The Bad Guys of Subprime Lending Are Raking in Bailout Billions

By John Dunbar and David Donald, The Center for Public Integrity. Posted May 20, 2009.

Countrywide Financial Corp., which made at least $97.2 billion worth of loans from 2005 through the end of 2007, ranked No. 1 among subprime lenders nationally. The company was purchased by Bank of America last year. No. 1 was Calabasas, California-based Countrywide Financial Corp., with at least $97.2 billion worth of loans from 2005 through the end of 2007. Countrywide was bought by Bank of America last year, saving it from probable bankruptcy. Second was Ameriquest Mortgage Co. of Orange, California, now defunct, which originated at least $80.6 billion worth of loans. Third was now-bankrupt New Century Financial Corp. of Irvine, California, with more than $75.9 billion in loans.

Non-Bank Lenders Dominate

Independent mortgage companies like Ameriquest and New Century were among the most prolific subprime lenders. Since they were not banks, they could not accept deposits, which limited their access to funds. At least 169 independent mortgage companies that reported lending data in 2006 ceased operations in 2007, according to the Federal Reserve.

Some of the nation's largest banks have subprime lending units, including Wells Fargo & Co., which ranked No. 8, JPMorgan Chase & Co. at No. 12, and Citigroup Inc. at No. 15. The big banks' mortgage business was less reliant on subprime lending than that of the non-bank lenders. But most of the big investment banks also purchased subprime loans made by other lenders and sold them as securities.

Several other lenders among the Top 25 were subsidiaries of Wall Street banks or hedge funds. Encore Credit Corp. (No. 17), for example, was a subsidiary of Bear Stearns, and BNC Mortgage Inc. was part of Lehman Brothers (No. 11).

The lending totals in the survey include subsidiaries owned by the parent companies. British bank HSBC Holdings plc (No. 9) owned American subsidiary HSBC Finance Corp., which in turn owned subprime lender Decision One and also operated under the names Beneficial and HLC.

Two of the top subprime lenders were seized by the government. IndyMac Bank (No. 14) and Washington Mutual (owner of Long Beach Mortgage Co., No. 5) were each taken over by federal banking regulators after big losses on their portfolios of subprime loans.

American International Group (AIG), better known for insurance and complex trades in financial derivatives, made the list at No. 18, thanks to subsidiaries like American General Finance Inc., MorEquity, and Wilmington Finance Inc.

The five banks on the list that are still lending are Wells Fargo, JPMorgan Chase, GMAC LLC, Citigroup, and AIG. All have received billions from the government's bank bailout programs.

Bailout Recipients

President George W. Bush signs the Emergency Economic Stabilization Act of 2008 in the Oval Office. (White House/Eric Draper)On Oct. 3, 2008, former President Bush signed the $700 billion Emergency Economic Stabilization Act of 2008 into law. The legislation created the "Troubled Asset Relief Program" -- or TARP, as it is known -- to buy up mortgage-backed securities and hold them, ideally, until they recovered some of their value and could be auctioned. By removing the so-called "toxic" assets from the banks' balance sheets, it was hoped they would begin lending again. The administration later changed direction and opted instead to buy shares of stock from the banks.

In addition to the $700 billion bailout, the Federal Reserve began committing hundreds of billions of dollars to guarantee against losses on failing mortgage assets of AIG, Citigroup, and Bank of America.

Among the lenders on the Center top 25 list, seven have received government assistance. Citigroup has collected $25 billion through the TARP program, $20 billion through the Treasury Department's "targeted investment program," and a $5 billion Treasury backstop on asset losses. It has also been guaranteed protection from losses on $306 billion in assets. Wells Fargo has collected $25 billion in TARP funds, and Bank of America, which bought Countrywide and Merrill Lynch before their imminent collapse, received another $45 billion in TARP money. Also on the list: JPMorgan Chase (owner of Chase Home Mortgage), Regions Financial Corp. (former owner of EquiFirst), GMAC/Cerberus Capital Management, and Capital One Financial Corp. (former owner of GreenPoint Mortgage). And the bailout of insurance giant AIG may go as high as $187 billion and includes a combination of loans, direct investment by the government, and purchases of shaky assets.

Center researchers attempted to reach every CEO and corporate owner on its list of the top 25 lenders with mixed success.

A call and e-mail to Bank of America were not returned. A Wells Fargo spokesman said the bank carefully reviews a borrower's ability to pay. "That's why 93 out of every 100 of our mortgage customers were current on their payments at the end of 2008," the bank's Kevin Waetke wrote in an e-mail.

Capital One spokeswoman Tatiana Stead responded that GreenPoint's loans were considered Alt-A, which generally do not require documentation of income but whose borrowers have good credit. Such loans are not considered subprime, she said, and added that the bank closed GreenPoint shortly after it was acquired.

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