AMERICAN PREDATORY LENDING AND THE
GLOBAL FINANCIAL CRISIS
ORAL HISTORY PROJECT
Interview with
Paul Needels
Bass Connections
Duke University
2020
PREFACE
The following Oral History is the
result of a recorded interview with Paul Needels conducted
by Malena Lopez-Sotelo on September 28, 2020. This interview is part of the
Bass Connections American Predatory Lending and the Global Financial Crisis project.
Readers are asked to bear in mind
that they are reading a transcript of spoken word, rather than written prose.
The transcript has been reviewed and approved by the interviewee.
Transcriber: Darielle
Engilman Session: 1
Interviewee: Paul Needels Location: Durham, NC
Interviewer: Malena Lopez-Sotelo Date: September 28, 2020
Malena Lopez-Sotelo: I'm Malena Lopez-Sotelo, a graduate student and a member of
the Bass Connections American Predatory Lending and the Global Financial Crisis
team and today it is September 28, 2020. I'm currently
in Durham for an oral history interview with Paul Needels,
former Senior Vice President of Strategy and Consumer Success at Informa
Research Services, who has joined us via Zoom. Thank you for joining me today,
Paul. I'd like to start by establishing a bit about
your background. I believe that you went to the University of Colorado Boulder
for college, and after college, you then completed a Master's in Business Administration
at the University of Southern California. What led you to get an MBA, Paul?
Paul
Needels: Just
thought it was needed to continue my career, fill in the gaps.
Malena
Lopez-Sotelo: In the context of your
work life, when and how did you first become involved with residential
mortgages?
Paul Needels: I've been involved in residential mortgages since going to
work for Home Savings of America, and you see that on my resume. That's where I first got involved with residential lending.
We were a portfolio lender. We were the largest lender in the country at the
time. That's how I got involved in residential.
Malena
Lopez-Sotelo: What attracted you to the
sector?
Paul
Needels: I
don't know that anything attracted me. Previously, I
was involved in commercial real estate and just by introduction, I got involved
with a really good company [Home Savings] with really
good people. The quality of those people like Charlie Reinhardt, William Barrett,
Chuck Reed, Mike Muir and Chaz Seale, they were just world class people. They
created a great company. So that's what attracted me,
the caliber of people in the town. Not really real
estate lending, it was really the people.
Malena
Lopez-Sotelo: How would you
characterize the state of the mortgage market when you began your professional
career?
Paul
Needels: Vastly
different than it is today—much smaller, much more portfolio-based, much more
community-based. It was a vastly different market—when I started lending, it
was nothing like it is today.
Malena
Lopez-Sotelo: What types of
institutions made more mortgages? Could you dive into a little detail around
what they looked like in terms of typical terms?
Paul
Needels: You
mean originally when I got into the business?
Malena
Lopez-Sotelo: Yes.
Paul Needels: Well, you had your mortgage bankers and brokers and banks that
are dealing with agency paper,
but you had large [thrifts] like Home Savings of America, Washington Mutual,
American Savings, World Savings, that were large portfolio lenders—they made
ARM [adjustable rate mortgage] loans largely for portfolio. They were
responsibly underwritten. They had very good performance history. The lenders
maintained largely their stake in the assets, so they had great interest in the
quality of the asset. They tended to service the assets they originated. So, it
was a vastly different market.
Malena
Lopez-Sotelo: How did the mortgage market
change from the time you began your professional career to when you joined
Washington Mutual in 2002?
Paul
Needels: I
don't know that it changed much from when I started to
when Washington Mutual came in. Washington Mutual acquired Home Savings and
basically, they were just a consolidator of the thrifts that were like Home
Savings of America. So, they weren't really doing
anything that different, it was an economies of scale game. So, I don't think it changed that much, from my perspective. The
biggest changes came when I was at Countrywide. You had the rise of subprime
lending. You had the massive increase in wholesale and correspondent lending,
third-party lending. You had financial incentives that were drastically
different than they were for a portfolio lender. That's
where I saw the big changes. Not that they weren't
there before, but that's when I started interfacing with them.
Malena
Lopez-Sotelo: What about your specific
role at Washington Mutual? Did it change at all?
