Countrywide's Angelo Mozilo: He Warned Us—But Washington Didn't Want To Know
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The Securities and Exchange Commission filed an insider-trading civil suit earlier this month against perhaps the most widely loathed wheeler-dealer of the Housing Bubble: Angelo Mozilo, co-founder and longtime CEO of Countrywide Financial Corporation, the largest mortgage lender at the peak of the boom.

The Economist writes: "As is the way these days, the SEC's case rests largely on internal emails." [Accusing Angelo June 5, 2009]The SEC released excerpts from Mozilo's emails to even more aggressive Countrywide executives in which the boss privately questioned his own firm's new lax credit products. For example, on April 17, 2006, he sensibly lambasted Countrywide's subprime 80/20 loans (in which borrowers would fund their nominal 20 percent downpayment by taking out a simultaneous second mortgage)
"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[.]"
Unfortunately, Mozilo's intermittent spasms of skepticism didn't have much effect—because he was also:
  • Imploring government regulators to allow more zero down payment mortgages and liar loans in the name of fighting racist redlining;
  • Publicly reassuring investors about the creditworthiness of Countrywide's increasingly bottom-of-the-barrel borrowers;
  • And…accelerating his own stock sales.
In February 2007, Countrywide's shares peaked at over $45. The following summer the subprime resale market collapsed, setting off the current global economic collapse. Mozilo was lucky to talk hapless Bank of America into buying Countrywide in 2008 for less than one-tenth of its peak price.

Still, you can't say that Mozilo didn't warn you in countless speeches over the years that Countrywide's corporate strategy depended upon pouring colossal sums down the rathole of lending to "underserved Americans" (i.e., minority and lower income borrowers).

For instance, in the top story in National Mortgage News on February 17, 2003:

"Mr. Mozilo labeled downpayments as 'nonsense' and said credit score requirements are 'still much too high.'… the outspoken industry leader called on his colleagues to 'take a chance on making mistakes rather than foreclose on the opportunity' to put minorities and other underserved families into homes of their own."

Or consider Mozilo's January 14, 2005 press release that trumpeted Countrywide's commitment of one trillion dollars through 2010 to politically favored groups:

"The $1 Trillion We House America Challenge … embodies Countrywide's long-standing commitment to lead the mortgage industry in closing the homeownership gap for minority and lower-income families and communities," said Countrywide Financial Corporation Chairman and CEO Angelo Mozilo…
And that was up $400 billion from the $600 billion Mozilo had promised in 2003 during a prestigious Harvard address entitled The American Dream of Homeownership: From Cliché to Mission.

I may have mentioned this before—but a trillion dollars here, a trillion dollars there, pretty soon we're talking about real money.

And that trillion dollar figure was not just talk. Mozilo testified to Congress on March 7, 2008:

"To date, we have met $850 billion of that goal, and we remain committed to beating the goal by 2010."

Countrywide's reckless strategy in 2005-2006 is readily visible in the federal government's Home Mortgage Disclosure Act database. This graph shows Countrywide's subprime lending in just the Riverside-San Bernardino exurbs of Southern California, which are home to close to one-tenth of all the defaulted dollars in America. In the Inland Empire, Countrywide quintupled its subprime lending in one year, with the great majority going to minorities.

This 2005 data was downloadable by investors and journalists in October 2006, months before Countrywide's stock price reached its apogee. But who would be so uncouth as to use the HMDA database to raise doubts about minorities' ability to repay mortgages? The HMDA exists to help the federal government and community organizers drive more lending to minorities, not less!

The roots of Countrywide's catastrophic trillion dollar pledge go back to the early years of the Clinton Administration. As Steve Malanga explained in the Spring 2009 City Journal:
"Pressuring nonbank lenders to make more loans to poor minorities didn't stop … If it didn't happen, Clinton officials warned, they'd seek to extend [Community Reinvestment Act] regulations to all mortgage makers. … To rebuff the criticism, the Mortgage Bankers Association (MBA) shocked the financial world by signing a 1994 agreement with the Department of Housing and Urban Development (HUD), pledging to increase lending to minorities and join in new efforts to rewrite lending standards. The first MBA member to sign up: Countrywide Financial, the mortgage firm that would be at the core of the subprime meltdown."[Obsessive Housing Disorder]
Interestingly, the Secretary of Housing and Urban Development who signed that 1994 deal with Countrywide was Henry Cisneros, who later served on Countrywide's Board of Directors from 2001 to 2007, the Bubble Years. Cisneros made over $6 million from Countrywide fees and stock options.

