early 1970s, the company managed to stay in business despite the onset of inflation and high interest rates. By 1974, the firm had expanded to eight branch offices, but it was nowhere near realizing its dream of becoming a nationwide company and, more important, it was barely making enough money to survive. It appeared that while the firm’s eight offices were doing quite well, Countrywide itself, which bore nearly all the risks of the operation, was not.
Realizing that a drastic change had to be made for the company to prosper, Loeb developed a radical idea: fire all of the salesmen and rebuild the corporation under a new philosophy. Like other mortgage companies, Countrywide employed a highly paid, commissioned sales force. This conventional approach, Loeb reasoned, placed more emphasis on the sales team than on the product itself, and Country wide’s “product,” he continued, should be its price—the combination of interest rates and points that would provide the home buyer with the best value. In order to achieve this goal, Loeb planned to convert the branch offices into uniform loan processors, with the central office taking care of sales by mailing out notices to realtors.
Although Mozilo, who had developed a reputation for forming close relationships with employees, initially balked at such draconian measures, he eventually came to accept his partner’s “product driven” philosophy. “Interest rates are the very fiber of what this country is all about,” he stated in Mortgage Banking. “The success or failure of capitalism rides with interest rates—it’s where the tar hits the road.” Rather than making the change gradually, Mozilo painfully agreed to fire 92 of the company’s 95 employees and shut down all of the branch offices at once, retaining the services of only a single secretary to help him and Loeb put together the first mailings to realtors.
The product that Countrywide made available was attractive. Not only were their interest rates lower than the competition’s, but they offered an unprecedented guarantee to lock in the rate quoted at the time of origination through the 60 to 90 days it takes to close a transaction on a home. Nevertheless, few realtors were impressed; Mozilo was again forced to hit the pavement to keep the company afloat. This time his job was to convince realtors that they could benefit from his company’s new idea.
Mozilo finally persuaded enough realtors to necessitate the reopening of the first Countrywide branch office in Whittier, California. The office was so successful that it nearly collapsed from the volume of new loans to be processed. New offices were soon needed to handle the ever-increasing demand. Although Countrywide handled a large amount of loans, it was able to maintain its high standards for approval because its loan processors were no longer motivated to take a chance on a questionable loan just to get a sales commission. Despite the ominous presence of stagflation and 17.5 percent interest rates strangling the real estate market, Countrywide rebuilt itself into a profitable company by 1978.
Consistent Growth in the 1980s
While discounted prices created the demand that fueled the company’s early growth, uniformity was the key to maintaining effective management. Each new Countrywide office that opened shared the characteristics of its predecessors: a shopping center or Main Street storefront, approximately 1,000 square feet of office space with a private area for meetings with applicants, and no more than two full-time employees. While a few offices were decorated with elegant furnishings, most conformed to the standard, no-frills company look. By standardizing everything from loan processing to floor coverings, Countrywide was able to keep costs down and improve efficiency. Not only did this strategy boost loan quality, it lowered the cost of loan originations below the one percent allowed by the Federal Housing Administration (FHA). Other mortgage bankers, in contrast, were losing money on originations and had to raise servicing fees to make up the difference.
Countrywide’s unconventional discounting and standardization policies were not the only factors that contributed to its rise to the top of the mortgage banking industry. The ability to skillfully read—or some would say fortuitously guess—when interest rates would fall also played a major role. In the early 1980s, while rates were still high, the company began selling off its servicing business to maintain profitability. While critics believed such a move was the equivalent of trading in valuable assets for short-term gain, Mozilo, who expected the record-high rates to fall, reasoned that what appeared to be assets would quickly become liabilities once rates fell and throngs of homeowners began refinancing their homes.
Mozilo’s gamble paid off. Interest rates plummeted, creating a boom in the refinancing business. Countrywide, having gained wider access to capital markets through its growing profitability, was prepared to meet the new demand, and, with the lowest originating fees and interest rates in the industry, Countrywide was able to take full advantage. By the mid-1980s, the company had expanded to 104 offices in 26 states, providing itself with the facilities to make the most of the boom years of 1984 and 1986. The firm also increased its loan production by initiating a registry program, agreeing to sell mortgages originated by small Savings and Loans and guaranteeing a loan rate to mortgage applicants. As a result of such strategies and market conditions, the company was able to process more than $3.2 billion in originations by the middle of the decade.
