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by Eric Englund
Angelo
Mozilo is the Chairman, President, and Chief Executive Officer
of the failed Countrywide Financial Corporation. Mr. Mozilo
co-founded this company, nearly 40 years ago, in 1969. To
be in business for almost forty years, and to become America’s
top private home-mortgage lender, are testimonies to genuine
business acumen. However, success can breed arrogance, and
a sense of supreme power, to the point where a corporate chieftain
believes his personal will can override the free market and
reshape society according to a grand vision – which, for Angelo
Mozilo, entailed making America a better country by bringing
home ownership within reach of all and sundry. For Countrywide
Financial, unfortunately, Mr. Mozilo’s dream of social engineering
demanded that sound credit-underwriting principles be abandoned.
And now, Countrywide Financial Corporation’s failure stands
as a monument as to how integrating egalitarianism and political
correctness, into a business plan, is downright poisonous.
February
4, 2003 marks the day when Countrywide Financial’s shareholders
should have dumped every last share of their stock. For on
this day Angelo Mozilo made a presentation, at The Joint Center
for Housing Studies of Harvard University, titled The
American Dream of Homeownership: From Cliché to Mission.
This is the day that Mr. Mozilo revealed to the world that
political correctness had infected his mind. He openly declared
that sound credit underwriting was tantamount to judgmentalism
and, therefore, anti-egalitarian. How dare anyone judge anyone
else – credit standards be damned. Subprime mortgages, accordingly,
were going to be a blessing for America since everyone deserves
a house. Oh how political correctness feels so good. He worshiped
the mortgage socialism hatched in the New Deal along with
every federal-housing program introduced in the succeeding
decades. A true credit professional would have been horrified
by this speech; which indubitably was met with approving applause
by the pseudo-intellectual, limousine liberals populating
Harvard University. February 4, 2003 is the day Countrywide
Financial’s Board of Directors should have fired Mr. Mozilo.
Over
the years, Angelo Mozilo has been handsomely
rewarded by Uncle Sam’s mortgage socialism. Here’s how
it works. Countrywide Financial makes a conforming home loan,
sells it to Fannie Mae or Freddie Mac (both are government
sponsored enterprises), and has its coffers replenished in
doing so; hence, allowing Countrywide to keep churning out
loans. Countrywide, in turn, remains the mortgage servicer
on each loan and earns a fee for doing so. These fees most
certainly add up when you are servicing $1.5
trillion in home loans (not all of which are Fannie and
Freddie loans). Needless to say, Countrywide had other sources
of revenues but mortgage servicing was top-shelf when it came
to profitability.
Thus,
it is no wonder why Mr. Mozilo waxed fondly, in his Harvard
speech, regarding America’s foray into mortgage socialism.
After all, it made him very wealthy. Here is an excerpt:
Our
Nation took another important step in 1938 – in fact, 65
years ago this week – when Fannie Mae was created to buy
those FHA loans, and as a result, the secondary mortgage
market was born. We took a few more giant steps in the 1940s
with the G.I. Bill in 1944 and the Housing Act of 1949,
which stated the goal of "a decent home and a suitable
living environment for every American family." We witnessed
the Fair Housing Act in the 60s, the creation of Freddie
Mac in 1970, the expansion of Fannie Mae’s activities, the
Community Reinvestment Act in the 70s, the introduction
of adjustable-rate mortgages in the 80s, and more recently,
the National Affordable Housing Act of 1990.
We
have traveled so far – thanks to a mortgage-finance system
that remains the envy of the world; thanks to a constant
stream of creative and innovative mortgage products, and
efforts directed at encouraging the offering of loans to
those who have been previously shut out; and simply put,
thanks to housing being an enduring public policy objective
and the lasting commitment to that objective symbolized
by our partnership.
We
have transformed from a Nation of renters to a Nation of
homeowners. The overall U.S. homeownership rate, which was
at 44 percent in 1940, hit 68 percent by the end of the
third quarter of 2002.
