Just be warned, I’m in a mood today.
A friend who saw me yesterday on CNBC’s Squawk Box promoting my book
commented that I was quickly becoming famous. Based on some of the
questions Karl Quintanilla threw at me (e.g. So what’s the worse thing
you’ve ever done?), maybe infamous would be a better word, but I’ll
leave that for you to decide.
In light of recent scandals among high profile governors, however, I
thought it wise to get out in front of this situation right way, trying
to maintain my quality public image. For the record, I have never
purchased high-priced call girls (can’t afford them), done a three-way
with a staffer and my wife (not very good at gymnastics) nor have I
ever been convicted of a felony (note the word, convicted). Speaking of
convictions, that leads me to our topic, Angelo Mozilo and his legacy
in the mortgage business.
I know, he’s an easy target that’s taken his share of skewering but
I hold a special place in my heart for Angelo “The Tangerine Dream”
Mozilo (I’ve been working on my Chris Berman schtick in case CNBC
should develop its own mortgage version of Sportscenter).
Never mind that I spent most of my five years ordering review
appraisals through Landsafe, Countrywide’s in-house appraisal division,
only to discover that every time a loan came back for repurchase,
they’d no longer view their own in-house appraisal as valid. Ironic how
their own appraisals worked when it meant driving loans to feed the
securitization machine but never when a loan developed a problem. Thank
you Angelo for effectively admitting that I closed loans on overvalued
properties with the blessing of your appraisal division (oh yes, which
I paid you for).
Personal disdain aside, my issues with him go much deeper. I went
back and reviewed his speech delivered to the John T. Dunlop Lecture
sponsored by the Joint Center for Housing Studies of Harvard University
and the National Housing Endowment in 2003.
In his presentation entitled "The American Dream of Homeownership:
From Cliche to Mission," he outlined suggestions that the mortgage
industry should consider to overcome barriers to homeownership. In true
Mozilo style, he used his full bravado to set the stage for what I
believe should become his lasting legacy.
Throughout the speech, he focused on the need to eliminate mortgage
down payment requirements and the reduction and streamlining of loan
application documentation. He carries on saying that FICO is culturally
biased and we need to find ways to imbed housing history (which was
usually bogus anyway once they started accepting private verifications
of rent) and utility payments into the scoring model.
I had forgotten about this speech until yesterday when a friend
copied me on it. I remember reading it back in early 2003 and being
struck by the oddity. How could it be that down payment and income
verification where no longer relevant? I didn’t give it much thought at
the time but I finally put it all together. It was about this time that
we saw Countrywide begin to loosen up some of their guidelines,
particularly with regard to the 100% and stated income programs for the
subprime product. Yes, the very same products that ultimately led to
the demise of the industry.
I view my five years as the owner of subprime lender with a mixture
of emotions. On one hand, I hold my hat on the fact that we maintained
a low delinquency rate, an average of about 3% during that time period,
which means we did a fairly decent job of managing risk. On the other,
I’m annoyed that I didn’t know better when things started getting out
of hand. Sure I pulled out of the business more than a year before the
implosion began believing the risk-reward curve no longer made sense,
but it’s little consolation given the impact this fallout has had on
all of us.
Looking back, I probably should have taken their underwriting
guidelines and developed a more conservative approach. Of course, do so
would probably have put us out of business. Any subprime lender who
operated a wholesale platform with a conservative underwriting bent
found it difficult to compete during this time of insanity.
At the end of the day, however, we closed every loan with our eyes
wide open. I’m not going to point the finger at Mozilo for our decision
to close a deal that fit their guidelines. That’s hypocritical. What
chaps my ass however, is that when you serve as the leader of the
largest mortgage company in America you have a fiduciary duty to manage
risk effectively, because you are in essence doing it for everyone.
Yes, you are held to a higher standard and maybe that’s not fair, but
that’s how business works. We expect more from those at the top. When
your guidelines become the standards for all divisions – retail, broker
and correspondent, they also help shape the rest of the market.
When you get down to it nothing, and I mean nothing else really
matters in this business except risk. All the talk about housing
America and whatever kind of spin you want to put on it is just window
dressing. Effective risk management has been and always will be the
cornerstone of this industry. Those who manage it well survive for the
long haul. Those who don’t and happen to run the largest company in the
industry, will drive it into the ground.
I’ve only superificially touched on his comments because to cover
the full insanity of the speech would require an additional chapter in
the book. To me, his presentation indicates that 50 years in the
business taught him nothing about risk management. David Sambol was the
voice of reason in that company and when he died some years ago, any
semblance of rational thinking left right along with him.
Is he the only one to blame? Of course not. But when the guy at the
top has an ego the size of Manitoba and starts selling the world on the
righteousness of a housing finance model that’s built on a foundation
of glue sticks and balsa wood, that should be his legacy.
As for me, I’m starting to work on my own legacy. I talked to this
girl, Becky, this morning at 1 800 HOOKERS about how she could help me
increase my visibility in the marketplace. I must say, she sure did
have some creative ideas.