In the midst of the boom in loan originations, Countrywide had the wisdom to realize that such favorable conditions would not last forever. A plan for maintaining profitability when interest rates rise had to be developed; otherwise, the completion of a natural business cycle would seriously threaten the company. Again, the company chose the unconventional route. Just as it had earlier sold off many of its loan servicing contracts to raise capital, it now decided to build that business to buffer changes in the market. The balanced strategy, which the company calls the “macro hedge,” has helped to make the company’s bottom line less sensitive to changes in interest rates. By holding on to the servicing rights of its loans and aggressively purchasing the rights to service mortgages originated by other lenders, the company has been able to sustain earnings when a rise in interest rates causes a decline in loan originations. As the decade progressed, the company’s servicing portfolio played an increasingly important role, reaching the $1 billion mark in 1984, only to increase tenfold over the next four years. In 1988, the company founded a new subsidiary, Countrywide Servicing Exchange, to act as a broker for buyers and sellers of servicing rights.
Since its beginnings in 1969, Countrywide has had the goal of helping customers realize the American dream of home ownership while maximizing shareholder value.… It is Countrywide’s goal to provide its customers with the best combination of price, product and service for their home financing requirements. The Company’s continuing commitment to this mission has resulted in the innovative development of diverse production channels as well as products to meet customers’ needs and procure their business.
Explosive Growth in the Late 1980s and Early 1990s
While Countrywide grew steadily through its first two decades, it was at the turn of the decade that revenues and profits began to soar. One of the principal factors behind the arrival of the company was the unforeseen collapse of the Savings and Loan industry, the mortgage bank’s chief rival. Most mortgage banks, however, were unable to keep up with the demand that rushed their way because they depended on commercial banks, which had tightened their purse strings as a result of the S & L scandal, for the money they lent out. While most mortgage banks were set back by the limits of the banks’ willingness to lend, Countrywide had no such problem. One of the few public companies in the industry, it already had access to capital. With a proven track record of efficient management and favorable market conditions, Countrywide was a safe bet for investors, who eagerly put up $409 million for new issues of stock between 1987 and 1992.
Countrywide was able to handle the wave of new business without being overwhelmed largely because of its commitment to technology back in the 1970s. Having invested heavily in computerized loan processing at a time when other mortgage bankers were not buying technology, the company further stood out from the competition through its ability to accommodate the surge of new employees and offices needed to handle the added demand. With such a solid technological infrastructure in place, the cost and time needed to train new loan production employees was reduced, making it easier for the company to maintain profitability despite fluctuations in the market. During refinancing booms, for instance, the company has been able to hire temporary employees to meet the immediate demand, sometimes letting them go when conditions change.
In addition to giving Countrywide the flexibility to meet the ever changing demands of the volatile housing market, technological innovation has enabled the company to reduce the time and cost associated with loan processing and funding. In 1990, for instance, the company introduced its own state-of-the-art loan origination service, EDGE, which was designed to reduce the risks of deficient loans and guarantee pricing. The system was able to significantly reduce origination and processing costs, while accelerating funding time to less than 30 days on conventional loans, by enabling loan representatives to enter customer information only once. Common information can then be copied to other files automatically; figures such as loan rates and discount points can be downloaded as well. EDGE then prints out completed legal copies of all documents on a laser printer, eliminating the need for preprinted loan forms and saving the company $1 million a year.
The 1990s and Beyond
By 1992 Countrywide began to realize the full benefits of the strategy it conceived in the 1970s and refined over the next two decades. Largely as a result of its continued commitment to technology, its balanced marketing strategy, and its unmatched aggressive pricing, the company emerged as the nation’s top mortgage banker. Taking full advantage of a 19-year low in interest rates, Countrywide originated more than $30 billion in mortgages, moving past such perennial powers as Prudential Insurance Co. and Norwest Corp., while enjoying $246 million in total revenue and profits of $60.2 million—a 170 percent jump from the previous year.
