Pride Go Before The Fall

Implications: Countrywide's heavy reliance on its underwriting programs and steady appetite for Pay-Option ARM's has created havoc for its portfolio management team. Countrywide's belief that it was smarter than the Mortgage Industry has led to this situation, and we have only begun to see the impact.

Analysis: During the heady-times of low mortgage interest rates and a highly competitive market, Countrywide was the leader in the Mortgage Industry for originations and closings: their secret? Quick underwriting and low interest rates captured by quite possibly the worst invention since voicemail, Pay-Option ARMs.

Traditionally, underwriting was tackled by grizzled mortgage professionals (usually in bad moods at best, surly on-average) who had both an extensive knowledge of underwriting guidelines, and a nose for sniffing out fraud or less-than-honest transactions. However, the powers-that-be at Countrywide moved this decision-making power away from its underwriters, who became more 'validators' than analysts, thereby putting sole reliance upon a credit model that scored the transaction as approved or not, and not whether the deal made sense. In doing so, they removed the logical, if not critical, mind of the underwriter, and replaced it with an obvious-less-than-favorable credit model. The theme of the time was: if it says approved, then approve it....regardless of whether or not you feel that a video store clerk can actually make $75k per year (actual story-I offered to quit that day as a consultant to work for this video chain if that is what their going rate of pay was).

The lack of authority given to strong underwriters (who I know personally), and inordinate amount of trust in autonomy by program given by the management at Countrywide, is just beginning to come to light. When we see the cracks on the surface in the form of delinquencies and chargeoffs, you have to figure that they start much deeper than that, and that can only spell more trouble for the nation's largest independent lender.