An expensive reminder

A couple years ago, when we bought our house, our mortgage was underwritten by Countrywide. We went with them because they matched the best rate I found on the Internet.  While sitting in their office, signing all the paperwork, I remember reading one of their brochures where they said they kept 98% of their mortgages and that did impress me quite a bit.  The mortgage on our first house got transferred around between banks quite a bit, so I had to keep track of which company to send the next month's payment to.  Stability would be a good thing.

So, when the sub-prime market cratered, taking Countrywide along with it, I thought it was a typical market over-reaction. If they kept 98% of their mortgages, then obviously they would have taken care that the loans were sound. Care they wouldn't have taken if their plan to was to bundle the loans into securities and sell them off. So, I went out and bought some shares last week at the low prices on offer.

Yesterday's (Sunday's) New York Times had an article on Countrywide and how it, too, was caught up in the sub-prime mess. One in four of its sub-prime loans, the article says, is in default. And the article indicated that Countrywide sells a huge fraction of its loans too.  Oops. Had I misremembered something?

I had misremembered all right, but I was naive in not noticing the exact words used by the brochure. The crucial distinction seems to that Countrywide continues to service the loans that it packages and sells. It's responsible for collecting payments, and the brochure was simply saying that I wouldn't have to send payments to a different bank every few months. But Countrywide does sell many of the loans, thus divesting itself of some of the risk.  The investors who buy the loans pay Countrywide to take care of collecting the mortgage payments, so even though 98% of its customers wouldn't know it, Countrywide sells a majority of its loans. This of course means that they wouldn't be all that careful when making loans. Most of the time, it would be someone else's problem if the customer defaulted.

Another reminder, if I am ever in doubt again, that it is extremely hard to beat the market with publicly available information -- it's been factored in already. An expensive reminder.