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The Blame Game at Countrywide

Posted by: Chris Palmeri on July 24, 2007

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.”

Reader Comments


July 24, 2007 8:06 PM

"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."

Not much a business models if it relies on the market only going up. What CFC was doing is akin to Ford ramping up car production during a sales downturn. Mozilo was bailing out of his stock the whole time, he knew it was coming, he just wants to keep people distracted while he cashes out and retires.


July 25, 2007 7:35 AM

In my humble opinion, lenders could have seen this coming, if they considered the "human element."

The "human element" is the strong desire to own their own home, a history of poor personal financial management, and habits. With the strong desire to purchase property, purchasers were willing to accept any loan program to get into a home or do whatever was necessary to procur a loan. People with a history of poor personal financial management could easily be seen by their credit scores and lack of any funds to put towards the down payment or closing costs. These individuals had a demostrated history of not being able to management their finances.

To compound the issue further for these individuals, they could get themselves into financial difficulty, refinance their property and clear their debts. However, with real estate values stagnating and interest rates rising - this practice could no longer continue.

Many of the borrowers that were weak in financial management skills had poor habits. By doing a 2/28 or 3/27 loan program - the thinking was the person would have the opportunity to work to get their credit scores up and would be able to refinance with a better loan program. However, their habits of spending did not change, credit scores did not improve and no refinancing was or now available. If one looks at the timing of when the adjustments for these loan program kicks in it ties directly with Mr. Mozilo's predictions of turn-around and when things will improve.

Red flags should have been popping up whenever a lender saw the preliminary closing statements (HUD-1's) with the buyer receiving cash back at closing on 100% financing programs. Lenders did a poor job on monitoring this aspect.

I did not address real estate investors because any type of investing requires risk - there is no guarantee of invests going up - they do go down. Again, amateur real estate investors got into the market and over extended themselves. They should have been better educated to know how to hedge themselves in case of a down swing.

Frankly, I don't feel any empathy for the corporations taking a hit - they should have been better at monitoring the borrowers history and how over extended they could be for their financial situation. The corporations were driven by the bottom line. It is truly ashame that Wall Street does not add value for corporate social consciousness.

I do feel great sympathy for those individuals that are facing the loss of their homes or struggling financially to hold onto their homes.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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