Mozilo Charges Highlight FHA Mortgage Sanity

by Peter G. Miller
June 8th, 2009

The announcement that the Securities & Exchange Commission has charged former Countrywide CEO Angelo Mozilo with securities fraud is hardly surprising. Whether fair or unfair, Mr. Mozilo has become the public face of the mortgage meltdown, a position he will now get to defend in court.

The Securities and Exchange Commission alleges that Mozilo and two other former executives had engaged in “securities fraud for deliberately misleading investors about the significant credit risks being taken in efforts to build and maintain the company’s market share. Mozilo was additionally charged with insider trading for selling his Countrywide stock based on non-public information for nearly $140 million in profits.”

The SEC also alleges that “Mozilo along with former chief operating officer and president David Sambol and former chief financial officer Eric Sieracki misled the market by falsely assuring investors that Countrywide was primarily a prime quality mortgage lender that had avoided the excesses of its competitors.”

Mozilo Emails

The SEC has posted some emails sent by Mozilo. In one 2006 email regarding subprime 80/20 loans, Mozilo writes that “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[.] With real estate values coming down…the product will become increasingly worse.”

In another 2006 email, Mozilo said regarding option ARMs that “we have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet. The only history we can look to is that of World Savings however their portfolio was fundamentally different than ours in that their focus was equity and our focus is fico. In my judgement [sic], as a long time lender, I would always trade off fico for equity. The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales.”

FHA Market Share Falls

Meanwhile, back in Washington, the FHA was getting clobbered in the marketplace. The use of FHA loans fell to less than 2 percent of all mortgage originations in 2006.

How could plain-vanilla FHA mortgages possibly compete with the private-sector loans being offered with no money down, no income check, no savings and no worries about credit scores? The reality is that they couldn’t.

I have no idea whether the allegations against Mozilo are true or not, that’s for a court to decide. But I do know this: The mortgages championed by Countrywide were indefensible from day one. They were lousy loans in concept, loans made worse when minimal guidelines were not followed.

FHA loans could not compete with private-sector lenders for the very simple reason that in too many cases private-sector lenders were offering loans to people who could not pay and with terms that could not be met. Meanwhile, the FHA was insuring mortgages with sane terms for borrowers who had to document their finances. The idea of “paperwork” became an issue when the real concern has always been the threat of foreclosure, the loss of a home and terrible hardship. The FHA was right to maintain its standards, that’s how you protect both the public and your program.

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