Countrywide Financial Corp. grew from a two-man startup in 1969 to become the nation's leading mortgage lender by deftly riding out housing boom-and-bust cycles. This time around, however, the ride has been a lot rougher, leaving the company in a scramble to regain its footing as the housing market has turned from boom to bust.
To survive, it's been forced to borrow billions of dollars, announce thousands of job cuts and dramatically restructure its lending practices to nearly eliminate risky subprime loans to borrowers with shaky credit that have led to massive foreclosures and defaults wracking the housing market.
"In an absolute level sense, this is the biggest challenge" Countrywide has ever faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.
Several analysts believe Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.
But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.
"At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo," Cannon said.
Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders move to focus on prime loans, a sector once dominated by Countrywide.
"It's going to take time, and I think their cutbacks are going to be greater than perhaps we anticipate," Ross said.
Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.
The company didn't lead the charge to make those loans, "but as an industry leader, they were right there," said Robert Napoli, an analyst with Piper Jaffray.
"They have an effect on the market. They have to, being the biggest," he said.
The Calabasas, Calif.-based company's loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.
Countrywide and the rest of the mortgage industry also got caught up in the frenzy to make nontraditional loans then resell the mortgages for hefty profits to Wall Street banks.
Fortunes dove when demand for those loan packages plummeted amid rising defaults. The resulting credit crunch that tore through the markets has left Countrywide and others holding loans they couldn't sell and hurting for cash to keep funding new ones.
"The market changed very quickly on them ... they just underestimated how rapidly the market changed," Napoli added.
A report in The New York Times cited unnamed former Countrywide employees saying the company used financial incentives to encourage employees to steer borrowers into subprime loans to boost profits.
The allegations prompted North Carolina Treasurer Richard Moore to send a letter dated Tuesday to Countrywide asking for an explanation. Moore is the trustee of a pension fund that holds more than $11 million in Countrywide shares.
"Countrywide has sacrificed long-term sustainability for short-term profits," Moore wrote. "As an investor, I expect assurances that these practices have ceased and that the company is returning to a business model that both respects consumers and protects shareholder value."
Countrywide has strongly refuted the report, noting its business processes are designed to prohibit pushing customers who qualify for prime loans into subprime loans, and that its loan officers do not receive higher commissions for selling subprime loans.
During a conference call with Wall Street analysts in January, Countrywide Chairman and Chief Executive Angelo Mozilo said the company expected rising delinquencies and a weak housing market but was "well positioned and extremely optimistic about our prospects to continue generating growth and superior returns over future cycles."
Since then, Countrywide stock has dropped about 60 percent and is now trading around $19 a share.
In a recent letter to employees announcing as many as 12,000 layoffs, he characterized the current housing market cycle as "the most severe in the contemporary history of our industry."
Countrywide didn't return calls seeking an interview with Mozilo.
The son of a butcher, he has guided Countrywide through a number of housing cycles.
He co-founded the company nearly four decades ago with fellow New Yorker David Loeb, taking the fledgling company public only six months after it launched.
Trading at less than $1 a share, the startup failed to generate much investment capital, so Mozilo and Loeb headed West in the fall of 1969 and set up shop in suburban Los Angeles, a housing hotbed.
Its rise was part of a broader trend in which banks and traditional savings and loans lost market share as borrowers turned to more market-savvy mortgage firms offering a wider variety of loan programs.
Countrywide's expansion was also fueled by its move to sell conventional mortgage loans that were then resold to government-sponsored mortgage companies the Federal National Mortgage Association, also known as Fannie Mae, and the Federal Home Loan Mortgage Corp, or Freddie Mac.
The strategy helped Countrywide weather the crash of the high-flying housing market at the end of the 1980s. In 1990 the company reported its loan production totaled more than $3 billion.
The interest rate upheaval during the 1990s had a mixed impact on the company. Low rates at the start of the decade helped boost business amid a surge in refinancing.
But when rates eventually kicked back up, the company and other mortgage lenders saw loan production fall off.
Countrywide coped with that downturn by diversifying into more financial services, eventually opening its retail bank.
When interest rates began to plunge at the start of this decade, Countrywide joined the rest of the industry in rushing to feed an unprecedented demand on Wall Street for home loans.
Last fall, Wall Street investors began to sour on mortgage loans, particularly subprime loans.
While Countrywide was less exposed to subprime loans than the rest of the market, it had stepped up high-yield loan products such as pay option loans, which give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance.
In recent weeks, the company has drawn down on an $11.5 billion line of credit and raised $2 billion by selling a stake to Bank of America.
This week, it boosted its borrowing capacity by another $12 billion through new or existing credit agreements.
To further help reassure investors of the company's stability, management has implemented layoffs and shifted its loan production through its banking arm.
It's also closed the door to all subprime loans except for those it can sell back to U.S. government-backed lenders.
"Countrywide is quickly adjusting to market conditions and ... now has the breathing room to do so," said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. "One sees glimmers of hope."