Countrywide Feels the Heat
Angelo Mozilo, CEO of Countrywide Financial (CFC), is taking serious flak for the mammoth mortgage company's role in the housing meltdown. I caught up with Mozilo twice in the space of a week—first for an exclusive interview on CNBC following Bank of America's (BAC) $2 billion infusion into Countrywide, and then on the heels of a New York Times story taxing Mozilo and Countrywide with allegedly engaging in questionable lending practices.
Now sources tell me the embattled Mozilo will soon announce layoffs of about 10% of Countrywide's 60,000 employees in the face of a 20% decline in the mortgage business. In addition, I am hearing that Countrywide is looking for further financing and that the next investor will likely come from private equity. When BusinessWeek magazine went to press on Aug. 29, Countrywide's stock had lost about half its value since June 1. That was the same day that Senator Chuck Schumer (D-N.Y.) urged Countrywide to halt "predatory" lending practices.
Since our interview on CNBC, you've been criticized, first for offering aggressive loans to people who should not have taken them and next for screaming that a recession is coming while still offering lax lending, because those loans were so lucrative for Countrywide. Your response?
I don't remember screaming, first of all. But let me just tell you that Countrywide for 40 years has been on a mission to lower the barriers of entry for the American people to have the opportunity of home ownership. And every application we take is within that framework of making certain as best we can that these individuals can afford the home.
And so my response is simply that we have not been an opportunist but have created opportunities for individuals and families to own a home. We've made 25 million loans in the 40 years we've been in existence. We hold about $1.5 trillion in loans today in our servicing portfolio. And we work very hard not only to position people to own a home but also to educate them on the responsibilities of home ownership.
What was the main driver of the mortgage boom—the desire to own a home or the Street's insatiable desire to buy up mortgages, repackage them, and sell them to hedge funds and other investors?
The main driver was real estate values rising. And when they begin to rise—no different from the tech boom—everybody at all levels of society wants to participate. They don't want to be left behind. And that's particularly true with home ownership, which [comes with] a passion to make a profit, to own something, to have a piece of America. But there's no question there were speculators who were trying to make a quick profit.
Did you tailor your business accordingly as this was happening?
Remember, we didn't reach out to home buyers. They came to us. And as prices went up and interest rates were at a palatable level, we began to tailor programs to see if we could assist these people in getting into homes.
Subprime was a very profitable part of your business. Did the company push these types of loans over others because they were such commission generators and money makers?
We did not. I mean, our subprime company, which was Full Spectrum, offered them. But if a prime loan came through that subprime arena, that loan had to close at a prime price, not at a subprime price. And the reason why the subprime prices were higher is because they were about four times more expensive to originate than a prime loan. It was more difficult to get documentation. We had a lot of counseling involved.
It's important to understand that everybody has experienced substantial losses. So it's not a matter of the borrower paying too much. There wasn't enough that could be charged because, you see, every company that was involved with subprime is either out of business or going out of business or has substantial losses. After the debacle in subprime, the conclusion that people charged too much is absurd.
But only recently did Countrywide stop making risky mortgages, like so-called liar loans, which require little verification of borrower information. Why did you let underwriting standards become so lax?
Well, I don't agree that the standards became lax. On every loan we made, we believed when we made it that the individuals were qualified for the mortgage product that they asked for. We had 184 programs. They picked the one that they wanted. And we adjusted our underwriting in certain categories based on rapidly changing market conditions. We're never lax. But there was no way that anybody could foresee what would happen. These were common practices that were done by every single institution in the country, be they large or small. You know, the words being used here, they're very incendiary words…
On Aug. 26, a New York Times article suggested that Countrywide steered borrowers into higher-cost mortgages when they would have qualified for lower ones under traditional standards. Why did you choose these strategies?
[Countrywide] didn't choose those strategies. This is not true. You have to consider the source. People [in the story] refused to identify themselves. This is all anonymous. You know, it's very easy to indict people and not be responsible for the words that you choose. I don't think a lot of people were interviewed. I think there was an allegation from one person.
You've got to remember that this was an environment where values were rising very rapidly and everybody thought that this was a gold rush. And they wanted to be in real estate and would say anything, do anything—not everybody, but certain people—in order to participate in the rising-value environment. And by the way, while values were rising, we heard none of this. Not one complaint. Not one person saying: "I've been abused, misused. I've been steered into something I didn't want." None of it until values came down.
I can tell you this, Maria, we have modified over 40,000 loans so far this year to try to keep people in homes at our expense. And so this company is the antithesis of what was described in that article. This is a great company that has solid values. It was never about taking a group of people or a certain amount of loans and exploiting them for inordinate profits. You know, the press is losing credibility with me because I've seen article after article that have absolutely no basis in fact, but there's nothing anybody can do about it. The press can say anything it wants without retribution.
So what about the Neighborhood Assistance Corp. of America, the nonprofit housing advocate that is making some of these allegations?
I don't know much about the organization, but from the little bit I've heard, I've got some questions about their credibility. If you study what they do, they attack lenders.
Let's talk about Bank of America's investment. Could you have gotten any better terms for Countrywide? It's a terrific thing for Countrywide. Terrific. There's only one Bank of America. There's only one marquee name like that. And so what it provided Countrywide was credibility. They came in and did their due diligence, and the conclusion was that we were a great investment for them. For a company of that quality to attach themselves to Countrywide was priceless to us. I hope they make lots of money on this transaction, because if they do, our shareholders will, as well.
Are you looking to bring in more investors?
