Countrywide Made the Loans That Everything Else Was Built On
The largest American mortgage originator wrote enormous volumes of loans it did not intend to keep. The originate to distribute model is where the crisis actually started.
The Model
Traditionally a bank made a mortgage and held it, so it bore the loss if the borrower defaulted. That created a direct incentive to verify income, assess the property, and lend prudently.
Originate to distribute severed that link. The originator made the loan and sold it, typically within weeks, to be securitised. Revenue came from origination fees and from the gain on sale, both driven by volume.
Countrywide became the largest originator in the United States operating this way.
When the party assessing the borrower keeps none of the risk, volume becomes the only thing their compensation responds to.
The Products
Competition for volume drove product design toward whatever expanded the pool of people who could nominally qualify.
That produced loans with limited or no income documentation, adjustable rate mortgages with low initial payments that reset sharply, and structures where borrowers could pay less than the accruing interest, adding the shortfall to principal.
Each product implicitly assumed rising house prices. A borrower who cannot afford the reset payment can refinance or sell if the property has appreciated. If prices fall, neither option exists.
Why Underwriting Deteriorated Predictably
The deterioration was not primarily a failure of individual judgment. It was the predictable result of the incentive structure.
Loan officers were compensated on volume. The originator sold the loans onward. Securitisers earned fees structuring the deals. Rating agencies were paid by issuers. Investors relied on ratings.
At no point in that chain did a party bear the consequence of a bad loan proportionate to their role in creating it.
The Representations Question
The mechanism that was supposed to control quality was contractual. Originators made representations and warranties about loans sold, and buyers could require repurchase of loans breaching them.
That protection depends on the originator remaining solvent and on the buyer detecting the breach. In practice, repurchase claims arrived years later after defaults, by which time originators had often failed or been absorbed, and the litigation ran for a decade.
The Outcome
Countrywide was acquired by Bank of America in 2008 in a transaction that proved enormously costly for the acquirer, generating many billions in subsequent legal settlements and losses relating to loans originated before the deal.
That outcome is a lesson in acquisition diligence. Buying an originator means buying its origination history, including representations made on loans already sold.
What Changed
Post crisis rules introduced ability to repay requirements, obliging lenders to verify a borrower can actually service the loan, and risk retention rules requiring securitisers to keep a portion of the credit risk so that some party in the chain bears consequences.
The Bottom Line
Countrywide wrote loans it never intended to hold, and every party in the chain was paid for volume rather than for performance. Risk retention exists because a chain where nobody keeps the risk produces exactly what it produced.