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| Comment: From the Editor |
Risky Business
Douglas McWhirter
01/01/2008
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In early winter, protesters gathered outside the Santa Ana,
Calif., offices of Countrywide Financial, the nation’s largest mortgage lender,
to demand that the firm stop foreclosure proceedings and modify
adjustable-rate mortgage loans about to reset to higher payments.
"These people gamed the system," Nativo Lopez, the president of
the Mexican American Political Association, told the Associated Press. "They
continued this game knowing full well that they were bringing borrowers into a
market that was turning belly-up."
No doubt, inside the Countrywide offices, management focused
on more pressing concerns than the demonstrators grousing outside their door. "The system" that Countrywide had allegedly gamed had turned sour, leading this
remarkable financial services company to post its first quarterly loss in 25
years. Thanks to its aggressive peddling of subprime loans to high-risk
borrowers who ultimately could not pay the money back, Countrywide’s stock
was now down 68 percent from the start of the year, meaning the company had
lost roughly $25 billion in market value. Its credit rating was languishing just
above junk status, and the firm was laying off 20 percent of its 60,000-person
workforce.
Over the summer, Countrywide’s CEO, Angelo Mozilo, had been
forced to go hat-in-hand to competitor Bank of America to offer a $2 billion
equity stake in the company. Now investors were calling for him and his board of
directors to resign. Mozilo had to deny rumors that bankruptcy was imminent.
Countrywide, which helped countless Americans realize their dreams of home
ownership and regularly delivered impressive returns, was being tied to the
whipping post and blamed for causing the credit crisis that threatened to
destabilize the U.S. economy.
The rest is a sad tale of federal investigations into lending
practices and ludicrous congressional bills to "protect" borrowers from lenders
who, as the popular narrative went, knowingly took advantage of innocent
families.
Did Countrywide—and Citigroup, Merrill Lynch, Wells Fargo, Bank
of America and virtually every institution that offered subprime loans—cunningly
lure low-income customers into borrowing money on terms that they could not
afford? Hardly. Yes, the feds may find some minor malfeasance in the ways some
lenders processed loans. Yes, it is heartbreaking to see families lose their
homes to foreclosure. But the responsibility for the subprime meltdown and its
growing economic and personal ramifications lies with all involved—lenders and borrowers alike.
Nativo Lopez probably doesn’t realize it, but Countrywide and
the borrowers on whose behalf he speaks, along with countless others whose homes
are now in foreclosure, were willing participants in the same game. Countrywide
chose to take on enormous risk in offering mortgages to lower-income customers.
Those customers, in turn, assumed just as much risk when they took out
adjustable-rate mortgages.
In this game, both parties lost. The only difference is that
Countrywide fully understood the risks involved when it made the loans. The
borrowers, on the other hand, apparently couldn’t be bothered to educate
themselves on this risk, or on how the game is played.
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