Mortgage Banking, which originates, purchases, securitizes, and services mortgages. During the year ended December 31, 2005, the Mortgage Banking segment generated 59% of the company's pre-tax earnings.
Banking, which operates a federally chartered thrift that primarily invests in mortgage loans and home equity lines of credit primarily sourced through its mortgage banking operation.
Capital Markets, which operates as an institutional broker-dealer that primarily specializes in trading and underwriting mortgage-backed securities.
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Global Operations, which provides mortgage loan application processing and loan servicing.
Mortgage banking
The Mortgage Banking segment produces mortgage loans through various channels on a national scale. Nearly all the mortgage loans the company produces in this segment are sold into the secondary market, mainly in mortgage-backed securities. In 2006, 45% of those mortgages were conventional non-conforming loans, loans too large to sell to Fannie Mae.
The company generally performs the ongoing servicing functions related to the mortgage loans that it produces. It also provides various loan closing services, such as title, escrow, and appraisal.
The Mortgage Banking segment comprises three distinct sectors: Loan Production, Loan servicing, and Loan Closing Services.
Loan production
The role of Loan Production is to originate and fund new loans and to acquire already-funded loans through purchases from other lenders. Loan Production produces mortgage loans through four divisions of Countrywide Home Loans: Consumer Markets, Full Spectrum Lending, Wholesale Lending, and Correspondent Lending.
Consumer Markets and Full Spectrum Lending offer loans directly to consumers. Loans produced by these two retail divisions are originated, funded, and sold by Countrywide. Consumer Markets offers various products, whereas Full Spectrum Lending focuses primarily on products appropriate for customers with less than prime-quality credit.
Wholesale Lending offers loans to consumers whose loans are originated by another mortgage broker. These loans are funded and sold by Countrywide but originated by other lenders.
Correspondent Lending purchases mortgage loans from other lenders, which include mortgage bankers, commercial banks, savings and loan associations, home builders, and credit unions. These loans may be sold by Countrywide to end-investors on the secondary market but are originated and funded by other lenders.
Loan servicing
Loan servicing services loans, i.e., collect payments from the borrower, handles escrow accounts, tax and insurance payments (if applicable), then remit "advances" to the investor's trustee as specified in the Pooling and Servicing Agreement (PSA).
Loan servicing typically retains a fraction of the payment made (normally 25 – 75 basis points of the unpaid principal balance) as a "servicing fee".
Loan servicing also generates income in the form of interest on monies received and held before paying scheduled advances to the trustee, fees charged for late payments, force-placed insurance, document requests, legal fees, payoff statements, etc.
Loan closing services
LandSafe and its subsidiaries offer loan closing services, including real estate appraisal services, automated credit reporting products, flood determination services, and residential title services for the six major counties of Southern California.
Banking
The Banking segment consisted of Countrywide Bank, FSB, and Countrywide Warehouse Lending. Formerly, the bank was known as Countrywide Bank, N.A.. This nationally chartered bank was regulated jointly by the Office of the Comptroller of the Currency and the Federal Reserve. Still, it converted its charter to a federally chartered thrift that is regulated by the Office of Thrift Supervision. Countrywide Bank is the 3rd largest Savings and Loan institution and is the fastest-growing bank in United States history. Assets from deposits are currently approaching $125 billion.
Countrywide Bank primarily originates and purchases mortgage loans and home equity lines of credit for investment purposes. Most of these loans are sourced through its mortgage banking subsidiary, Countrywide Home Loans. In addition, the Bank obtains retail deposits, primarily certificates of deposit, through the Internet, call centers, and more than 200 financial centers, many of which were located in Countrywide Home Loans' retail branch offices as of April 1, 2007.
Countrywide Warehouse Lending provides warehouse lines of credit to mortgage bankers, who use these funds to originate loans. These mortgage bankers are primarily customers of Countrywide Home Loans' Correspondent Lending division and the Capital Markets divisions; the mortgage bankers use warehouse lines of credit from Countrywide Warehouse Lending to help originate loans, then sell those loans to Countrywide through Correspondent Lending or Capital Markets.
Capital markets
The Capital Markets segment primarily operates as a registered securities broker-dealer, a residential mortgage loan manager, and a commercial mortgage loan originator. CFC also operates broker-dealers in Japan and the United Kingdom, an introducing broker-dealer of futures contracts, an asset manager, and a broker of mortgage servicing rights. Except its commercial mortgage activities, the company transacts only with institutional customers, such as banks, other depository institutions, insurance companies, asset managers, mutual funds, pension plans, other broker-dealers and governmental agencies. Customers of its commercial real estate finance business are the owners or sponsors of commercial properties, who can be individuals or institutions.
Countrywide Asset Management Corporation manages the acquisition and disposition of loans from third parties and loans originated by Countrywide Home Loans on behalf of Countrywide Home Loans. These are typically delinquent or otherwise illiquid residential mortgage loans, which have primarily originated under Federal Housing Administration (FHA) and Veterans Administration (VA) programs. The Company attempts to rehabilitate the loans, using the servicing operations of Countrywide Home Loans, to securitize those loans that become eligible for securitization. The remaining loans are serviced through foreclosure and liquidation, including collecting government insurance and guarantee proceeds relating to defaulted FHA and VA program loans.
