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FINANCIAL CRISIS INQUIRY COMMISSION REPORT
The risk in these loans was growing. From to , the average loan-to-
value ratio rose about , the combined loan-to-value ratio rose about , and debt-
to-income ratios had risen from to : borrowers were pledging more of their
income to their mortgage payments. Moreover, of these two originators’ option
ARMs had low documentation in . The percentage of these loans made to in-
vestors and speculators—that is, borrowers with no plans to use the home as their
primary residence—also rose.
These changes worried the lenders even as they continued to make the loans. In
September and August , Mozilo emailed to senior management that these
loans could bring “financial and reputational catastrophe.” Countrywide should not
market them to investors, he insisted. “Pay option loans being used by investors is a
pure commercial spec[ulation] loan and not the traditional home loan that we have
successfully managed throughout our history,” Mozilo wrote to Carlos Garcia, CEO
of Countrywide Bank. Speculative investors “should go to Chase or Wells not us. It is
also important for you and your team to understand from my point of view that there
is nothing intrinsically wrong with pay options loans themselves, the problem is the
quality of borrowers who are being offered the product and the abuse by third party
originators. . . . [I]f you are unable to find sufficient product then slow down the
growth of the Bank for the time being.”
However, Countrywide’s growth did not slow. Nor did the volume of option
ARMs retained on its balance sheet, increasing from billion in to billion
in and peaking in at billion. Finding these loans very profitable,
through , WaMu also retained option ARMs—more than billion with the
bulk from California, followed by Florida. But in the end, these loans would cause
significant losses during the crisis.
Mentioning Countrywide and WaMu as tough, “in our face” competitors, John
Stumpf, the CEO, chairman, and president of Wells Fargo, recalled Wells’s decision
not to write option ARMs, even as it originated many other high-risk mortgages.
These were “hard decisions to make at the time,” he said, noting “we did lose revenue,
and we did lose volume.”
Across the market, the volume of option ARMs had risen nearly fourfold from
to , from approximately billion to billion. By then, WaMu and
Countrywide had plenty of evidence that more borrowers were making only the
minimum payments and that their mortgages were negatively amortizing—which
meant their equity was being eaten away. The percentage of Countrywide’s option
ARMs that were negatively amortizing grew from just in to in and
then to more than by . At WaMu, it was in , in , and
in . Declines in house prices added to borrowers’ problems: any equity remain-
ing after the negative amortization would simply be eroded. Increasingly, borrowers
would owe more on their mortgages than their homes were worth on the market, giv-
ing them an incentive to walk away from both home and mortgage.
Kevin Stein, from the California Reinvestment Coalition, testified to the FCIC
that option ARMs were sold inappropriately: “Nowhere was this dynamic more
clearly on display than in the summer of when the Federal Reserve convened