Paul
Needels: My
role constantly changed. I started off at Home Savings, and I was on the board
of a number of subsidiaries. I did turnarounds for
them. I managed the re-engineering of the mortgage division, and then we got
acquired. Then later on I went to work for Washington
Mutual. There, I was responsible for product and residential construction
lending. So that was a different role—product support, sales support, that kind
of thing.
Malena Lopez-Sotelo: Can you clarify what residential construction lending is?
Paul Needels: Well, imagine you want to buy a home that needs a substantial
amount of renovation, or you may have a piece of ground and you want to build
from scratch, and you're looking for a loan that is both a construction and a
permanent loan, and they're all in one. So, it was a single-close construction
product. So one loan did your construction and your
permanent loan— very efficient for the consumer.
Malena
Lopez-Sotelo: I believe the role was
previously in Colorado and now you are sitting in California. Was that
different in any respect from state to state?
Paul
Needels: Well,
when I've been involved in mortgage lending, it's
always been in California.
Malena
Lopez-Sotelo: Now moving more into your
specific role at Washington Mutual. What opportunities did you see there in
your specific role?
Paul
Needels: What
do you mean opportunities?
Malena
Lopez-Sotelo: More broadly, what
opportunities you saw as an employee, whether that's
at the state level or on the national level?
Paul
Needels: Washington
Mutual was a very interesting company. It had been growing very rapidly. It had
scale. The people were very nice. They had, I thought, seemingly a good culture
that valued employees. So, there was good opportunity because it was growing,
and they had scale.
Malena
Lopez-Sotelo: What was the function of
your role in terms of the stakeholders that you might've
worked with?
Paul
Needels: At
Washington Mutual?
Malena
Lopez-Sotelo: Yes.
Paul Needels: I reported to the head of sales, who was responsible for
both direct as well as third-party originations for the company. I was responsible
for making sure that our sales force had the products they needed to compete,
that they understood the products, and that they had incentive plans that were
appropriate and equitable. I was responsible for also running both the
origination and operations of the construction.
Malena Lopez-Sotelo: You brought up the term third parties. Can you clarify
what those are?
Paul
Needels: So in order to [do] lending, you can be a direct lender. So
[to] give you an example, Bank of America is lending directly to you. You go to
Bank of America, and they underwrite it, then they fund it. Third party is
where the Bank of America, in this case—but Bank of America doesn't
do third party today, but they did when I was with them—let's say Bank of
America did third-party lending today. They could buy loans that were
originated by a third party, meaning a mortgage banker or a mortgage broker. So
that's the difference. Instead of Bank of America, as
an example, dealing directly in underwriting, having a loan officer that
handles the application and handles the funding and does the servicing, Bank of
America could buy from a third party—so where they're not the one that's
originating the loan originally. They could be table funding it, or they could
be buying it as a closed loan, but they're not the
ones that are originating at the start. That's
third-party lending, and that's grown to be huge.
Malena
Lopez-Sotelo: You used the term table
funding. Can you clarify and explain a little bit more of what that is?
Paul
Needels: Let's distinguish, we're in the category of third-party
lending. So there's direct lenders, there's
third-party. There's a couple of flavors of third-party. One flavor is you're a broker. Brokers typically are the least
capitalized. They're a big part of the market, they’re
very important. They offer very good value to consumers because they have a lot
of choice, but they don't have the capital, typically,
to fund the loans. So what they do is they work with a
bank who has a wholesale lending division who would actually send the money to
the escrow company to fund the loan. So it's not “ABC Mortgage
Broker’s” funds that are funding the loan—it’s the lender. It's
your Bank of America that's actually funding the loan. But as far as the
customer's concerned, the consumer, they're blind to
it really because all they care about is, “Did I get the loan that I expected
to get? Did I get the money I expected?” That is what a mortgage broker is. A
mortgage banker is more well-capitalized and they have warehouse lines of
credit that enable them to fund the loans and then sell them as funded loans to
a Bank of America or Wells Fargo, or whoever's buying closed loans at the time.
That's third-party lending, and there's wholesale
correspondent.
Malena
Lopez-Sotelo: How did you decide which
third parties to work with, or Washington Mutual?