One can
only imagine Mr. Mozilo’s broad smile as he delivered these
words. Between his compensation and stock sales, Angelo has
made hundreds of millions of dollars. Socialism certainly
can be beneficial for an elite few.
Do you
remember President George W. Bush’s initiatives
to increase homeownership in the United States? His administration
definitely played a role in creating America’s housing bubble.
When speaking about housing assistance, President Bush evoked
the emotion of envy and declared that the U.S. had a "homeownership
gap." Angelo Mozilo, being a kingpin of political correctness,
couldn’t resist playing the envy-card to an approving Harvard
audience. He stated:
It
started with the New Deal, and now, we’re in a new century.
But through it all, one thing has remained, more or less,
constant. This constant is our challenge. And this challenge
is to increase the access to affordable housing. And in
order to do this, we must close the homeownership gap that
still exists.
As
President Bush said last October:
"Two
thirds of all Americans own their homes, yet we have a
problem here in America because fewer than half of the
Hispanics and half of the African Americans own their
home. That’s a homeownership gap. It’s a gap that we’ve
got to work together to close for the good of our Country,
for the sake of a more hopeful future. We’ve got to work
to knock down the barriers..."
While
the number of minority homeowners has advanced recently,
climbing from 9.5 million in 1994 to 13.3 million in 2001
– an increase of 40 percent – the fact remains that it is
still not at a level equal to that of white homeownership.
And as President Bush pointed out, the homeownership rate
for African Americans is 47 percent and for Hispanic Americans
it is 48 percent, a stark contrast to the homeownership
rate of 75 percent for white American households. That means
there is currently a homeownership gap of over 25 points
when comparing white households with African Americans and
Hispanics. My friends, that gap is obviously far too wide.
It has been far too wide for far too long. And when adding
new factors into the equation – like an influx of new immigrants
or continued reduction in the supply of affordable housing
– it has the potential to become far worse.
Credit
underwriting has nothing to do with race, creed, skin color,
gender, or religion. Sound credit underwriting has everything
to do with the "Five
Cs" of credit – i.e., character, capacity, capital,
collateral, and conditions. Under pure capitalism, a credit
underwriter is not concerned about making people happy by
lending money regardless of a person’s creditworthiness. An
underwriter’s primary objective is to make profitable loans
and this demands nothing less than effectively assessing risk
on a case-by-case basis. This, undeniably, requires underwriters
to exercise learned judgment. Ah, but to say this in the cradle
of political correctness (Harvard) would have been met with
resounding "boos."
To be
sure, Mr. Mozilo did not disappoint his fellow limousine liberals.
He goes on the attack and smears credit underwriters as being
judgmental – the antithesis of political correctness. Considering
that Countrywide had become the largest private mortgage lender
in the U.S., the following words depict a man who had taken
leave of his senses:
I have
two issues with our industry’s current underwriting methodology.
The first is that the automated underwriting systems kick
far too many applicants down to the manual underwriting
process, thereby implying these borrowers are not creditworthy;
and the second issue is that once arriving in the hands
of a manual underwriter, the applicant is subject to basic
human judgment that can be influenced by the level of a
borrower’s credit score.
Let’s
address my first issue. I acknowledge that credit scoring
uses proven statistical methods to provide lenders with
the ability to quantify the risk of extending credit. And
there is little question that the technique effectively
and efficiently separates those with very good credit from
those with questionable credit.
However,
far too many borrowers are being referred to an arduous
manual and cumbersome underwriting process. To me, that
is clear proof that the level deemed to be an acceptable
risk by our automated underwriting systems is much too high.
While many of these borrowers may ultimately be approved,
it is because the manual process, or human underwriter,
has analyzed non-traditional factors such as the borrower’s
rent and utility payment history, which should be imbedded
in the automated underwriting process.
Now,
let me address my second issue, and that is the manual underwriting
process itself. While Countrywide’s own internal evidence
supports the notion that manual underwriters are approving
a good majority of the loan applications that get referred,
the fact of the matter remains that a human is involved
in this step of the process thereby creating the possibility
that a decision is made based upon the level of the borrower’s
FICO score.
