Home > Mortgages > Awaiting the True Fallout from Countrywide

Comments 0 Comments
Advertiser Disclosure


We’re in still the throes of the mortgage meltdown, and it’s becoming apparent that the long-term damage done by Countrywide has still not fully unfurled.  Looking back, as 2007 came to a close, Countrywide Financial was reeling from liquidity problems, rumors of a potential bankruptcy, and a severe loss of market value. This is a chart of the Countrywide stock price.  Here, you see that the immediate damage was just a prelude to greater damage that would not unfold until later.

CountrywideA cash infusion by Bank of America of $2 billion in late 2007 kept the company afloat but the writing was on the wall. Early in 2008, BofA announced that it would purchase Countrywide for $4.1 billion. Obviously, this appeared to be an attractive price to BofA because of the 60,000 plus employees, the 900 branches, and its position as the leading mortgage lender in the United States. It gave BofA instant market share it could never have grown itself and it appeared possible that BofA could leverage that into greater market share for many of its other financial services as well.

What was not obvious at the time were the grenades hidden off the balance sheet that were to explode at regular intervals over the next three years just ended. And there are more in which the pin may have been pulled.

The first of these was the settlement of suits by the attorneys general of most states alleging deceptive sales practices by Countrywide employees. In October 2008, BofA agreed to set aside $8.69 billion in a fund to pay for re-writing the terms of those mortgages. At issue were subprime loans, Alt-A loans to less creditworthy borrowers, and adjustable rate mortgages with a pay-option feature that allowed interest payments of less than the amount of interest owed.

Note that this feature figured prominently in a re-statement of earnings whereby Countrywide had been accruing as income the interest that was owed but not yet collected on this type of loan. A more conservative accounting method would have been to count interest as income only when it was paid but that would have lowered earnings.

As the market crashed, it was obvious that the interest would likely never be collected and neither was it possible to collect the principal balance. You may see the court order here. How many were helped? Who knows because there have never been any reports by BofA as to how many homeowners received modifications under this program and what, if any, of the $8.68 billion has still not been distributed.

BofA announced previously that it had paid $3.5 billion to Fannie Mae and Freddie Mac to resolve claims about the quality of loans previously sold to them by Countrywide. Then as the year came to a close they made a further payment. They announced in early January the payment of a further $2.8 billion to Fannie and Freddie and announced that it had reduced the book value of the Countrywide operation by another $2 billion.

Not included in this settlement were some loans that were sold and called “private label securities.” Obviously, this is a snake that could still bite. And also left unresolved are claims in relation to loans actually originated by BofA, not Countrywide, as well as the claims of other purchasers of such loans outside the Fannie-Freddie channel. These claims were some $6 billion at last count. And in a suit filed just days ago, for example, Allstate Insurance sued BofA for $700 million over loans they bought beginning in 2005.

So if you add up what BofA paid for Countrywide, $4.2 billion, the $8.68 billion settlement, the $3.5 billion payment, and the $2.8 billion payment, it adds up to $19 billion. There are certainly more similar settlements that have been below my radar screen so it is likely that the final number likely will be higher than any analyst at BofA thought possible back in late 2007. It is equally obvious that there is more to come in the future and we have yet to understand the true scope of the aftermath.

Personally, I don’t think much of anything gets settled in Court and I hope that all of this gets settled soon so we can all move along and get housing back on a healthy track. To that point, BofA announced in mid-December that they were reassigning some 2,500 employees in their loan origination centers to work on loan modifications. That’s probably not enough to deal with a problem of this magnitude and, indeed, I understand that BofA is actually considering reassigning significantly more people than that to address modifications more aggressively. We’ll see.

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team