Paul Needels: You have a sales force that is targeted, that is chartered
with knowing who are the largest originators in a given market that you want to
participate in, and you think you can be competitive in, and you have staffing
for. The sales force is chartered with account representatives that are
chartered then with going out and soliciting them, and explaining why we're really good to work with, and why they should fund
loans through us. They have to go through an
application process, there's net worth requirements, there's quality controls
to make sure that you're dealing with reputable people, but that's generally
the process.
Malena
Lopez-Sotelo: At your role at
Washington Mutual, did you ever interact with any regulators?
Paul
Needels: No,
I don't remember interfacing with regulators.
Malena
Lopez-Sotelo: How would you describe
the key goals of Washington Mutual and your division while you were at
Washington Mutual?
Paul
Needels: The
key goals?
Malena Lopez- Sotelo: Yes.
Paul Needels: Quality growth.
Malena
Lopez-Sotelo: Is there a little more
detail around what quality growth might mean in the context of your role?
Paul
Needels: I
guess I'm not sure what you're asking me. I mean the
goal of any profit institution is to grow and to increase its return to its
shareholders. So, our charter was to have the best products, have the most
motivated, educated sales force with all the best tools, and to do so
efficiently, and to continually grow. So my job was to
help make sure they had the right products, that our sales force understood
what they were doing. I didn't manage the sales force
directly, but I was a piece of the support function.
Malena
Lopez-Sotelo: Thank you. And your time
at Washington Mutual, how would you describe the firm's culture?
Paul
Needels: It
was friendly, but I'd say kind of inbred. There was
kind of a culture of those that were originally with the company, and I guess
maybe because they'd acquired so many different
companies, they assumed that they knew best. So there
was a little bit of an attitude of, “We know best, you don't, and we really
don't need your input, thank you.” So there was some
of that.
Malena
Lopez-Sotelo: As I understand it, your
next move after Washington Mutual was moving to Countrywide. What motivated you
to join Countrywide?
Paul
Needels: The
person that I reported to who's head of sales went to Countrywide and asked me
to come work with him, which I was happy to because I [had] great respect for
him.
Malena
Lopez-Sotelo: In what ways was Countrywide
different than Washington Mutual?
Paul
Needels: There
was no comparison. Washington Mutual was a mess. They grew through
acquisitions, but they never integrated, systematically, all
of their operations. So at one point, I think we
had a dozen operating systems that we were supporting. That adds tremendous
complexity cost, customer service errors, so it was just operationally a mess
because of their infrastructure decisions that they made, and they never
overcame that. So Washington Mutual, while the people
were good, and I enjoyed it there, operationally, because of their
infrastructure and systems failures, it was a mess. Countrywide is like
comparing a razor against a dull knife. They were a razor. Smartest people.
Operationally, very savvy. Financially, very savvy. Very singular focused.
Washington Mutual was big in mortgages, but they had a lot else going on. They
had retail branches and maintained such. Countrywide was laser focused on
mortgage originations, and they weren't limited to by
any means, but they wanted a portfolio. So, it was a very different type of
environment. A much harder place to work, much more demanding, brutal at times.
They paid very, very well, but you earned every nickel. Very different.
Malena
Lopez-Sotelo: Was Countrywide, in your
experience, regulated differently than Washington Mutual? And if it was, how
did that impact your role?
Paul
Needels: I
think we were. I don't know that it impacted my role,
and I can only surmise how we were regulated differently. We had a bank [at]
Countrywide. It wasn't anything on the scale of
Washington Mutual. Most of the loans that we originated we sold off, so we kept
the servicing. It was just a different model. I can't
really speak to how the regulators differed between the two institutions.
Malena
Lopez-Sotelo: Earlier, you mentioned
two terms: wholesale lending and custom construction. Can you describe how that
affected your specific role at Countrywide?
Paul Needels: Let's be clear, at Countrywide, I was in the wholesale
division. So we had a direct division, we had a
correspondent division, and we had a wholesale division. I was in the wholesale
division. We did have a construction product that I also was responsible for at
Countrywide. I had a similar role in terms of sales support at Countrywide as I
did at Washington Mutual. Correspondent was, let’s
say, a competitor channel. We were all very competitive. So much so that you didn't go onto the other floor. It was like a different
business. We were very competitive.