We look continuously. This is a living organism. Countrywide continues to operate in an environment that's changing constantly around it. And the reason why we've survived over many years and nobody else has in the mortgage banking space—nobody else has, we're the only survivor—is because Countrywide constantly adjusts itself to the environment. And so we will do whatever the environment dictates that we must do to make certain we remain a viable player going forward.
Will you bring in private equity money?
We have had a lot of people approach us over the last several months…and what we do going forward will really depend upon how the company is positioned relative to the market that we find ourselves in.
So what will determine whether the Bank of America investment, in addition to the $11½ billion credit line Countrywide has tapped, will be enough for the near term?
Again, the business environment, what happens in the mortgage origination space, and what happens with interest rates going forward. You could have a refinance boom going forward, and that would create one situation. As you see, real estate sales are down. Real estate values continue to go down, which breeds dissatisfaction on the part of people out there who bought houses thinking they were going to make a profit. And so it just depends. You just have to have confidence that Countrywide will continue to morph.
What do you regret most about your business practices or not seeing this downturn earlier in the last six to eight months?
I reflect on this all the time. But by the way, nobody called and asked me these questions a year ago. Nobody called me and said: "Hey, look, there's going to be a real problem here in subprime." Knowing what I knew then, I don't think I would have done anything much different. Knowing what I know now, obviously I'd do a lot of things differently.
But we didn't know that values would be receding. We didn't know that these markets would seize up. We didn't know that there would be no liquidity in the global system. We didn't know that Bear Stearns (BSC) and Lehman (LEH) and people of that quality were going to have major problems. We didn't know that funds were going to collapse around the world. And we didn't know that most of our competitors would go down, such as the New Centurys and NovaStars of the world. We didn't know any of that. You can only deal with the information that you have at the time you're making these decisions. And I had very different information then than I have now.
But not so long ago you called Countrywide a prime company, with subprime accounting for only 7% of the business. You lambasted the poor underwriting standards of other lenders. And then in March, I remember you came on my show and said Countrywide would benefit from the subprime chaos as irrational lenders got blown out. Why do you think the events turned out differently?
They didn't. They have been blown out. You know, the Ameriquests, the New Centurys, the Own Its—just go through the whole list of them—are gone. So they have been blown out. And over time Countrywide will be the beneficiary.
There's been speculation that the Federal Reserve lowered the discount rate specifically to prevent Countrywide from going under after it couldn't draw on the commercial paper markets for capital. What do you think?
Absolutely not. I think that's placing an inordinate amount of importance on Countrywide. This deal [with BofA] was struck long before the discount rate was changed.
Have you had contact with the Fed?
I've had no contact with the Fed whatsoever, with the exception of a single transaction that had nothing to do with the issue we're talking about. A very specific transaction in New York. But not with the Washington Fed at all.
But don't you think it's curious that on the day the banks go to the discount window, Bank of America included, it announces the $2 billion investment? Do you think at some point the Fed in some way encouraged Bank of America or one of the other banks to get involved?
That would be very speculative on my part. That's for you journalists [to speculate about]. Frankly, I'd be surprised. I know of no connection whatsoever.
How much more pain is still to come in the mortgage market? What's the worst-case scenario?
I can't say I see any great signs of light in terms of the market easing. There's still a lot of tension in the [mortgage] market, a lot of stress in the financial markets. But the only thing I would say is that a couple of weeks ago you probably couldn't do anything at any price, and now it appears you can do something at some price. So, you know, maybe there is a little bit of liquidity coming back. But it's hard to tell how long this is going to go on.
How helpful would it be if the Fed lowered rates in September?
If nothing else, it would have a great psychological effect and demonstrate that the Fed is really concerned about the impact that housing could have on the rest of the economy.
You've said repeatedly that you see a recession ahead and have never seen housing not take us in and out of recession.
There's a recession in housing. I don't think anybody can debate that. Prices continue to go down, as evidenced by the National Association of Realtors numbers. Sales are down 12 months in a row [actually 16]. And you see what's happening to homebuilders. The question that can be debated is whether this is going to spill over into the economy in one form or another. I think it is.
Given your position, how responsible is it to keep predicting recession and how does that benefit your shareholders?
I think it's my responsibility to everybody at Countrywide and to the shareholders that I tell them how I feel, that I tell them how I believe it is. It may not be the way it is, but it's the way I believe it is. I think my responsibility is to tell the truth. And I have to accept the consequences of that.
Let me turn to another source of upset, and that is you selling stock. You've made more than $100 million just in the last year. How do you answer people who say it is wrong for you to be selling while shareholders watch their shares drop?
I have not sold any stock—to my recollection—in 10 years. Everything I've sold were options. The selling is because [when the options] expire, I no longer have the benefit of what I have built and what this team has built for the last 40 years. Up until this debacle, I created $25 billion in value for shareholders. There have been very few—only about 11 stocks—that have performed better over the last 25 years than Countrywide. I could have sold all of those shares at 40 bucks a share and didn't because I want to be aligned with the shareholders.
Also, I have to have an orderly way of selling the stock. I could sell everything today, but I don't. If anything, I have frankly gone overboard to protect the interest of the shareholders, sometimes at the expense of my family.
Did your planned selling accelerate beginning last fall?
Let me see, there were two contracts involved. One, I think—I don't know when these things originate—was in October and one in December. And they didn't accelerate. There was just an additional contract put on, I believe in December.
Have we seen the worst at Countrywide?
I can only say that we continue to do everything we can to make certain that we're prepared, but we're facing an environment that's unpredictable.