So That's What Happened to Countrywide and BAC...
Some research took me back to Countrywide's 2005 annual report today. It's funny looking back at it in retrospect because so much looks painfully obvious. Take this, for instance, from right at the beginning of the Management's Discussion section:
"Our total loan production volume increased during 2005 largely because we increased our market share. Our adjustable rate loan production has remained relatively constant from last year at 52% of total loan production. Although adjustable rate production has remained constant, the composition has changed due to the increase in pay-option loans—which provide borrowers with the option to make fully-amortizing, interest-only, or “negative-amortizing” payments.
"Pay-option loans have increased from approximately 6% of our loan production during the year ended December 31, 2004, to approximately 19% of our production during the year ended December 31, 2005. "
What's funny is that what really did Countrywide in (and, later, Bank of America (NYSE: BAC)) is that it decided to believe its own delusion about these loans and keep more on the books. Between 2004 and 2005, Countrywide's banking segment more than doubled the amount of mortgage loans that it kept on its books, from $24B to $53B.