Countrywide Home Loan’s Subprime Scandal

Countrywide Financial was one of the country’s major mortgage lenders, but CEO Angelo Mozilo ignored his own warnings in the run-up to the financial crisis of 2007.

Angelo Mozilo and David Loeb started Countrywide Financial in 1968. It was the largest single-family mortgage originator in the United States in 1992. By 2006, the company had risen to number 122 on the Fortune 500 list and had established itself as one of the leading mortgage lenders in the country. Countrywide financed approximately $500 billion in loans in the same year. The company would lend to both prime borrowers with good credit and subprime borrowers with bad credit who would have trouble keeping up with their repayment schedules. Subprime loans typically have higher interest rates to compensate for the possibility of higher credit risk.

Mozilo was vocal and acted as Countrywide’s public face. He described it as both a company objective and a commercial imperative to include minority and immigrant clients. He believed that encouraging people to buy homes would result in a more egalitarian society. Countrywide became the first mortgage lender to sign a fair-lending agreement with the Department of Housing and Urban Development in 1994, considerably increasing the number of loans for African-American and Hispanic consumers. By 2004, the company had established itself as the dominant lender to what it called “multicultural market communities.”

As Countrywide flourished, Mozilo tightened his grip on the company and insisted on high standards. He loved giving speeches, inspiring his employees, and interacting with the media. He was quite open about his company’s goals and his thoughts on other businesses. In 2002, he openly stated his goal of reaching a market share of 30 to 40%. At the time, no business controlled more than 13% of the market. This necessitated a more aggressive sales strategy, and the company introduced a commission-based sales system, something it had previously opposed. Many salespeople made millions of dollars a year selling mortgages that were getting worse and worse.

In 2005, he expressed alarm about the lending sector’s future, saying, “I’m genuinely concerned about credit quality in the broader business,” and adding, “I believe the amount of capacity generated for subprime is far more than the quality of subprime loans available.” “I feel there is a lot of fraud,” he said in 2006.

Despite this, Mozilo publicly stated that these were not Countrywide concerns. He later branded the company’s 80/20 subprime loan (which involves a first lien for 80% of the purchase price and a second lien for 20%) as “the most dangerous product in existence and there can be nothing more toxic” in internal emails. “I personally witnessed a major lack of compliance inside our origination system as it relates to documentation and generally a decline in the quality of loans,” he stated in another email. This included a “piggyback” loan, which allowed borrowers to buy a home without having to put down any money of their own. “What will we do next—pay borrowers to take loans?” one Countrywide executive wondered.

Over 200,000 African-American and Hispanic homebuyers were also overcharged by Countrywide. Subprime loans were issued to black borrowers more than twice as often as white clients.

Countrywide’s computer systems, pay structures, and employee sales training all rewarded maximum profits for the corporation, and consumers have frequently led away from lower-cost loans, even if they qualified. However, as the property market fell in 2007, Countrywide’s profits fell as well. Countrywide was forced to sell itself to Bank of America for $4 billion in 2008, a fraction of its previous value.

Countrywide was charged with civil fraud by the Department of Justice (DOJ) as a result of its dealings with federal mortgage companies Fannie Mae and Freddie Mac. Countrywide was found responsible by a federal jury. Countrywide was also fined $335 million by the DOJ for discriminating against African-American and Hispanic borrowers in a residential fair-lending deal. These and other liabilities were assumed by Bank of America.

In 2008, Mozilo departed Countrywide. The Securities and Exchange Commission charged him with securities fraud and insider trading in 2010. The charges stemmed from a disparity between Mozilo’s upbeat public pronouncements about the subprime mortgage market and his company’s operations and his sometimes negative private e-mails, as well as his choice to sell $160 million of Countrywide stock while publicly praising it. Mozilo settled insider trading accusations with the SEC in 2010 for $67.5 million. Prior accusations of mortgage fraud against Mozilo were dropped by the DOJ in 2016.

Self-Serving Bias

Ethical Insight

In the run-up to the subprime mortgage scandal and financial crisis of 2007-2008, Countrywide was the largest issuer of private mortgage securities, causing an economic disaster in the United States in 2008. Despite his public warnings of ominous economic signs at other companies and his private worries expressed in intra-company e-mails, Countrywide co-founder and CEO Angelo Mozilo appeared to be able to convince himself that there was nothing seriously wrong with the mortgage instruments his company was issuing.

Discussion Questions

1. In what ways did Angelo Mozilo exhibit self-serving bias? Explain.

   ANS: Countrywide workers’ activities are likely to show indications of both a very conscious self-serving bias as well as some level of unconscious self-serving bias. Explain how each of these traits would have expressed in this circumstance.

2. Do you believe the unconscious or conscious versions of self-serving bias played a bigger part in the Countrywide scandal?

3. Why would Mozilo talk publicly about the lending industry’s flaws while ignoring his own warnings? Explain.

   ANS: When pitcher Andy Pettitte was detected taking a banned substance, he explained to Gino, Aval, and Ariely that he didn’t do it “to get an edge,” but rather to get off the disabled list so he wouldn’t “let his team down.” This explanation was dubbed “self-serving altruism” by the researchers. People are more inclined to give themselves permission to break the rules if they can still think of themselves as decent people because their conduct benefits others, even if it also (and perhaps largely) benefits them.