In his 2005 "$1 Trillion We House America Challenge" press release, Mozilo announced:

"We have also called upon one of our esteemed directors, the Honorable Henry Cisneros … Henry will put to use his long and respected experience as an advocate for affordable housing who understands the benefits to communities of homeownership."

Cisneros chimed in:

"Countrywide's $1 trillion commitment is very tangible proof of this company's commitment to fair, affordable and responsible lending. This company is leading the industry in closing the homeownership gap …"

An October 18, 2008 New York Times article about Cisneros by David Streitfeld and Gretchen Morgenson, Building Flawed American Dreams, recounts:

"But until recently getting a mortgage was a challenge for low-income families. Many of these families were minorities, which naturally made the subject of special interest to Mr. Cisneros, who, in 1993, became the first Hispanic head of the Department of Housing and Urban Development. He had President Clinton's ear, an easy charisma and a determination to increase a homeownership rate that had been stagnant for nearly three decades. Thus was born the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all."
Cisneros rationalized to the NYT:
"It was, he argues, impossible to know in the beginning that the federal push to increase homeownership would end so badly. Once the housing boom got going, he suggests, laws and regulations barely had a chance. 'You think you have a finely tuned instrument that you can use to say: 'Stop! We're at 69 percent homeownership. We should not go further. There are people who should remain renters,' he says. 'But you really are just given a sledgehammer and an ax.' "
Mozilo was hardly a victim of the politicians, however. They were co-conspirators.

For example, Mozilo notoriously provided special discount mortgages to a host of politically connected "Friends of Angelo," such as the chairman of the Senate Banking Committee, Chris Dodd (D-CN).

Mozilo pocketed an estimated $387 million from 2002 through 2006. As it turns out, of course, it would have been cheaper for all concerned if the Friends of Angelo in Congress had simply voted to give $387 million of the taxpayers' money to Mozilo.

A tell-tale sign: According to his employment contract, Countrywide paid $95,000 annually for Mozilo's "country club dues at Sherwood Country Club in Thousand Oaks, CA, Quarry Country Club in La Quinta, CA and Robert Trent Jones Golf Club in Gainesville, VA." Why did the Southern California financier belong to a golf club in the Washington D.C. suburbs? Obviously, to aid in schmoozing Washington politicians, regulators, and Fannie Mae / Freddie Mac executives, who bought vast quantities of mortgage-backed securities from Mozilo.

Back when Mozilo was riding high, Jeff Bailey's New York Times profile of him pointed out:

"By buying his mortgages and thus freeing up his capital to solicit even more business, Fannie and Freddie are a big reason Mr. Mozilo has driven Countrywide past the Citigroups and the Wells Fargos to the top of the mortgage heap. 'If it wasn't for them,' he said of Fannie and Freddie, 'Wells knows they'd have us.'" [The Mortgage Maker vs. the World, October 16, 2005]
(By the way, from the Unfortunate Metaphor Department:
"'We didn't really know what we were buying,' said Marc Gott, a former director in Fannie's loan servicing department. 'This system was designed for plain vanilla loans, and we were trying to push chocolate sundaes through the gears.' "[Pressured to Take More Risk, Fannie Reached Tipping Point, Charles Duhigg, New York Times, October 4, 2008])
It's crucial to understand the subtle way in which government pressure for more minority lending affected the mortgage industry—selecting for success those executives like Mozilo who were both wildly ambitious and true believers in the diversity mantra.

As I pointed out in my analysis of the 2008 failure of Kerry Killinger's Washington Mutual after it had pledged $375 billion in CRA lending to win FDIC approval for acquisitions, the government can't force financial institutions to lend to likely deadbeats. You can always stay small and under the radar.

What the government can do, using a host of threats, is block from growing big those firms whose executives don't share its dogma that lending more to minorities is a great idea.

Further, the government can excommunicate with anti-discrimination lawsuits anybody who expresses his skepticism on paper (or pixels). Imagine if a financial executive's private emails turned up in discovery for a lawsuit had read: "Why are we lending so much money to Mexicans in the Inland Empire? How can Mexicans ever pay off these huge mortgages?" He would have been flayed alive in the press and in the courts.

So nobody in Corporate America puts their Doubts about Diversity into text where plaintiffs' attorneys can later read them.

And that means they mostly don't get communicated anymore—which explains much about why the Mortgage Meltdown, which has been highly concentrated among minority borrowers, was a surprise to so many.

Over the decades, the federal government changed the entire culture of the mortgage industry from penny-pinching skeptics to politically correct pollyannas.

