Though the big home-mortgage lender faced large and unpredictable losses on defaults, the more immediate danger was pressure from regulators, politicians and rating firms, these people say. That realization helped spur Countrywide co-founder and Chief Executive Angelo Mozilo to call Bank of America in December and start talks that led to the Charlotte, N.C., bank's $4 billion deal to acquire Countrywide, which was announced Jan. 11.
Countrywide, due to report fourth-quarter results today, faced "a cascading series of regulatory issues" as it pondered whether to try to stay independent, says one person briefed on the situation. A Countrywide spokeswoman declined to comment.
After falling home prices and mounting mortgage defaults rattled investors in mid-2007, Countrywide could no longer raise money through short-term borrowings in the capital markets or sales of mortgages other than those that could be guaranteed by government-sponsored investors Fannie Mae and Freddie Mac. That forced Countrywide to rely much more heavily on two other sources of funding: deposits at its savings-bank unit and borrowings -- so-called advances -- from the Federal Home Loan Banks system. But the sustainability of those funding sources was increasingly in doubt by late last year.
In late November, Sen. Charles Schumer, a New York Democrat, wrote to regulators of the 12 regional Federal Home Loan Banks, cooperatives that lend money to banks and other financial institutions. Mr. Schumer argued that a surge in Countrywide's home-loan bank borrowings to $51.1 billion as of Sept. 30 from $28.8 billion three months earlier might "pose a risk to the safety and soundness of the FHLB system as a whole."
Countrywide already was near a cap on the amount of FHLB borrowings it could obtain under rules that limit those to 50% of assets held by the borrower. Ordinarily, FHLB borrowings equal no more than about 15% to 25% of a bank's assets, a former bank regulator says, and much higher levels would tend to make regulators jittery.
Sen. Schumer says Countrywide now has reduced its FHLB borrowings by about $4 billion. The next quarterly disclosures on those borrowings are due in late March.
A spokesman for Countrywide says the FHLB borrowings declined "primarily because of growth in customer deposits, which reduced our need" for funding from the home-loan banks. "This decline was not driven by any action taken by the FHLB of Atlanta," the spokesman says.
Countrywide's deposits from consumers, attracted by unusually high interest rates of more than 5% on certificates of deposit, grew rapidly in recent months, expanding by $2.3 billion in December alone. Countrywide could attract that money, despite its financial problems and $1.2 billion third-quarter loss, because the deposits are insured by the Federal Deposit Insurance Corp.
But advisers to Countrywide's board -- including representatives of Promontory Financial Group, a Washington consulting firm headed by Eugene Ludwig, a former U.S. bank regulator -- saw the risk that the FDIC would start asking tougher questions about the safety of funding Countrywide's large mortgage holdings through those insured deposits, people familiar with the discussions say. These people viewed the FDIC's chairman, Sheila Bair, as a tough regulator willing to take on the big players.
An FDIC spokesman declined to comment on Countrywide. There is no indication that the FDIC plans any action that would jeopardize its insurance of Countrywide deposits.
Another threat to the deposit base was that further cuts in Countrywide's credit ratings could prevent it from placing funds from custodial accounts at its savings-bank subsidiary, the company has disclosed.
Meanwhile, Countrywide was dealing with investigations of its lending practices by attorney-general offices in California, Illinois and Florida and facing suits from shareholders, borrowers and employees. The Securities and Exchange Commission has been investigating share sales by Mr. Mozilo as well as Countrywide's accounting. Mr. Mozilo has denied wrongdoing.