Countrywide Takes Beating Amid Mortgage Crunch

"We were in a bubble and the bubble has popped," says Paul Miller, an analyst at Freidman Billings Ramsey & Co. "I think a lot of these companies were overconfident of their own capabilities, and I think [Countrywide Chief Executive] Angelo Mozilo, who'd said he'd never seen a soft landing in housing, was even surprised that so much of this crisis landed on his front door."

At the eye of the storm that hit Main Street and Wall Street with equal severity were the subprime loans made to borrowers with less-than-stellar credit histories. As defaults on these riskier mortgages that readjusted to higher interest rates accelerated from a pitter-pat to a steady drumbeat to a flailing John Bonham-Led Zeppelin drum solo, Countrywide paid a steep price. Adding to its woes, so-called Alt-A loans, which required little or no income verification but were considered a step up from subprime, began to unravel too.

Amid the meltdown, CEO Mozilo retained a cheerful public demeanor. After all, Countrywide's subprime exposure was far less than competitors such as New Century Financial, which was forced to declare bankruptcy in April. When the extent of problem with Alt-A loans, which represented big business for Countrywide, started to grow over the summer, the company in August sold a $2 billion stake to Bank of America (BAC) to ward off worries.

But by October, Countrywide unveiled its first-ever quarterly loss and announced write-downs of $1.2 billion, with admissions of more to come. That made it official: The company was being swept along in the current of a market collapse.

Despite shedding more than $20 billion in market cap Countrywide survived, and that's something of a triumph, says Miller. Chalk it up to luck or foresight, but Mozilo's ambition to dominate the business prompted his company to expand into banking services, and its certification gave Countrywide access to federal bank insurance, which made all the difference. Look at New Century, or any of the 209 other companies that wound up on the inauspicious Mortgage Lender Implode-O-Meter, which has diligently chronicled the fallen in the ongoing subprime crash.

"If you weren't able to tap the federal home loan banking system, you went under," says Miller. "If [Countrywide] hadn't gone out and gotten a bank charter a couple of years ago, they would not have survived this."

Robert Brusca, chief economist at Fact and Opinion Economics in New York, says former Federal Reserve Chairman Alan Greenspan, who famously warned of irrational exuberance in the technology stock boom of the 1990s, failed to heed signs of overly lax lending standards. Combined with low interest rates, the stage was set for an unsustainable mortgage boom.