Bank of America foreclosures also consist of properties owned by its subsidiaries, and companies that were acquired by them. Before the sub-prime mortgage crisis reached its peak, Bank of America acquired Countrywide Financial for $4.1 billion. Countrywide acquisition is now generally considered to be a strategic, if not fatal, blunder for the bank, as the loans originated by that company have mostly fallen into default, causing severe losses to Bank of America over the past few years. The excesses and lax underwriting of companies like Countrywide is now widely blamed for the sub-prime foreclosure crisis.
The acquisition also catapulted Bank of America into pole position in residential mortgage lending and consumer banking. Bank of America currently has a financial interest as a mortgage lender in one out of every four outstanding residential home loans in the US. Before the deal to acquire was announced, Countrywide was on the verge of bankruptcy due to a high number of failed loans and write-offs on its books. The deal saved, as a matter of fact, saved Countrywide from certain death.
Rising Foreclosures and REOs
During the real estate boom, prices increased at a rapid pace all over the country. Bolstered by this growth, subprime mortgage lenders such as Countrywide underwrote loans with little regard for their viability and solvency in the long run. Most of the borrowers who took out subprime loans not only had bad credit history, they also lacked documentable assets and income. The loose underwriting guidelines followed by sub-prime mortgage lenders allowed even the borderline insolvent borrowers to secure residential loans through their no-documentation (NINJA) loan programs. These lending practices have contributed significantly to both the housing market growth and the bust that was seen over the past decade in real estate markets across the country. Currently, most of the prominent subprime lenders are no longer in business, and the ones who did manage to survive are facing overwhelming number of defaults, resulting in foreclosures.
History of Countrywide Financial
Countrywide began as Countrywide Credit Industries. It was founded in 1969 by Angelo R. Mozilo and David Loeb in New York City. From its humble beginnings, it became the nation’s largest home lender during the 1990s and by 2007 it grew to a $400 billion behemoth with 62,000 employees, $200 billion assets and 900 offices. The growth was especially unprecedented from 2002 – 2007, coinciding with the rapid rise in home values and residential lending.
As mentioned earlier, by 2007, countrywide was one of the leading subprime lenders making home loans with questionable lending criteria. Their lax standards caught up with them when the financial and secondary mortgage markets came to a standstill. The once high-flying Countrywide was compelled to draw down on its entire $11.5 billion credit line. This event marked the beginning of its end as an independent, largest residential mortgage lender. Market sensed blood and its stock got pummeled down every day. Its once huge market capitalization quickly evaporated with its viability as an independent company brought into question. By December of 2007, its market cap fell by 90% and rumors of its impending bankruptcy led to its eventual agreement for a takeover by Bank of America in January, 2008. The fallout from the subprime crisis influenced Bank of America to take the decision to retire the once mighty countrywide brand.
The Rise of Mortgage Backed Securities
Mortgage lending in the past was much more conservative and straight forward. Banks took in deposits and lent it out as mortgages and other loans. The mortgage note was held to the end by the same bank or lender that made a loan. But, due to financial innovation, Mortgage Backed Securities came into being. These new instruments allowed lenders like Countrywide to borrow funds from commercial banks and investment bankers, and they made out loans through these funds. Upon closing a loan, they sold these mortgages in the secondary markets, where the buyers pooled them together and created MBS. MBS offered flexibility and allowed lenders to make more loans in a continuous fashion from same pool of funds they raised initially without having to increase their asset base through deposits. Countrywide before their acquisition by Bank of America was one of the significant players in this lending cycle.
This new form of lending proved quite profitable to all the parties when the going was good. Everyone was touting them as one of the greatest innovations of 20th century. The voracious appetite of the investors buoyed lenders to ultimately make loans to borrowers who wouldn’t have qualified under prudent lending standards, and if the funds used would have been theirs or their depositors. When the housing market and general economy came to a standstill in the second half of 2007, the borrowers who counted on rising home prices and robust economic conditions to meet their housing payments began to default in droves. With falling home values and little to no equity in their residences, this reaction of homeowners seems reasonable.
Bank of America Mergers and Acquisitions
Bank of America, on the other hand, mainly grew through a series of acquisitions made throughout the first half of the last decade. In 2003, they acquired FleetBoston for $48 billion. This acquisition paved the way for their largest branch network, customers and checking accounts than any other bank in US. By acquiring MBNA in 2005 for $35 billions, they also became the biggest issuer of credit cards in the country. In 2003, for example, it paid $48 billion for FleetBoston Financial, which gave it the most branches, customers and checking accounts of any United States bank.
Bank of America truly felt that by acquiring Countrywide they could become the largest player in the residential lending market. Countrywide was a well known brand with 700 loan offices and 200 branches, and the merger would complement their 6,000 branches spread across 31 states. In hindsight, this was one of the worst things to have happened to a Bank of America and the best thing for Countrywide, given their precarious financial position at that time.
While top executives of Countrywide were negotiating their earn-out bonuses and pay, the substandard loans made during the heydays of housing boom were coming home to roost. The number of Countrywide foreclosures dramatically shot up during and after the acquisition. Due to their ill-timed purchase, Bank of America became responsible for dealing with all the mess created by Countrywide’s excesses. The huge number of Bank of America’s foreclosures is due to the Countrywide loans. Bank of America is sadly reaping what they hadn’t sown.