Mortgage Machine

By Cocheo, Steve | ABA Banking Journal, October 1995 | Go to article overview

Mortgage Machine


Cocheo, Steve, ABA Banking Journal


While others change partners, Countrywide Credit Industries keeps dancing with the home-lending business and profiting. What does Countrywide know that you don't?

Not so long ago, a mortgage banking operation was to financial services companies, especially banks, the equivalent of hot tubs: everyone had to have one. But when the plug got pulled on the refinancing flood, mortgage banking got to be about as trendy as long sideburns. Before, during, and after the faddish days, Countrywide Credit Industries, Inc., Pasadena, Calif., has been in there, not only steadily making loans but leading its industry in size and innovations.

What keeps Countrywide out front?

Angelo R. Mozilo, vice-chairman and executive vice-president, boils the formula down to a single word: focus.

Banking companies--particularly large ones--are highly diversified, while Countrywide has several thousand employees whose focus is on mortgages or operations related to the company's main business of mortgages.

"The chairmen of the board of most of these other institutions do not wake up thinking about their mortgage product--I do, and so does every officer of this company," says Mozilo.

Yet single-mindedness doesn't answer all the questions about Countrywide. For example, the company is one of the few mortgage banking operations that makes a profit both on the origination of mortgages and the servicing of the loans, which are sold into the secondary market. And while commercial bankers are talking about "virtual banking," with an accent on electronics displacing branches and live bankers, Countrywide, an acknowledged technological leader among mortgage banks, has been building its branch system.

Understanding the "macro hedge"

Excruciatingly detailed in practice, mortgage banking in principle boils down to two operations: make the loan (origination or production) and after selling it to the secondary market, collect the payments and handle the paperwork (servicing).

In pursuit of profitability, some lenders have jettisoned one side or the other of the business. Countrywide continues to perform both functions. The balance the organization maintains between the two it calls its "macro hedge." Simply put, when rates are high, servicing is very profitable because prepayments are low and the servicer reaps the return on the investment made in servicing, either purchased or produced. When rates are low, servicing runs off because borrowers refinance, but originations can be profitable because while many people are refinancing, others are obtaining purchase mortgages.

Not surprisingly, the production side provided more than 80% of Countrywide's earnings during the refi booms of the 1990s. After the booms, servicing generated nearly all of Countrywide's profit. Sometimes the macro hedge isn't quite so neat, but that's the principle.

"But it's not like you go on autopilot," says Stanford L. Kurland, president and chief operating officer at Countrywide Funding Corp., the company's main subsidiary and the one that handles lending and servicing. If year-in, year-out profitability hinged only on maintaining both origination and servicing operations, everybody would still be at it.

Making the macro hedge work requires some real hedging too, Kurland points out. Financial hedges are maintained on the servicing portfolio as well as on the pipeline of originated loans being processed.

However, there are more workaday forces involved in Countrywide's effort. For example, one of the keys to making a servicing operation profitable is to pump as much volume through a servicing "factory" as possible. Countrywide can accomplish this through a combination of state-of-the-art technology and a huge servicing stream that is augmented from time to time with bulk purchases. While other servicers may face costs of servicing per loan of an average $80, Countrywide has this below $60, according to a recent report by Merrill Lynch analyst L. …

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