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THE MORTGAGE MACHINE
mortgage payments on ever more expensive homes affordable—at least initially. Pop-
ular Alt-A products included interest-only mortgages and payment-option ARMs.
Option ARMs let borrowers pick their payment each month, including payments
that actually increased the principal—any shortfall on the interest payment was
added to the principal, something called negative amortization. If the balance got
large enough, the loan would convert to a fixed-rate mortgage, increasing the
monthly payment—perhaps dramatically. Option ARMs rose from of mortgages
in to in .
Simultaneously, underwriting standards for nonprime and prime mortgages
weakened. Combined loan-to-value ratios—reflecting first, second, and even third
mortgages—rose. Debt-to-income ratios climbed, as did loans made for non-owner-
occupied properties. Fannie Mae and Freddie Mac’s market share shrank from
of all mortgages purchased in to in , and down to by . Tak-
ing their place were private-label securitizations—meaning those not issued and
guaranteed by the GSEs.
In this new market, originators competed fiercely; Countrywide Financial Corpo-
ration took the crown. It was the biggest mortgage originator from until the
market collapsed in . Even after Countrywide nearly failed, buckling under a
mortgage portfolio with loans that its co-founder and CEO Angelo Mozilo once
called “toxic,” Mozilo would describe his -year-old company to the Commission as
having helped million people buy homes and prevented social unrest by extending
loans to minorities, historically the victims of discrimination: “Countrywide was one
of the greatest companies in the history of this country and probably made more dif-
ference to society, to the integrity of our society, than any company in the history of
America.” Lending to home buyers was only part of the business. Countrywide’s
President and COO David Sambol told the Commission, as long as a loan did not
harm the company from a financial or reputation standpoint, Countrywide was “a
seller of securities to Wall Street.” Countrywide’s essential business strategy was
“originating what was salable in the secondary market.” The company sold or secu-
ritized of the . trillion in mortgages it originated between and .
In , Mozilo announced a very aggressive goal of gaining “market dominance”
by capturing of the origination market. His share at the time was . But Coun-
trywide was not unique: Ameriquest, New Century, Washington Mutual, and others all
pursued loans as aggressively. They competed by originating types of mortgages cre-
ated years before as niche products, but now transformed into riskier, mass-market ver-
sions. “The definition of a good loan changed from ‘one that pays’ to ‘one that could be
sold,’” Patricia Lindsay, formerly a fraud specialist at New Century, told the FCIC.
/s and /s: “Adjust for the affordability”
Historically, /s or /s, also known as hybrid ARMs, let credit-impaired borrow-
ers repair their credit. During the first two or three years, a lower interest rate meant
a manageable payment schedule and enabled borrowers to demonstrate they could
make timely payments. Eventually the interest rates would rise sharply, and payments
