2009 June 07 Sunday
Mozilo Of Countrywide Saw The Mortgage Disaster In 2006

An on-going question I keep asking as I watch powerful people make bad decisions in politics and business is this: Do they understand the consequences of what they are doing? In the case of former Countrywide Finance CEO Angelo Mozilo some commentators I came across months ago claimed Mozilo was a populist believer in what he was doing. In this theory Mozilo thought he was extending credit to deserving borrowers who just weren't able to get credit from staid racist mortgage companies and banks. But emails released as part of criminal charges against Mozilo show in 2006 Mozilo knew Countrywide was issuing terrible toxic loans.

In March 2006, Mozilo wrote that the lender’s program of granting subprime loans for 100% of the value of a borrower’s home was "the most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from [underwriting] guidelines be permitted irrespective of the circumstances."

He was using the term privately before the term toxic entered the mainstream lexicon for talking about loan quality.

Here in April 2006 Mozilo warns then Countrywide President David Sambol about the low quality of Countrywide's subprime loans.

Furthermore, in an April 7, 2006 email to Sambol concerning Countrywide’s subprime 80/20 loans, Mozilo fumed: “In all my years in the business I have never seen a more toxic prduct. [sic] It’s not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400[.] With real estate values coming down …the product will become increasingly worse. There has [sic] to be major changes in this program, including substantial increases in the minimum FICO…. Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production.”

So why didn't Mozilo just order a stop to the issuance of such loans?

Mark Gimein asks why did Mozilo catalog the problems with Countrywide's lending while still sitting by as they happened.

Irresponsible loans to folks lying about their income, toxic zero-down deals, pay-option loans with exploding payments: All the misdeeds that brought the mortgage industry down are cataloged in Mozilo's own e-mails. You would think that with all this coming straight from the top, Countrywide would have been racing to change its practices. But the stunning thing is that this is in no way the case. What's most striking about the Mozilo e-mails is not that he continued to present a rosy picture of Countrywide's prospects to investors. That's dishonest but easy to understand. It's that all those complaints didn't actually change how Countrywide did business.

Gimein advances a few theories. Did Mozilo just want to sell (which he did) a couple hundred million dollars worth of Countrywide stock without spooking the market with a bit cut-back in lending? Were the memoes a form of cover-your-ass where he went on record stating his opposition as if somehow he didn't have the power to stop them? The board of directors made him do it? Whatever his motives, he can't honestly claim ignorance as Countrywide's lending practices contributed to the huge and disastrously damaging housing bubble.

Share |      By Randall Parker at 2009 June 07 08:38 AM  Economics Lending

James Bowery said at June 7, 2009 10:40 AM:

As usual, the ethical problem facing influential people is not that they received ill gotten gains, but whether they then invested those ill gotten gains in fixing the bugs in the environment that presented that opportunity to them.

For example, I don't begrudge Bill Gates the fact that he queered the potential of Moore's Law to become the world's richest man through economic rents arising from the network effect -- I was trying to develop an 8086 OS myself before the first silicon for precisely the reason I saw the monopoly potential.

But the problem with Bill Gates is that he didn't then propose a tax on the net liquidation value of nonhomestead assets as a replacement for taxes on economic activity, and instead took his ill gotten gains to buy social status with the Gates Foundation.

Likewise, Mozilo failed to take his $200M and use it to alert the public to the problems with government imposed affirmative action in mortgages.

Mozilo therefore owes every penny of that $200M plus triple punitive damages and Gates owes every penny in the Gates Foundation plus triple punitive damages.

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