Securities trading activities include trading debt securities in the secondary market after the original issuance of the security. Underwriting activities encompass the assumption of the risk of buying a new issue of securities from the issuer and reselling the securities to investors, either directly or through dealers. Capital Markets primarily underwrites mortgage-related debt securities.
Insurance
The Insurance segment activities include offering property, casualty, life, and credit insurance as an underwriter and as an insurance agency and providing reinsurance coverage to primary mortgage insurers through two business units: Balboa Life and Casualty Operations, and Balboa Reinsurance Company.
Balboa Life and Casualty Group underwrite property, casualty, life, and credit insurance in all 50 states. Its products include Lender-Placed Property and Auto, which includes lender-placed auto insurance and lender-placed, real-property hazard insurance; Voluntary Homeowners and Auto, which underwrites retail homeowners insurance and home warranty plans for consumers; and Life and Credit, which underwrites term life, credit life, and credit disability insurance products.
Balboa Reinsurance Company provides a mezzanine layer of reinsurance coverage for losses between minimum and maximum specified amounts to the insurance companies that provide private mortgage insurance (PMI) on loans in its servicing portfolio. It provides this coverage concerning substantially all of the loans in the Company's portfolio that are covered by PMI, which generally includes all conventional loans with an original loan amount over 80% of the property's appraised value. It earns a portion of the PMI premiums in return for providing this coverage.
Global operations
The primary activities of the Global Operations segment was Global Home Loans (GHL): a UK third-party administrator (TPA) formed out of a joint venture between Countrywide and Woolwich plc in 1998. Activities included Loan Processing and subservicing, providing mortgage loan application processing, and mortgage loan subservicing in the United Kingdom.
Following the acquisition of Woolwich by Barclays plc, this relationship developed further, with GHL adding the servicing of the Barclays mortgage portfolio and expanding operations with the transfer of ownership of the Barclays mortgage operation in Leeds to GHL in 2003.
By 2005, GHL operation processed more than £11.3 billion ($20.3 billion) in loans, all of which are subserviced for Barclays, PLC, the joint venture partner. As of December 31, 2005, Global's subservicing portfolio was £59 billion ($102 billion).
In November 2005, Barclays announced that it intended to terminate the third party administration arrangement with GHL and bring the mortgage originations and servicing operations back in-house. This resulted in Countrywide buying out Barclays' remaining 30% stake in GHL. Barclays brought the operation back in-house in February 2006.
Following that acquisition Global's presence in the UK was confined to providing support to Barclays and Prudential Assurance, who continued to use the proprietary originations, servicing and arrears processing systems developed for GHL and Countrywide by Countrywide Technology Group (CWTG) until those systems were decommissioned in 2012.
A second venture in the UK, Valuation Services, provided one of the first electronic residential property valuation services to third parties in the United Kingdom through a majority-owned joint venture. This was sold to First American in 2007.
Offshore Services commenced operations in India in 2004. Set up to exploit the strategic advantage of employing systems specialists based in the sub-continent, it provides business process and technology services to the Parent Company and its subsidiaries in both the United States and the United Kingdom.
Secondary market disruption
When Countrywide finances mortgage loans, they usually packaged them for sale to large investors as mortgage-backed securities. Fannie Mae or Freddie Mac can only buy loans which conform to the standards of government-sponsored enterprises. Non-conforming mortgages securities must be sold in the private, secondary market to alternative investors. On August 3, 2007, this secondary market essentially stopped trading most of the non-conforming securities.
Secondary mortgage market disruptions had happened previously, but, the new disruption appeared more serious, both larger in range and likely duration.
Alt-A mortgages (loans given to apparently creditworthy borrowers without much or any documentation) completely stopped at ratings lower than AAA.
Difficulties extended to much of AAA-rated mortgage-backed securities. Only securities with conforming mortgages were trading.
Countrywide Financial issued a statement that its mortgage business has access to a nearly $50 billion funding cushion.
After the collapse of American Home Mortgage on August 6, 2007, attention returned to Countrywide Financial which at the time had issued about 17% of all mortgages in the United States.
Only days later, Countrywide Financial disclosed to the U.S. Securities and Exchange Commission (SEC) that these disruptions in the secondary mortgage markets could hurt it financially:
Since the company is highly dependent on the availability of credit to finance its operations, disruptions in the debt markets or a reduction in our credit ratings could have an adverse impact on our earnings and financial condition, particularly in the short term… Current conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future…. There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to operate at profitable levels.
This raised speculation that Countrywide was a potential bankruptcy risk.
On August 10, a run on the bank began as the secondary mortgage market shut down, curtailing new mortgage funding.
The perceived risk of Countrywide bonds rose. Fitch, Moody's and Standard & Poor's credit ratings agencies downgraded Countrywide 1 or 2 grades, some to near junk status. The cost of insuring its bonds rose 22% overnight.
This also limited its access to commercial paper. Some institutional investors admitted trying to sell Countrywide paper.
Fifty other mortgage lenders had already filed for Chapter 11 bankruptcy, and Countrywide Financial was cited as a possible bankruptcy risk by Merrill Lynch and others on August 15. This combined with news that its ability to issue new commercial paper might be severely hampered put severe pressure on the stock. Its shares fell $3.17 to $21.29, which was its biggest fall in a single day since the crash of 1987 – the shares had fallen 50% so far that year. On August 15, 2007, Merrill Lynch advised its clients to sell their stock in Countrywide.
