From Peak in ‘93, Countrywide Comes Uneasily Back to Earth : Finance: Rising mortgage rates have led to layoffs at the Pasadena-based lender, damaging morale.

In the fall of 1992, when mortgage banker Countrywide Funding set an in-house record by closing $3 billion in loans in a single month, management threw a lavish party for hundreds of employees at the firm’s sparkling headquarters building in Pasadena.

Dubbed the “Everything’s Coming Up Roses” reception by its public relations department, the occasion was also marked by Chief Executive Angelo Mozilo’s announcement that the company would be sponsoring its first float in the upcoming Rose Parade.

The theme of the party was prophetic. Less than a year later, a refinancing boom triggered by falling mortgage rates--combined with an aggressive staff of bonus-driven loan agents who could undercut the competition and build market share--had nearly doubled the company’s business for the second time and cemented its position as the biggest provider of home loans in the nation. Its stock price doubled too.

But now, the steady run-up in interest rates appears to have knocked the bloom off Countrywide’s rose. Its loan production has plunged nearly 60% since the start of the year and about 30% of its 4,800-member work force--including 40% of its loan staff--has been fired. The firm’s stock, which hit a record $23 a share in 1993, now sells for less than $15.

It’s been a rude episode that has not only stirred up naysayers on Wall Street but has shaken morale at a company whose culture, forged by Mozilo, places a high premium on employee loyalty.

Mozilo--a straight-talking Bronx native who started in the business at the age of 14, running errands for a Manhattan banking firm--insists that his ambitious plans to begin offering mutual funds and other services to Countrywide’s 812,000 borrowers will help it weather the downturn in the mortgage lending business.

But some of the same Wall Street analysts who were touting the company just a year ago aren’t so sure. They say that Countrywide--despite being the largest mortgage banker in the country--could even be swallowed up by another financial institution as the industry continues to consolidate.

“The refinancing wave that Countrywide rode to the top has crashed, and now the company is being crushed by it,” said Jonathan Gray, a Sanford C. Bernstein & Co. analyst in New York.

“Countrywide is probably the best-run mortgage banker in the country, but anybody could have made money (in the business) over the past few years because interest rates were dropping,” Gray said. “The outlook isn’t so great now, because rates have gone up. And since Countrywide is so big, it’s got the most to lose.”

Like party-goers nursing a hangover on New Year’s Day, mortgage bankers across the nation have been suffering from a yearlong rise in interest rates after enjoying record profits in 1993.

A record 5.3 million homeowners refinanced about $556 billion in loans last year to take advantage of the lowest rates in a quarter of a century. Mortgage bankers specializing in fixed-rate loans were the biggest beneficiaries of the borrowing binge.

But refinancings dropped to near zero after rates began marching upward this spring, while tepid home sales have limited demand for “purchase” loans to buy new houses. As a result, the number of mortgage bankers and brokers in the country has declined about 5% from a peak of 258,000 last April, according to the Bureau of Labor Statistics. Some say layoffs in the mortgage banking industry alone could hit 20% to 40% by next year.

“If you have to let people go, you should just do it and get it over with,” Mozilo said in a recent interview in his mahogany-drenched office. “There’s no reason to lie by telling them that everything will be OK, because they know when you’re lying. It’s less painful for everyone if you just get it over with quick.”

Such fearless cost cutting makes analysts and shareholders happy. But insiders say it has seriously damaged morale among workers who still have jobs at Countrywide, a company whose success has been largely attributed to the sense of responsibility and “team spirit” that Mozilo and other corporate executives have tried to instill.

Department managers at Countrywide drill some new clerks, who earn about $10 an hour, to treat every document they touch as if it were a $1,000 bill, because that’s what it would cost the company to replace, say, a lost grant deed.

Employees who take part in the company-sponsored retirement plan can invest their own cash in a variety of mutual funds, but Countrywide’s matching contribution comes in only one form--its own stock. “We want our employees to feel like they have a stake in the company,” Mozilo said.

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But now, with business down and layoffs rampant, some Countrywide employees complain that for Mozilo, loyalty is a one-way street.

“I made more than $50 million in loans for that company over the last few years and--wham!--I was laid off without a minute’s notice,” said one ex-loan agent who is still looking for work. “They handed me a check for the rest of the day’s pay and told me to clear out my stuff.

“Everybody there is trained to be loyal to Mozilo (and) to Countrywide. Now it’s become the Jonestown of the business.”

Clearly, though, workers who have lost their jobs could not have been expecting lifetime employment: All employees are required to sign a statement in which they acknowledge that mortgage banking is “cyclical” and their jobs could be eliminated at any time.

