Countrywide's Home Sweet Loans

There's no denying that Angelo R. Mozilo is a thrill seeker. Last winter, the 53-year-old vice-chairman of Countrywide Credit Industries Inc. made his first--and last, he promises--attempt at helicopter skiing. Airlifted to the top of an especially treacherous run in the Canadian Rockies, Mozilo schussed his way to the bottom--but only after cracking a few ribs along the way. "I do like to beat myself up," laughs the deeply tanned executive of the Pasadena (Calif.) mortgage banker.

Unfortunately for Mozilo's competitors, he has applied that same adventurous spirit to his business dealings. And the rest of the mortgage-banking industry can be excused for feeling pummeled lately. Dismissed as an also-ran less than three years ago and still relatively unknown, Countrywide has emerged rather suddenly as the top home-loan originator in the nation, nudging past perennial powerhouses Prudential Insurance Co. and Norwest Corp. Thanks to aggressive pricing--as well as a 19-year low in mortgage rates and a subsequent rush by homeowners to refinance existing loans--Countrywide is expected to originate $30 billion in mortgages this year (chart).

The revenue boom has munificently stoked Countrywide's bottom line. Earnings in the fiscal year that ended last February soared 170%, to $60.2 million on $246 million in revenue. Analyst Jonathan E. Gray of Sanford C. Bernstein & Co. expects earnings to more than double again this year, topping $136 million.

Although companies such as Countrywide are commonly referred to as mortgage bankers, it's a misnomer. They aren't really banks in that they don't have charters or collect deposits. Instead, they borrow funds from the capital markets and then originate their own mortgages, often through referrals from mortgage brokers. They also purchase mortgages from other lenders, such as banks. Mortgage bankers usually sell the loans to intermediaries, such as the Federal National Mortgage Assn. Mortgage bankers make most of their money from upfront finance charges, loan sales, and fees for servicing mortgages.

Mozilo founded Countrywide in 1969 with David S. Loeb, a longtime business associate. Originally a tiny company serving only California, it now has 110 retail branches in 26 states. The partners have carved out separate realms. The low-profile Loeb, with the dual titles of chairman and president, directs much of the back-office chores, such as fund-raising and hedging interest-rate exposure. At 68, he is seldom at headquarters, preferring to work out of his home in northern California's Squaw Valley or his Manhattan apartment.

NO COMMISSIONS. By contrast, Mozilo, who runs day-to-day operations in Pasadena, prefers a high profile. A boxer during his early teens, Mozilo displays his combative nature hunting for new business in the increasingly competitive mortgage industry. Says Howard Levine, president of ARCS Mortgage Inc. and a longtime friend: "Angelo will do whatever it takes to be No. 1."

That was graphically demonstrated when interest rates began declining in 1990 and the volume of mortgage refinancings ballooned. Mozilo feverishly chased new business, purchasing billions of dollars in fixed-rate mortgages from banks and thrifts that wanted to reduce their interest-rate exposure. He also vigorously marketed Countrywide's services to mortgage brokers. Last year, 75% of Countrywide's mortgages were acquired from other lenders or through brokers. The remainder were made through its own offices. Mozilo helped fund the expansion with $346 million raised from three separate public stock offerings last year.

Although Countrywide's soaring volume has attracted the most attention from analysts, a major reason for the company's profit success has been low costs. In the 1970s, Mozilo did away with high-priced commissioned salespeople, replacing them with salaried underwriters. That has made Countrywide's low expense ratios the envy of the industry. As loan volume has climbed, Mozilo has offered even better deals to borrowers by reducing finance charges, which are better known as points. Countrywide was recently charging 0.25% of the loan amount for a 30-year, fixed-rate mortgage; competitors get 0.5%. Sanford Bernstein's Gray calls Countrywide the Charles Schwab of mortgages.

Even though Countrywide had to add 1,200 employees in the past year to keep up with business growth, Mozilo has found ways to pursue efficiencies. He has spent $25 million over the past three years to upgrade Countrywide's computers. And an artificial-intelligence underwriting system, expected to be rolled out next year, should reduce the time to process some loan applications from 40 minutes to 10 seconds.

PICKY IS PRUDENT. While they're finally out in front of their rivals, Mozilo and Loeb may have trouble staying there. In Countrywide's rush to originate mortgages, say competitors, the quality of its loan portfolio could easily suffer, though that won't be apparent for some time. "In our business," warns Marvin I. Moskowitz, chief executive officer of Prudential Home Mortgage Co., "you don't know you're making bad loans until a couple of years later."

Countrywide securitizes and sells its loans, but it could still be forced to take back bad loans if its underwriting proves to be sloppy. Even if underwriting isn't at fault, souring loans could jeopardize Countrywide's relationships with the federal mortgage agencies, which guarantee the loans before selling them to investors.

Then there's the specter of higher interest rates. Right now, refinancings, a hefty 72% of Countrywide's current originations, are continuing at a healthy pace. There's still $1 trillion in mortgages outstanding nationally, with rates of 9% or higher. But with rates expected to rise in coming years, Countrywide's boom days may be numbered.

So far, Mozilo appears unfazed by such concerns. He insists that Countrywide won't jeopardize credit quality as it grows, noting that at the end of March, only 3.4% of Countrywide's mortgages were 30 days or more past due, vs. the industry's 4.5% average. He says he's lowering his exposure to the weakening California real estate market while expanding into states such as Utah, Pennsylvania, and Michigan. "I could do $100 billion this year and have 10% of the market," Mozilo insists. "The only thing restraining us from doing that is we want to originate quality loans."

As for the possibility of higher rates, Mozilo believes that mortgage rates will rise by only two percentage points at most in the next five years, to a little over 10% for a 30-year, fixed-rate loan. If he's wrong, there's always Countrywide's highly remunerative mortgage-servicing business. Fees from such chores as collecting payments and generating monthly statements accounted for 31% of Countrywide's profits last year. And Mozilo is determined to increase that share as a hedge against a possible fall-off in lending. Countrywide's servicing portfolio has doubled in the past year, to $33.4 billion.

For now, Mozilo is relishing his spot at the top of the heap. With good reason: He received $1.9 million in salary and bonuses last year. That's more than either Banc One Corp. CEO John B. McCoy or BankAmerica Corp. chief Richard M. Rosenberg earned in 1991. Mozilo is even planning an encore to last year's helicopter skiing: bungee jumping. Clearly, he's gambling that the rewards from his many ventures will more than keep pace with the risks.