Mortgage Firm Has Top Rating, Helped by Credit Crunch
The credit crunch may be leaving most traditional lenders guarding their purse strings. But by acting as a financial middle-man, Pasadena-based Countrywide Credit Industries has boosted its mortgage banking business to record levels.
Fresh from a new stock offering in September from which it raised $160 million, Countrywide has aggressively taken market share away from traditional lenders by financing home mortgage loans with money borrowed from banks.
“We’re opportunists,” said Angelo R. Mozilo, 53, Countrywide’s co-founder and chief executive. “The primary fuel that drives our business is interest rates, and the current interest rate environment is euphoric.”
Total new loans on homes fell about 8% last year to an estimated $350 billion as the nation’s housing market stumbled through one of its deepest slumps in years. But Countrywide’s profit soared 70% to $22.3 million for the fiscal year ended Feb. 28, 1991. Its $21 million in net income for the first half of the 1992 fiscal year has nearly matched all of fiscal 1991. In September, Countrywide originated a record $950 billion in new mortgages.
The emergence of Countrywide from a small feisty concern to the nation’s largest independent mortgage banker has been aided by a shakeout in the mortgage banking industry as well as a shift in consumer preference from adjustable-rate mortgages to fixed-rate loans.
The housing slump has forced hundreds of mortgage bankers to merge or close their doors. Membership in the Mortgage Bankers Assn. of America, for example, fell from 2,800 in 1987 to 2,300 in the first half of 1991.
And as mortgage rates have dropped, savings and loans--the main competitors to mortgage bankers such as Countrywide--have lost market share because they generally prefer to originate and retain adjustable-rate mortgages in their loan portfolios. ARMs generally have less interest rate risk than fixed-rate loans. Thrifts have also suffered because of the widespread credit problems of their industry.
Countrywide, which also operates a thrift, an insurance agency, a brokerage firm and manages a real estate investment trust, has escaped the credit crunch and avoided the risk that interest rates may rise by acting as a middleman. Countrywide borrows money from banks at lower short-term rates--using mortgage deeds as collateral--then it lends the money to home purchasers at higher long-term rates. After it funds the home purchases, Countrywide packages its mortgages and quickly resells them to insurance companies, pension funds and other investors on the secondary market.
Banks favor such borrowing because, from an accounting standpoint, it leaves a financial institution with a stronger bottom line since it isn’t burdened with carrying the home mortgages on its books.
It also means brisk business for Countrywide. About $83.6 million, or 60%, of Countrywide’s $135 million in annual revenue is derived from exploiting the spread in short- and long-term interest rates. The company generates another $41.6 million in revenue by “servicing” or collecting loan payments on behalf of the secondary market investors it sells loans to.
However, the arrangement isn’t risk-free for Countrywide. Many mortgages are the responsibility of the company that services them. Thus, Countrywide and other mortgage bankers have some exposure to the rising number of defaults in the industry. Countrywide’s growth could also be slowed by any spike in interest rates that would slow refinancings and borrowing by new home buyers, analysts say.
But Countrywide has taken strides to enhance its interest rate advantage with a sophisticated computer system that enables the company’s loan officers to oversee up to 840 loans, compared to the industry average of 650, Mozilo said.
The state-of-the art computer system can handle up to 40,000 transactions per hour and enables Countrywide, which has about 1,300 employees, to shave nearly half a point from loan fees and cut average loan approval time to under 30 days.
The computer technology, of course, is available to anyone. But at a cost of more than $8 million and months of training time, it requires a capital investment few competitors have the time and financial wherewithal to make. Countrywide has spent more than four years working with International Business Machines Corp. to transfer mountains of mortgage loan paper work to its computer databases. And it isn’t resting on its laurels. Its computer will soon have the ability to display the name, address and phone number of a loan applicant before operators answer the applicant’s call.
“Countrywide has come along and vastly streamlined a business that was notoriously inefficient,” said Kenneth Campbell, an analyst for Audit Investments Inc. in Upper Saddle River, N.J. “They can originate and service loans much cheaper than their competitors.”
Another Countrywide fan, Merrill Lynch analyst Jordan Heller, last month boosted his earnings-per-share estimate for Countrywide to $1.80 from the $1.50 to $1.55 range. Heller noted that giant Citicorp--formerly the No. 2 mortgage banker behind Minneapolis-based Norwest Corp.--”is pulling back from the (mortgage) market,” and he said that as a result, Countrywide will be in a position to reap “significant” benefits from the current round of mortgage refinancings.
Though its jump to the top ranks of mortgage banking has seemed sudden, Countrywide has been perfecting the idea of providing fast and cheap home loans since it was formed in 1965.
It was years, however, before the strategy began to pay off.
The company first floundered in the mid-1970s when the costs of fielding a commissioned sales staff threatened to drag the company under. The outlook became so dire that Mozilo and co-founder David S. Loeb decided to start over nearly from scratch. They fired most of Countrywide’s staff in 1974.
Later in 1982, Countrywide was threatened by government deregulation of the savings and loan industry--a move that touched off intense mortgage loan competition among thrifts.
Outgunned by the S&Ls;, Countrywide’s sales flattened, its stock slumped and the company briefly became a takeover target of Canadian investors Samuel, William and Hyman Belzberg.
The brush with bankruptcy and the Belzbergs caused Countrywide to adopt a scrappy, bottom-line approach even though the company has joined the major leagues of mortgage banking. Since dispensing with its commissioned sales force, Countrywide has carefully built a network of 114 offices in 22 states, each staffed with just three employees.
Mozilo leans on his youthful work force to produce for the company by promoting a hard-nosed work ethic that emphasizes style as much as substance.
“There are issues I’m very dictatorial about,” Mozilo said. “People are required to report at 8:15 a.m. or before and leave at 5:15 p.m. or after. Appearance is important too. I expect my people to wear a suit and tie.”
But it’s the bottom-line attitude that most impresses outsiders.
“Countrywide is kind of looked at as the shinning star of mortgage banking because they’ve maintained staying power and kept their overhead low,” said Cory Hubbard, vice president of La Jolla-based American Residential Mortgage Corp., the nation’s 24th-largest mortgage originator. “They are tough competitors.”
And Mozilo shows no signs of easing up. He said his goal is to increase loan servicing, now about $20 billion, to $90 billion in 1996 and triple loan production from 1990’s $4.6 billion.
“Time is not fungible,” Mozilo said. “A company never, never goes down because of mistakes. It only goes down because it repeats its mistakes. And I’m trying to make sure we keep moving in a direction where we don’t have any mistakes repeated.”
Lower Rates, More Loans Countrywide Credit Industries has seen its loan volume increase dramatically to nearly a billion dollars a month as mortgage interest rates have fallen.
Interest Rates*:
September, 1990: 10.24%
September, 1991: 9.12%
Loan Volume:
September, 1990: $350 million
September, 1991: $950 million
*Rate represents the monthly average for conventional, 30-year fixed loans. Source: Countrywide Credit, HSH Associates of Butler, N.J.
