Countrywide Credit Borrowed From Bank Of America
Beneficial's success was lost somewhat on Angelo Mozilo. In the early to mid-1970s he and his partner, David Loeb, were busy managing a very young mortgage banking company called Countrywide Credit Industries, which went public on the New York Stock Exchange in 1969, raising $450,000. (They were hoping for $3 million.) The two men, who had met while working for a home lending company that Loeb owned part of, launched the first version of Countrywide on Loeb 's kitchen table in his apartment at 99th Street and Park Avenue in Manhattan. To hear Mozilo tell it, the owners of Loeb 's previous company had itchy fingers—they couldn 't keep their hands off of the lender's escrow accounts, which legally belonged not to the company
but to the customers who had borrowed money from it. "They wanted to play games with the cash accounts, so I quit," said Mozilo.
Six months after selling its stock to the public, Countrywide 's shares were trading for less than $1 apiece. Mozilo and Loeb were struggling to keep the company afloat. "There were periods when we had no capital at all," remembered Mozilo. The housing market in the New York area wasn 't exactly on fire. Countrywide, it might be said, was risk averse; when it made mortgages it wasn 't taking any chances. Countrywide was not a bank or savings and loan. In its early years it was a nondepository (nonbank) mortgage company that lent money to consumers not by using deposits (it didn 't have any) but borrowing money from larger money center banks. (These lines of credit to Countrywide were called "warehouse" loans.) Its lenders included Bank of America (a company Ken Lewis would later lead) and Chase Manhattan Bank of New York.
Under Mozilo and Loeb, Countrywide originated only first lien mortgages that were insured by two government agencies: the Federal Housing Administration (FHA) and the Veterans Administration (VA). If a mortgage went into foreclosure, the government—not Countrywide— would take the hit. That may seem like an easy way to make a living, but it wasn 't. As a nondepository mortgage banker, Countrywide had a ton of competition, namely 6,000 S&Ls that had a lock on the business of originating first mortgages. Savings and loans could either keep the mortgages on their books or sell them off to two government-chartered investing companies—the Federal Home Loan Mortgage Corporation, also known as Freddie Mac, or the Federal National Mortgage Association (Fannie Mae).
At the time (though this would change), Countrywide didn 't have access (the ability) to sell its mortgages to Fannie Mae and Freddie Mac. To keep the company afloat, Loeb remained in New York while Mozilo left his wife and kids back east, at least for a little while, and moved to Los Angeles to open branches for Countrywide. There was one central reason for being in Southern California in the 1970s. The housing market was hot. "We have to be in California, because that's where 25 percent of the business is," Mozilo told Loeb.
While in California opening retail branches, Mozilo wasn 't paying any attention to Beneficial. Mortgage banking companies that borrowed money from big banks to make residential loans to mom-and-pop Americans didn 't fund second liens. This left the second deed of trust industry wide open for Beneficial to snatch up. Even though Mozilo wasn' t paying any attention to Beneficial, that didn' t mean other busi-nesspeople weren 't watching and following in its footsteps.
By the early 1970s, other consumer finance companies had sprung up to originate second liens. The term subprime still had not reared its head in the mortgage industry or the rest of the world at large. If a second lien lender like Beneficial was funding a mortgage, it was called "nonconforming," which meant it didn 't conform to conventional "A" paper standards set by government-sponsored Fannie Mae and Freddie Mac. The term 'ubprime did not become widely used until the early 1990s. And even then, the phrases B&C lending and hard money lending that preceded 'ubprime were used to distinguish these second liens from "A" paper loans eligible for sale by lenders to Fannie and Freddie. As Cugno knew, "A" paper firms like Mozilo 's Countrywide "did not want to know us. We were lepers, scum of the earth. That 's how we were viewed."
