I came across a New York Times article this weekend that outlines the lending practices of one of the US's largest mortgage lenders, Countrywide Financial Corporation. Here are some of the 'lowlights':
On its way to becoming the nation's largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. "I want to be sure you are getting the best loan possible," the sales representatives would say.
But providing "the best loan possible" to customers wasn't always the bank's main goal, say some former employees. Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide's smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.
Countrywide's entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company's subprime unit excluded borrowers' cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.
Now, Canada is often accused of being a highly-regulated country, but reading this story makes me wonder if there is a time and a place for being boring.
It may well be that risk-averse executives and government regulators are one reason that we are largely insulated from the economic turmoil stemming from the collapse of the US subprime mortgage industry (though some of our banks will likely take a hit).
If so, 'boring' may not always be a bad thing.
John is a sales associate at Prudential Properties Plus in Toronto and a founder of Realosophy. Email John