In an attempt to further reduce origination costs and extend its lead over the competition, Countrywide made another landmark advance in the field of artificial-intelligence underwriting systems the following year, through its introduction of the Countrywide Loan Underwriting Expert System (CLUES). The state-of-the-art system was developed to expedite loan processing by handling most routine cases automatically. Able to not only approve an application—in less than a minute in routine cases—but to underwrite all types of mortgage loans, the system has helped Country wide’s underwriters spend more time on difficult or exceptional cases. With CLUES handling more than 7,000 loans per month, nearly 85 percent, underwriters have been able to increase production and attract more customers.
As Countrywide entered the mid-1990s, it directed much of its attention to a market that has been traditionally underserved by banks and mortgage companies alike: the low- and moderate-income population. In 1992, the company launched the “House America” program, to attend to this need. Designed to make the American Dream of home ownership a reality for those who lacked the finances, the credit history, or the stable employment necessary to qualify for a loan an opportunity to do so, House America represented an unprecedented move in the industry. Under the flexible underwriting program, customers have been approved for mortgages with a down payment of as low as three percent of the sale price. The program has also provided financial counseling and education to thousands, helping individuals with high student loan payments and unstable employment alike to find ways to better manage their money. Countrywide supported its commitment to this goal by pledging to sell $5 billion in House-America type loans to the nation’s two largest mortgage lenders, the Federal National Mortgage Association, “Fannie Mae,” and the Federal Home Loan Mortgage Corp., “Freddie Mac,” both of which were established by Congress to ensure that lenders have a constant source of money for mortgages.
According to Mozilo, House America, as its mission statement reads, was designed for the purpose of creating an “equality paradigm … which will positively impact the revitalization of local communities and economies through home ownership.” Accordingly, Countrywide has taken unprecedented measures to give minority populations greater access to loans. The company’s field officers, in fact, do not have the authority to deny loans to minority applicants; officials from central headquarters, including Mozilo, must first review the applications.
While Country wide’s commitment to equal housing has drawn widespread praise, it also promises to be good business. With the nation’s population growth occurring fastest among immigrant populations, minority and low-income groups represent perhaps the area of greatest potential to the company. According to a USA Today survey, only 43 percent of African American and 40 percent of Hispanic families—compared to 70 percent of white families—own their own home. Countrywide’s continued success may depend largely on its ability to reduce this disparity. Plans to market no-load mutual funds, stocks, annuities and money market funds in 1996 may also contribute to the company’s predicted annual earnings of more than $300 million by the end of the decade.
Countrywide Home Loans, Inc.; Countrywide Financial Planning Services, Inc.; Countrywide Capital Markets, Inc.; Countrywide Securities Corp.; Countrywide Servicing Exchange; CTC Foreclosure Services Corp.; LandSafe, Inc.; Countrywide Investments, Inc.; Countrywide Agency, Inc.
Barrett, Amy, “Countrywide’s Home Sweet Loans,” Business Week, September 14, 1992.
Cocheo, Steve, “Mortgage Machine,” American Banking Association Banking Journal, October 1995.
Collett, Wayne C., “Homeward Bound,” Mortgage Banking, January 1995, pp. 1-6.
Darlin, Damon, “Desensitizing,” Forbes, September 14, 1996, pp. 60-61.
Hill, Christian, and Carlton, Jim, “Countrywide Credit Takes Mortgage Market by Storm,” The Wall Street Journal, September 4, 1992.
Kulkosky, Edward, “Mozilo’s Countrywide Still in the Fast Lane,” American Banker, June 11, 1993.
Magnet, Myron, “Countrywide Credit Industries: Be Ready to Push Your Luck,” Fortune, April 4, 1994.
Willette, Anne, “New Rules Help More People Qualify,” USA Today, November 15, 1994.