Paper Economy: Mozilo’s Bluff

As the sub-prime market continues to unwind it would be easy to feel almost sad to watch as desperate mortgage lenders, particularly their CEOs, struggle to hang on if it weren’t so ironic.

For about a decade now the mortgage lending industry has worked tirelessly to provide virtually anyone, good credit or bad, collateral or zero-down, commensurate income or undocumented with debt that would have been considered exceptional during any prior era.

Gone were the days of “rule of thumb” lending limits, deposits or mortgage insurance, replaced by an ever increasing menu of “exotic” mortgage products purportedly created to suit the present modern needs of the market.

There were many “independent” observers, inside and outside the mortgage industry, who justified and even supported the implementation of this lowering of credit standards.

Famously there was Alan Greenspan’s testimony back in 2004 when he suggested “many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade,”.

Not as well know though are the numerous mortgage industry “analysts” and insiders who worked tirelessly to justify the new mortgage products while they downplayed the risks as well as the possibility of things ending up in the predicament that we see today.

Two notable names in this category are Barry Habib CEO of the Mortgage Market Guide, and Michael Youngblood, analyst with Friedman Billings Ramsey & Co. both of whom, even very recently, continued to express support for “toxic” mortgage products as well as deny risk that they introduced into the industry.

But probably worst of all are the recent, subtly desperate attempts by Countrywide Financial CEO Angelo Mozilo as well as his executives to calm the market especially as it relates to the interest of their organization.

Speaking to CNBC’s Maria Bartiromo yesterday Mozilo suggested that Countrywide will actually benefit from the sub-prime melt-down (WATCH THE FULL VIDEOS ON BNN! Part 1 and Part 2):

“This will be great for Countrywide at the end of the day because all the irrational competitors will be gone.”

Mozilo then continued on at length about a few very key items that if put under further scrutiny shows definitively that he is truly feeling pressure and, in an attempt to manipulate a more desirable outcome, is beginning to show his cards.

First, Mozilo suggested that of all the loans originated by Countrywide, only 7% are considered sub-prime.

It only takes a quick pass at their financial disclosures to see that what Mozilo was actually referring to was the results for February 2007.

In actuality, Countrywide produced closer to 10% sub-prime loan for the full year 2006, a fact that was even noted by Countrywide CFO Eric Sieracki last week during a Raymond James-sponsored investment conference.

Additionally, roughly 15% of all loans originated by Countrywide in 2006 are considered Alt-A leaving a astounding 25% of all 2006 originations squarely in the category of extreme risk.

Second, Mozilo attempted to persuade Maria and the viewers that his concern is really with the country, who apparently in his mind, will be severely damaged if they are prevented access to Countrywide’s services.

“My concern, Maria, is for… the Country, and for first time homebuyers who are the beginning of the housing chain. And the only way that lower income minorities can get into middle income.. the primary way is through housing.”

This can only be described as one of the most disingenuous, preposterous and, in fact, reprehensible presentations of the realities behind the sub-prime lending environment as has ever been offered.

As we have seen in the past decade, sub-prime lending has time and time again been shown to be biased and advantageous at best and predatory at worst.

Millions of people of moderate income including minorities, the elderly and recent immigrants have been falling prey to unscrupulous lending practices leading to a nationwide wave of state and local laws that attempt to regulate dishonest lenders.

Countrywide may not necessarily be in the worst category of lender but as anyone who has listened to the radio or watched TV in recent years can tell you, Countrywide is probably best know for its advertising of teaser loans such as their “Combo Loan” that seeks to persuade homeowners to refinance all their debt, including automobile and revolving credit into their home loan.

There’s nothing like providing services for financing cars or some Lord and Taylor purchases over 30 years to help strengthen the middle and lower income strata of the country.

Mozilo then paradoxically goes on to suggest that the problems with the mortgage market is not the loan products but the borrowers themselves.

“These are not new products nor are they exotic products… [the problem is that] some of these products were sold to people they shouldn’t have been sold to… the loans themselves are not problematic.. its who they were sold to and how they were used.”

Mozilo then struggles to suggest that the problems they are seeing now are as a result of making “good” loans to investors and speculators to buy investment properties.

Clearly, this is certainly partly true.

Rampant speculation was an obvious factor in the housing boom but attempting to suggest that all the defaults and delinquencies are coming from borrowers that are attempted to game the system and not the lending industry is purely disingenuous.

Mozilo further misses the point when he suggests that the “rules are changing” on first time home buyers, limiting refinance activity and leaving them stranded with bad loans.

“These first time homebuyers that are in homes who need to refinance because the resetting now can’t get refinancing simply because the rules changed on them after the game started.”

Again, this is true and certainly highlights a potentially enormous problem soon to materialize in the housing market but Mozilo completely and disingenuously forgets to mention that it was the lenders that got these first time homebuyers into bad, rate resetting, loans in the first place.

Finally, Mozilo mentions just a bit about the indemnifications that Countrywide provides on the loans they sell to larger financial institutions. This, of course, is the “Achilles Heal” of their business.

As was seen with New Century Financial, as loans went bad and loan holders called in this indemnifications, the cost far out paced what New Century had reserved.

Will Countrywide fair any better… Mozilo suggests it will.

In a final thought, last week there was a widely publicized “urgent” email which specified that brokers were to no longer provide any 100% financing deals as of March 12.

"Please get in any deals over 95 LTV (loan-to-value) today!... Countrywide BC will no longer be offering any 100 LTV products as of Monday, March 12."

This event was very reminiscent of the complete about-face publicized by New Century Financial last October when, in a public release, they stated that they would virtually completely adopt all the provisions that the Federal Reserve had suggested for better managing risk in their operations.

Obviously though, these reforms, if even implemented, were too late incoming for New Century and one has to wonder, with all the possible “smoke and mirrors” currently being presented now by Countrywide executives, whether they are seeing their dynasty slip fast away as well.

Wednesday, March 14, 2007

Mozilo’s Bluff