Mozilo Predicted U.S. Housing Collapse as Fed Overlooked Risk

Former Countrywide Financial Corp. Chief Executive Officer Angelo Mozilo warned as early as 2004 of a possible housing-market collapse while the Federal Reserve overlooked the threat a year later, according to documents released by the Financial Crisis Inquiry Commission.

“Not only at Countrywide, but also with other lenders, there is a clear deterioration in the credit quality of loans being originated,” he wrote to company executives on Sept. 1, 2004. “The type of loans currently being originated combined with the unprecedented stretching of all aspects of credit standards could cause a bump in the road that could bring with it catastrophic consequences.”

Fed policy makers got a mid-2005 staff briefing suggesting the mortgage market had “solid fundamentals” and the officials didn’t believe overvaluation of homes “posed the major systemic risks that we now know it did,” Fed Chairman Ben S. Bernanke wrote to the FCIC last month. The congressionally appointed panel said this week that the crisis could have been avoided through better corporate management and government oversight.

“What this shows is that the Fed had blinders on,” said Geoffrey Miller, director of New York University’s Center for the Study of Central Banks and Financial Institutions. “They had some doubts about the market, but they chose to overlook them because they already had a view. They saw what they wanted to see.” David Skidmore, a spokesman for the Fed, didn’t immediately return a message seeking comment.

SEC Settlement

Mozilo agreed in a record $67.5 million settlement to resolve U.S. Securities and Exchange Commission allegations that he misled investors by not disclosing deteriorating mortgage conditions while he sold his Countrywide shares. He wrote in an e-mail in September 2006 that Countrywide was “flying blind” and had “no way” to determine the risks of some adjustable- rate mortgages, according to an SEC complaint.

E-mail released by the FCIC show that Mozilo issued warnings to his company about the potential for rising defaults two years before that. David Siegel, a lawyer for Mozilo, didn’t immediately return a call to his office.

“Buyers, driven by a strong desire to own a home combined with rapidly increasing values, are stretching themselves beyond any historical standards to get into the home of their dreams,” Mozilo wrote in the September 2004 e-mail released by the FCIC. “The bottom line of my perspective on this trend is that we should seriously consider securitizing and selling” the riskiest portions of the mortgages.

Mozilo didn’t admit or deny wrongdoing in accepting the SEC’s largest-ever fine against a senior executive of a publicly traded company. He was “increasingly concerned” about credit quality in 2005, he told executives Aug. 1 of that year.

Florida Condos

“I feel strongly that over the next twelve months we are going to be facing one of the most difficult and challenging real estate and mortgage markets in decades,” he said in a message released by the FCIC. “I have been in contact with developers who have told me that they are anticipating a collapse in the condo market very shortly” in South Florida, Las Vegas and other “hot” markets.

Countrywide was the third-largest subprime lender in 2006, with about $40.6 billion in the mortgages, compared with $44.6 billion in 2005, according to data from Inside Mortgage Finance. Bank of America Corp., which acquired the lender in 2008, is still adding to reserves for defaults on loans originated under Mozilo.

Mozilo said on April 13, 2006, that his company was failing to follow its own guidelines for safety on some products. “The loans were originated through our channels with serious disregard for process, compliance with guidelines and irresponsible behavior relative to meeting timelines,” he said, and he contradicted an executive who called the mortgages “milk” by referring to them as “poison.”

‘Increased Vigilance’

In 2006, Fed officials “expressed nervousness” about some practices in the mortgage industry, said Bernanke, who became chairman in February of that year. He said he “had in mind increased regulatory oversight” and “increased vigilance” for the implications of housing on interest-rate policy.

Mozilo said in a May 18, 2006, e-mail that the company should “grow our sales force and all other businesses that keep the top line growing.”

To contact the reporters on this story: James Sterngold in New York at jsterngold2@bloomberg.net.

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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