The encyclopedia · Finance & Accounting · Financial decision · 2006–2008
Countrywide was America's largest mortgage lender — then its subprime loans blew it up
Countrywide originated $97B in subprime loans in 2006. Bank of America bought it for $4B — and inherited $50B+ in losses.
Countrywide Financial · Bank of America · 2008-01
What happened
Countrywide Financial, co-founded by Angelo Mozilo in 1969, grew to become the largest mortgage lender in the United States. By 2006, it originated over $97 billion in subprime and Alt-A loans — mortgages given to borrowers with poor credit or no income verification. Countrywide's 'Household Authority' program let borrowers qualify with stated income only.
When the housing market turned in 2007, Countrywide's subprime portfolio collapsed. Borrowers defaulted. The company's stock fell from $70 to under $5. In January 2008, Bank of America agreed to acquire Countrywide for approximately $4 billion in stock — a fraction of Countrywide's peak market capitalization of $25 billion.
The acquisition was a disaster for Bank of America. Countrywide's toxic mortgage portfolio generated over $50 billion in losses, legal settlements, and buyback demands. Bank of America paid $16.65 billion to settle Countrywide-related claims with the DOJ and state attorneys general in 2014. Angelo Mozilo, who had sold $100 million in Countrywide stock before the collapse, paid a $67.5 million SEC settlement for insider trading.
Why it happened
- Countrywide's growth was built on lending to borrowers who could not repay — the 'Household Authority' program was a factory for defaults waiting to happen.
- The $97B in subprime originations in 2006 was the peak of the bubble; Countrywide was maximizing volume at the exact moment the market was turning.
- Angelo Mozilo sold $100M in stock while telling investors the company was sound — the CEO's actions contradicted his words.
- Bank of America's $4B acquisition price looked cheap until the $50B+ in inherited losses made it the worst deal in banking history.
The lesson
The largest mortgage lender was also the most reckless. Countrywide's $97B in subprime loans were a bet that prices would never fall. The cheapest acquisition is the one you skip.
Aftermath
Countrywide was absorbed into Bank of America and the brand was retired. Angelo Mozilo paid a $67.5M SEC settlement and was barred from serving as an officer of a public company. The Countrywide case is cited as the single most important example of how subprime lending practices caused the 2008 financial crisis.
Sources
- Countrywide Financial — Wikipedia (co-founded 1969 by Angelo Mozilo; largest US mortgage lender; $97B subprime originations 2006; stock $70 to under $5; Bank of America acquired for $4B January 2008; $50B+ inherited losses; $16.65B DOJ settlement 2014; Mozilo $67.5M SEC settlement)
- SEC Press Release 2009-129 — SEC Charges Former Countrywide Executives With Fraud (4 June 2009; Mozilo charged with securities fraud and insider trading; Sambol and Sieracki charged with fraud; Mozilo sold 5.1M shares generating ~$140M; executives concealed risky subprime lending from investors)
spotted an error? The club wants to know.
More like this
International Paper wrote off $2.47B of DS Smith goodwill a year after buying it
Smucker wrote its Hostess goodwill down to zero within two years of the $5.6B deal
Forward Air wrote down $1B of its $2.1B Omni acquisition a year after closing it
Somewhere, someone solved the problem this company failed at. 2nd Opinion →
Comments · 0
Sign in to join the comments.