Lepers or not, soon enough other consumer finance companies had begun to come out of the woodwork to originate second liens. Another phrase to describe what these consumer finance firms were doing was "home equity" lending, which meant a borrower could get a loan as long as he or she had spare cash (equity) locked up in the value of the house. In the early 1970s, on the East Coast a consumer finance company called The Money Store (TMS) was beginning to gain traction. Founded by New Jersey businessman Alan Turtletaub, The Money Store began to advertise heavily on television and radio. Its TV commercials, shown often during Yankees games and on the independent station WPIX, featured Yankee Hall of Famer Phil Rizzuto. Rizzuto, as every Yankee (and Met) fan knew, was also the team 's play-by-play commentator who spent half the game regaling listeners about his glory days with the Bronx Bombers of the 1940s and 1950s and saying hello to his old neighbors on 188th Street.
As a shortstop, Rizzuto 's nickname was the Scooter, and he was the kind of pitchman who gave viewers the warm fuzzies. You trusted the Scooter. After all, how could you not trust a Yankee all-star who played alongside giants of the game like Joe DiMaggio and Mickey
Mantle, a man who made sliding catches and diving throws? In a Money Store commercial that ran frequently in the 1970s, Rizzuto, hair graying, his eyes beaming through an oversized pair of aviator glasses, stood in front of a retail store window, The Money Store name emblazoned in big black letters, the Scooter telling viewers, "If you need money." An 800 number would be superimposed on the bottom of the screen. It worked.
The Money Store, under Alan Turtletaub and his oldest son, Marc, began to expand east to west, branching out in the hottest market of all: California. Mozilo and his partner Loeb weren 't the only ones who realized that California accounted for one-quarter of the U.S. home loan market. The Money Store found enough success in the Golden State that Marc Turtletaub opened a second ("dual") headquarters in West Sacramento, just outside the state capital. It leased a 400,000-square-foot gold ziggurat-shaped office building on the Sacramento River. In time, the younger Turtletaub, like many lending CEOs, would become a generous donor to federally elected officials. He was also a friend of Bill Clinton and, like other FOBs (friends of Bill), got to sleep in the Lincoln bedroom.
The Money Store and Beneficial were far from being the only consumer finance companies with loan officers (management trainees) pounding the pavement in search of credit-impaired customers who needed to borrow against the value of their homes. As the 1980s wore on, companies like Associates First Capital Corporation of Dallas,4 Household Finance of Illinois, and United Companies in Louisiana (among other firms) were making second lien home equity loans as well as personal loans, issuing credit cards, offering lease financing, and selling other products that were a little bit too scary for the banking industry.
Banks and S&Ls that offered deposit and checking accounts to the public were at somewhat of a competitive disadvantage to consumer finance companies, because they were subject to a usury law that capped how much interest they could charge for loans. The whole point of being a hard money lender was that you took on risk and
4 After Beneficial, Associates was the second oldest consumer finance company in the United States.
expected to be compensated for that risk, whether it was five, six, or seven points above the "A" paper loan rate. And there was yet one more advantage to being a consumer finance company: There were no pesky federal regulators in Washington to deal with.
Depending on where they were located, consumer finance companies also might be subject to usury laws, but Beneficial, Cugno 's employer, found a way around them. "If you worked for Beneficial," said Cugno, "you got a 'personal property broker license,' which was exempt from state laws," which meant usury laws. Consumer finance companies and all their management trainees or loan officers would get state licenses. And there was yet one more advantage to being a consumer finance company, especially one that was making loans (second liens) secured by a house. Congress passed the Tax Reform Act of 1986—signed into law by President Reagan—which eliminated the ability of consumers to deduct interest payments on credit cards, auto loans, and all types of personal loans. Worried about a growing budget deficit, the politicians were hoping that by eliminating the tax deduction, this newfound money would feed the federal coffers.
At first, it looked like the law might spell trouble for Beneficial, Associates, The Money Store, and the rest of the consumer finance industry. If consumers could no longer deduct the interest payments on their cars, credit cards, or personal loans, they might stop spending, which ultimately might hurt the consumer finance industry. Instead, it shifted borrowing—to some degree—away from personal loans to an asset class where Americans could still deduct the interest payments: the home.
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