But while they’re there, top-producing Countrywide loan officers can collect bonuses making them among the highest-paid in the business.

Much of Countrywide’s produce-or-perish corporate image is a direct reflection of Mozilo, the streetwise son of an Italian butcher who graduated with degrees in marketing and philosophy from Fordham University in 1960 and co-founded Countrywide in 1969 after spending more than a decade in banking on the East Coast.

A tireless worker, Mozilo has always expected his employees to work as hard as he does. They are also expected to dress for success; Mozilo himself is fond of expensive suits and has even modeled executive wear for magazines. Some longtime employees say they have never seen him loosen his tie, and jokingly wonder if he’s got an Adam’s apple.

As the company grew, so did Mozilo’s reputation as an aggressive marketer and industry leader. His status as mantle bearer of the business was cemented when he was named the 1992 president of the Mortgage Bankers Assn., the industry’s largest and most influential trade group.

Although most of his predecessors had treated their one-year presidential stints with the association as a part-time ceremonial position, Mozilo used the post as a bully pulpit to call for changes in federal laws and industrywide practices that he felt discouraged lending to the poor and minorities.

As the trade group’s chief spokesman, he caustically criticized Jack Kemp--then secretary of Housing and Urban Development--for scaling back parts of the agency’s popular FHA loan program.

“He’s a lousy secretary. He’s the worst person who could have possibly been put in that position,” Mozilo fumed at a press conference.

“I guess quarterbacking gave him all the background he needed” to run HUD, Mozilo added sarcastically, referring to Kemp’s days as a star for the Buffalo Bills. “They must have talked about housing a lot in those huddles.”

Although Mozilo’s term as president of the trade association is over, he remains on its board and is still happy to share his views on any issue remotely connected to the lending industry.

He also speaks frankly about the problems his company now faces.

“The refinancing business is dead, and it’s not coming back for years,” says Mozilo. He says he made the layoffs with lightning speed to keep Countrywide competitive in a toughening market and to keep earnings from slipping even faster. But, he admits, “employee morale in this type of environment stinks.”

Mozilo, who earned more than $3 million in salary and bonuses last year, is banking on an array of new services that Countrywide will soon offer to offset at least some of the revenue lost by the sharp decline in mortgage lending.

Countrywide already operates an insurance brokerage unit, and makes money by distributing credit cards issued by Bank of New York. It recently opened a title insurance and escrow company, and it will start collecting stock brokerage fees when it begins offering a family of mutual funds later this year.

Still, it is Countrywide’s vast pool of existing mortgages that Mozilo and analysts alike say is the key to the company’s salvation.

Although Countrywide quickly sells off every loan it makes to investors on the nation’s vast secondary market, those investors also pay the company an ongoing “servicing” fee for processing monthly loan payments and handling borrowers’ complaints. Countrywide collects those fees, month in and month out, until the mortgage debt is retired.

The refinancing boom in 1993 cut sharply into the company’s fee income, because so many of its outstanding loans were paid off. But now, Countrywide’s fee income is soaring because the refinancing binge is over and few borrowers are paying off their mortgages. A year ago, these fees accounted for a fifth of the company’s pretax income. In the latest quarter, fee income surged nearly threefold and accounted for nearly 60% of pretax income.

By next year, Mozilo and most analysts say, that higher fee income--combined with the firm’s cost-cutting efforts--will largely offset the decline in Countrywide’s new-loan production.

“The doomsayers don’t realize how important those servicing fees are,” Mozilo said. “Those fees are our trump card.”

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Regardless of what may lie ahead for Countrywide and its employees, one thing is clear: The company’s fate won’t hinge on California’s fledgling recovery. Most of the company’s expansion over the last few years has come in other states where real estate markets have been hotter and local economies stronger.

California accounts for only about 35% of Countrywide’s business today, down from more than 80% in the 1980s. And although many experts say the market here is rebounding, Mozilo isn’t so sure.

“I’m perfectly happy with one-third of our business coming from California and the rest coming from somewhere else,” Mozilo said. “There’s no question that real estate is a poor investment in California right now.”

Countrywide’s Plunging Loan Volume

Countrywide Funding set a mortgage-banking record when it made more than $5.02 billion in loans last December, shortly after interest rates had bottomed out. But rising rates have pummeled the company this year, cutting its loan volume in half. Loans originated in billions of dollars:

Aug. 1994: $2.188 billion

SOURCE: Countrywide Funding Corp.