Bank of America plans to acquire Countrywide Financial, the nation's largest home loan lender, as part of a "rescue deal" intended to help ease the impact of the subprime mortgage crisis. BusinessWeek senior writer Roben Farzad explains the ins and outs of the deal.
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Bank of America to the rescue. Jeffrey Brown has our big mortgage story.
Not that long ago, Countrywide Financial was a symbol of the real estate boom.
Last year, the nation's largest mortgage lender originated nearly one in every six home loans, more than $400 billion in mortgages. It also serviced more than $1 trillion in other mortgage loans.
But in recent months, Countrywide became a different kind of symbol: of risky lending practices, foreclosures and defaults, and the so-called subprime crisis.
The company's value plummeted, bankruptcy rumors swirled, even in the last few days.
Today's rescue deal involves the nation's largest consumer bank, Bank of America. It now becomes the nation's largest mortgage lender, as well.
Roben Farzad has been covering the story as a senior writer for BusinessWeek magazine. He joins us now.
Roben, first remind us how Countrywide became so important in the boom.
ROBEN FARZAD, Editor, BusinessWeek:
Countrywide really jumped at the chance to become the foremost mortgage lender. Much of this boom started around the 9/11 period, 2001, 2002, when we record low interest rates for the next two, three, or four years, and people who were still heartbroken from their losses in the stock market really started espousing this new reality that your home was the ultimate redoubt.
Everybody suddenly had this flare for the American dream. And Countrywide was all too happy to take advantage of that cheap credit and give loans to even the riskiest of borrowers. And the assumption being, as long as home prices go up, everybody is going to be OK.
And then things changed. I mean, is it clear what caused its downfall at this point?
Hubris. You know, if you are out there dispensing the notion that the housing market can defy gravity ad infinitum, you're obviously going to embolden your mortgage brokers to go out and sell these loans.
We thought there was a new paradigm. Mortgage lenders like Countrywide thought that they could make the loans, one, because housing prices were going up at a record clip, and, two, they could repackage and sell them to Wall Street and institutional investors and keep the virtuous cycle of making loans, making loans.
And truth be told, as long as home prices went up, it didn't matter if you only made $90,000 a year and took out a $500,000 mortgage. But that came to a crashing end in the past year.