Malena
Lopez-Sotelo: Earlier as well you
described brokers and where they fit in the landscape. How did you identify
brokers to partner with at Countrywide?
Paul
Needels: Well,
as I explained before, you're looking for originators
that have scale, have net worth, and have quality production. So you're not looking for somebody who's under-capitalized,
produces no volume, and can't produce a quality loan. There's
just going to be a headache, and you're going to have a lot of failures, and
it's not going to work out. So, those were the goals.
Malena
Lopez-Sotelo: Can you describe the
incentives in place for brokers to work with Countrywide?
Paul Needels: Well, the incentives were the same for pretty much
everybody—us as well as all our competitors in the wholesale space. They could
earn points on the deal from the origination. They could earn yield spread
premiums, which was a huge issue as time grew in terms of originating loans
that shouldn't have been originated. So, yield spread
premium is where, if the broker can get the borrower to agree to a higher rate,
there's a yield spread premium that can be paid to
that broker. So, that can be very substantial at times, especially when there was
subprime lending going on.
Malena
Lopez-Sotelo: Were you ever concerned
about broker behavior during subprime lending, for example?
Paul
Needels: Constantly,
constantly. There is a saying, “If you leave a little hole in your protective
armor, they'll drive a truck through it.” Brokers are very entrepreneurial, and
they're very smart. They're
very cagey. And when they see a window of opportunity, they'll
flood it. So, yeah, you're constantly worried about
it.
Malena Lopez-Sotelo: So to what extent was Countrywide aware of brokers' behavior
as you described?
Paul
Needels: What,
that they're interested in their own self-profiting?
Fully. Yeah. We knew who our client was.
Malena
Lopez-Sotelo: In terms of [when] after
mortgage loans were made, can you describe what Countrywide did with them? For
example, did they keep them on their balance sheet or sell them to an entity
like Fannie Mae or Freddie Mac, or securitize them?
Paul
Needels: Well,
okay. You're talking about two different things. So, there's the principal of the loan, and then there's the
servicing of the loan. I believe that Countrywide, to a very large extent, kept
the servicing and built up a large servicing portfolio and would have sold the
paper, either through an agency or through bundling into mortgage bonds if they
were non-agency paper. But Countrywide, its ability to survive depended on its
ability to sell its assets. It didn't have a huge
balance sheet that you could just continue to pile assets onto. What it originated
it had to package and sell, take a profit, and maintain the servicing, spread,
and move on to your next. That's the business model.
Malena
Lopez-Sotelo: What was your perspective
on the mortgage market and its impact on house prices as it evolved?
Paul
Needels: Well,
clearly the whole subprime lending and non-agency, aggressive lending practices
that came into play, caused assets (homes) to be appreciated because people
were buying—people had the ability to get loans that they shouldn't have been
able to get. And therefore you had more demand for
housing driving up housing prices and then on the flip side, when it all fell
apart, it had the opposite leveraged effect. So, it caused trauma on both sides
of the equation.
Malena
Lopez-Sotelo: Did you think the market
was overheated at all?
Paul Needels: Oh yeah, absolutely. We thought it was insane. Didn't make sense.
Malena
Lopez-Sotelo: To what extent do you
feel securitization had a role to play in the global financial crisis?
Paul
Needels: Well,
what I would say is that to the extent that you have institutions that are
profit-motivated like Countrywide, and they have demands for growth, [to] keep
that stock price going, and there is another party that is willing to take the
risk, and thinks it's a good risk and is willing to take the risk and offload
it, that lender is going to underwrite loans that it normally would not
underwrite. And that's what happened. Countrywide had
no interest in originating bad loans. My perception was that there was a
realization that the underwriting terms, especially in subprime, were extremely
aggressive and risky. Countrywide was not at direct risk, because all the
assets were either guaranteed or sold off to the agencies, and everything was
originated per parameters. So everything was done
correctly, and a third party took the risk. So, why not originate it? That was
kind of the attitude. And so that obviously fueled large volumes of loans that shouldn't have been originated.
Malena
Lopez-Sotelo: On that topic, to what
extent, if at all, did figures within your firm, whether [at] Countrywide or
Washington Mutual, express concerns about the changing nature of credit
extension during the 2000s?