Thus,
the current protocol intentionally creates an environment
where borrowers with lower FICO scores are subject to being
disproportionately affected by the manual underwriting process.
I say we need to amend these systems to do more than just
approve the "cream of the crop," by creating a
system that says "no" only to those deemed unwilling
to make their mortgage payments.
We
must understand that the credit scoring system we have built
is still imperfect, and that if we are to have any chance
at closing the homeownership gap, we must make a serious
investment in improving its capacity and capabilities. We
must do this through improved automated underwriting models
that take into account more variables, and measure true
indicators of risk and willingness to pay. We need an ongoing
educational process, not only at the primary market level,
but also in the secondary markets and with mortgage insurers
to help lead this effort to recalibrate the scoring system.
And finally, it must be recognized that borrowers with credit
scores below what is currently defined as "creditworthy"
levels can still be acceptable credit risks. Thus, the credit
score bar dividing creditworthy from high-risk borrowers,
must be substantially lowered by the GSEs, the secondary
market in general, and with bank regulators. The GSEs have
made good progress over the last few years in expanding
their credit criteria, but I encourage them to become much
more aggressive in this regard.
What
Angelo Mozilo desires to accomplish is to replace human underwriters
with computers. He never mentions the Five Cs of credit because
sound credit underwriting requires human judgment; which can
be aided with, yet never replaced by, technology. In Mr. Mozilo’s
daffy world of credit progressivism, he may as well distill
the mortgage application down to a one-page document containing
a single question: Are you willing to make your mortgage
payment? If the answer is "yes" then the loan
is approved and if the answer is "no" then it is
declined. Under such circumstances, a computer would work
perfectly.
As I
have asserted before,
political correctness is an enfeebling infection of the mind.
Mr. Mozilo’s vision of politically-correct, and "enlightened,"
credit underwriting was nothing short of daffy. Yet, one can
only imagine how approvingly this pabulum was met by his Harvard
chums.
Angelo
Mozilo had no intention of disappointing his fellow travelers.
There was hope as to closing the homeownership gap. It was
something called the subprime mortgage. In his bizarre mind,
the more subprime mortgage originations there were, the better
off America would be. To wit:
Historically
low interest rates along with new, creative and flexible
underwriting techniques are continuing to fuel a record
period of growth for our industry. According to the Federal
Reserve, the amount of overall mortgage debt outstanding
is nearly $6 trillion. And, increasingly, the sub-prime
market is boosting that number and the industry as a whole.
During the first nine months of 2002, sub-prime originations
rose an estimated 26 percent over the same period in 2001
– outpacing the overall market.
Had Mr.
Mozilo delivered this speech today, he would have immediately
been fitted into a straightjacket and then driven to the nearest
loony bin.
Countrywide
Financial and many other financial institutions ended up throwing
all credit standards out the window in order to package and
sell as many subprime mortgage-backed securities as possible.
To be sure, many did not do so sharing Mozilo’s politically-correct
and egalitarian hallucination – they just wanted to make a
fast buck.
An important
distinction to convey here pertains to the fact that Countrywide
and others were not selling all of their loans to Freddie
and Fannie. The aforementioned mortgage-backed securities
were purely packaged and sold under private labels. When America’s
housing bubble was expanding, buyers of such subprime securities
obviously felt there was no downside. Such are the delusions
that materialize when central bankers flood the world with
the opiates of easy money and credit.
Regrettably,
by completely ignoring underwriting fundamentals, Countrywide
and its ilk have set up so many borrowers for failure (as
have the king and queen of mortgage socialism, Freddie Mac
and Fannie Mae; both of whom, by the way, may be on the brink
of their own financial
meltdowns). The pain and anguish of losing a home, and
having one’s family displaced, will be visited upon countless
families. Of course, such borrowers must look in the mirror
when the urge, to pass around the blame, emerges. Nonetheless,
Angelo Mozilo’s dream has transmuted into a nightmare for
millions.
My, oh
my, aren’t political correctness, egalitarianism, and social
engineering wonderful? You be the judge.
January
28, 2008
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