Nobody took less persuading, however, than Mozilo. He always felt discriminated against by the old WASP financial elite. He said: "At least in my generation, when you are Italian in the financial services industry, you are terribly underestimated. A natural reaction for some in the financial community was to infer or suggest that perhaps you were associated with the Mafia."

Bailey's 2005 NYT article about Mozilo begins:
"A touch of resentment—based on income, education, social class—motivates countless ambitious people, though few will admit to it once they become successful. An exception is Angelo R. Mozilo … Modest origins—a butcher's son from the Bronx who worked his way through Fordham University—drove Mr. Mozilo to push Countrywide past the mortgage businesses of far larger companies, including Citigroup, Wells Fargo and Washington Mutual. He readily admits to having a chip on his shoulder …"

Connie Bruck's fairly sympathetic new article, Angelo's Ashes: The man who became the face of the financial crisis, in the June 29, 2009 New Yorker (an abstract is online here) documents

just how driven Mozilo always has been by his Commitment to Diversity. Mozilo's sister told Bruck:
"He was always this Italian guy people didn't want to accept. When he tans he gets really dark. My mother told me that when he worked in Florida he was asked to sit in the back of the bus."

(Actually, in many photographs, Mozilo looks less brown than orange, more like an Oompa-Loompa in Willy Wonka and the Chocolate Factory, or the victim of a bad spray-on tan.)

Bruck notes:
"Mozilo always saw himself as providing mortgages to many who were like him — disenfranchised. ('So they're not upper-middle-class white people—so what?' he would say. 'They're Hispanics, and maybe their money is not in a bank—but they are responsible.')'

Bruck's article suggests that Mozilo actually believes what he told Congress in 2008:

"By the early 1990s, the government had recognized the obvious truth that our housing finance system was leaving major segments of society behind. In 1992, a landmark study by the Federal Reserve Bank of Boston made it clear that there were systemic underwriting issues relating to the treatment of African American and Hispanic borrowers. Policymakers called upon the mortgage industry to change their practices and redouble their efforts to better serve minorities and underserved communities. While many in the industry discounted the Boston Fed study as flawed, at Countrywide, we stepped up to the challenge by creating our affordable lending initiative known as 'House America.' "
Bruck's New Yorker article supports Mozilo's sincerity—or self-delusion:
"… In 1992, shortly after Mozilo became chairman of the Mortgage Bankers Association, the Federal Reserve Bank of Boston issued a report stating that it had found systemic discrimination by mortgage lenders against African-American and Hispanic borrowers. … Mozilo was appalled. He ordered that all Countrywide's records on rejected minority applicants be sent to him, and he retroactively approved about half of them. …"

(This Boston Fed report was the one that Peter Brimelow and Leslie Spencer easily refuted in Forbes Magazine at the time, by demonstrating that it had misunderstood the meaning of mortgage default rates. But no-one, not just Mozilo, wanted to hear that.)

In 2002, a UCLA business professor named Eric Flamholtz suggested to Mozilo the disastrous strategy of trying to grow Countrywide's share of the mortgage market from ten percent to an oligopolistic 30 to 40 percent. But to pursue its goal of market dominance, Countrywide's marginal customers would inevitably have to be drawn increasingly from the ranks of those who had never qualified for a mortgage before: in other words, they'd be largely minority.

Result: Mozilo grew into the ultimate embodiment of the type of financial executive the federal government had been cultivating: a monster of ambition combined with a diva of diversity.

Bruck goes on:
"By 2004, Countrywide had become a leading U.S. mortgage lender to what it called 'multicultural market communities.' Mozilo always described Countrywide's inclusion of minority and immigrant populations as both business and mission, and he had become perhaps the single most important advocate of those who believed in advancing homeownership as a means of achieving a more equitable society."

According to The New Yorker, my kind of thinking about the Minority Mortgage Meltdown is personally and politically offensive to Mozilo:

"Several years ago, at the Midwinter Housing Conference, in Park City, Utah, after hearing some mortgage bankers saying that minorities didn't deserve loans, he declared in a speech, 'Homeownership is not a privilege but a right!' Now he abhors the idea that the retrograde view has gained credence. As the Fox Business Network anchor Neil Cavuto said last September, 'Loaning to minorities and risky folks is a disaster.'"
Sorry about that, Angelo. Tell you what: don't worry yourself about bringing down the world financial system.

[Steve Sailer (email him) is movie critic for The American Conservative. His website features his daily blog. His new book, AMERICA'S HALF-BLOOD PRINCE: BARACK OBAMA'S "STORY OF RACE AND INHERITANCE", is available here.]

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