Paul
Needels: Was
there concern voiced?
Malena
Lopez-Sotelo: Yes, from figures.
Paul
Needels: You're
asking me for figures? I'm confused.
Malena
Lopez-Sotelo: No, sorry. I'll repeat the question. To what extent did figures or
people within your firm express concerns about the changing nature of credit
extension during the 2000s?
Paul
Needels: I
wasn't in underwriting, but I did participate in the
senior leadership meetings. There was extensive discussion about underwriting,
underwriting quality in the industry, propensity for failure, whether or not we should be participating in the marketplace
given how overinflated we saw [it]. There was a constant debate about that. There
was unquestionably an awareness that this was not sustainable.
Malena
Lopez-Sotelo: On those internal debates
or those concerns that were put out, did any changes occur within your time
there, whether it’s business practice, for example?
Paul Needels: Well, yeah, we got out of the subprime business. But, I'd say the biggest change is the market fell apart,
and we couldn't sell our loans, and we had to sell to Bank of America. I mean,
at the end of the day, that's what changed our practices
was our ability to originate and sell assets. And when the market stopped,
there was no liquidity in the market, it ceased and an entity like Countrywide
lives because it can originate and immediately sell off those assets. You couldn't sell off those assets. You could still originate
them, but you couldn't sell them off. And so, we had
to completely change everything we did because we went with BofA
[Bank of America], which was completely risk averse. And it turns out it was a
horrible acquisition for them, just disastrous for them.
Malena
Lopez-Sotelo: On the topic of the
transition from Countrywide to Bank of America, what was the culture like at BofA when your team began to transition into the company?
Paul Needels: The BofA people were very
professional. It was just a very different culture in that it was very
bureaucratic and layer upon layer upon layer of control, extremely slow moving,
and very, very risk averse. So much so that after a while, they worked on
bridging in the wholesale group into Bank of America, they shortly thereafter
closed it out. They then sold the correspondent group to PennyMac, so then they
got out of third-party lending altogether, so obviously everything changed.
Malena
Lopez-Sotelo: Were there any additional
challenges outside of the culture that you experienced within Bank of America?
Paul
Needels: No.
The main challenge with BofA is it was so large. Your
ability to really do anything as an individual was challenging. It was just a
giant model.
Malena
Lopez-Sotelo: Did your role change at
all during your time there?
Paul
Needels: Not
really. I was on the transition team, and it was designed to be an interim
position.
Malena
Lopez-Sotelo: These are some concluding
questions. Over the last decade, we have seen a number of
different narratives emerge to explain the financial crisis. How do you
understand what caused that crisis?
Paul
Needels: The
mispricing of risk is how I would surmise it. If at Countrywide or Washington
Mutual or anywhere else, if the markets were properly pricing risk, we would
not have been able to originate the loans that we did. So
at the end of the day, that's the failure. It's pretty
simple. Risk was completely mispriced. So, if you can get somebody to buy your loan that should be at par, but the
reality is because of the risk, it should be greatly discounted. You're going to generate those all day long, because
somebody's paying you above market. That's what
happened. And this goes to the rating agencies, the Moody's and the like. There
was obvious either incompetence or some kind of corruption
that led them to not properly assess the systemic risk that the market was
facing with the kind of lending practices that were commonplace. What I'd say is, just because you can do something doesn't mean you should do something. It's pretty clear that the industry should not have
originated many of the loans that they originated. But they could, and
unfortunately, they did. But again, it goes back to—the risk was mispriced.
Malena
Lopez-Sotelo: To what extent do you see
your personal experience as adding something important to our understanding of
what happened in the run up to 2007 and ‘08?
Paul
Needels: I
have no idea, because I have no idea what you've
learned or know. So, I have no idea.
Malena
Lopez-Sotelo: Looking back on the
crisis over a decade later, what do you see as its most important lessons for
mortgage lenders?
Paul Needels: Just because you can doesn't mean
you should. Sometimes you should just walk away. Again, there's money there,
but is that who you are, and is that good for the community? Don't
be such a profit whore. Take a long view.
Malena
Lopez-Sotelo: Thank you for that
reflection, Paul.
[END
OF SESSION]