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The Blame Game at Countrywide


Angelo Mozilo usually doesn’t mince words. But the billionaire founder of Countrywide Financial certainly is trying to deflect criticism as his company reported its worst earnings results in years.

Countrywide is the largest, most powerful force in the mortgage market, collecting payments on nearly one-in-five US mortgages. Today the company reported a 33% drop in second quarter earnings. The big problem: losses on home equity loans taken on by overextended borrowers. The company set aside $300 million for credit losses, five times what it had in the same period last year. The company’s shares fell 10% to their lowest level since 2005 and the news shook the whole market.

Mozilo says he was blindsided. “Nobody saw this coming,” he told investors in a conference call. “S&P and Moody’s didn’t, but they simply downgrade bonds. They don’t take hits. Bear Stearns certainly didn’t.” Mozilo’s take seems to be that aggressive lending by mortgage companies had nothing to do with the industry’s troubles: “It was the deterioration in real estate values that was the base cause. We had none of these problems as real estate values were going up.”

Mozilo also blames the Federal Reserve. “The Fed knowing that well over 60% of the loans made were indexed to the Fed funds rate, increased the rate seventeen times. You never knew when they were going to stop. So for a Fed governor to say the lending industry had this coming is unbelievable when the Fed was a contributing factor to this.”

Of most concern to investors is the future of the mortgage market. Mozilo says it will take until 2009 to recover. “It just takes a long time to turn a battleship around,” he says. “This is a huge battleship and it is turning in the wrong direction. It’s going to take 2007 to get this thing slowing down; 2008 to get it to stop and 2009 to head in the other direction.” A big challenge, he says, will be the economy. “I do think that this ultimately has to have an effect on the economy. I just can’t believe the economy is totally insulated from housing.”


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