Angelo Mozilo leaves a complicated legacy. Founder of Countrywide Financial, once the largest mortgage company in America, he also oversaw its demise. To the very end, he believed that no entity has done more to help Americans achieve the dream of homeownership, yet he also shattered many of those dreams. He died on Sunday, 15 years after being named by Time magazine as one of the “25 people to blame for the financial crisis”. 

Angelo Mozilo learned the mortgage business while still at school. Aged 14, he started as a messenger for a small Manhattan mortgage company and by the time he graduated, he’d worked across all its various departments. He continued working there while attending college and joined on a full-time basis afterwards, by which time it had merged with a larger firm, United Mortgage Servicing Company. In 1968, the company was bought out and Mozilo and his boss, David Loeb, left to set up their own firm. They called it Countrywide to convey their aspirations for a national franchise. 

Benefitting from the collapse of the savings and loans industry that traditionally dominated the market for home loans as well as regulatory changes that allowed Fannie Mae to buy conventional mortgages so that they wouldn’t have to carry them on their own balance sheet, they quickly gained market share. By 1992, Countrywide had become the largest originator of single family mortgages in the US, issuing close to $40 billion of mortgages. Growth was enabled through a string of innovations. The firm was early to utilise independent brokers rather than its own staff to make loans, and it marketed refinancings to capture business from people who already owned their own homes. 

For much of its life, Countrywide was focussed on originating only high quality loans. In 1991, after Citicorp was forced to take heavy losses on poor loans it had made in an effort to boost market share, Mozilo told National Mortgage News, “They tried to take a shortcut and went the way of every institution that has ever tried to defy the basics of sound underwriting principles.”

As subprime lending took off, Mozilo looked askance. Regulatory changes in the 1980s designed to revitalise savings and loans companies laid the groundwork for lower quality lending. Caps on the rates financial firms could charge on a mortgage were lifted and new products such as adjustable rate mortgages (ARMs) were permitted. Finance companies such as Associates (later bought by Citigroup) and Household (later bought by HSBC) took advantage, and a swathe of new companies led by Long Beach followed. 

“It was a business, he groused, that made its money overcharging unsuspecting customers,” Bethany McLean and Joe Nocera record in their book, All the Devils Are Here. “Most subprime executives were ‘crooks,’ he railed to friends.”

But subprime growth was so dramatic, Countrywide couldn’t not get involved. Rising rates in 1994 put the brakes on prime lending volumes, leaving traditional lenders looking for new sources of growth. And subprime had the endorsement of government. Promoting a policy of higher home ownership, the administration at the time advocated “financing strategies fueled by creativity to help home buyers who lacked the cash to buy a home or the income to make the down payments.” Over the next five years, the volume of subprime mortgage originations surged from $35 billion to $160 billion. 

In 1997, Countrywide launched a specialist subprime unit, Full Spectrum. In its first year, it did just $140 million of originations. Initially, Mozilo was careful to capture only the most creditworthy subprime borrowers, keeping riskier borrowers away. There were three rules to the business: subprime loans had to be sold with no residuals left on Countrywide’s books, borrowers had to make a 20% down payment or get insurance to cover it, and Countrywide wouldn’t offer any subprime loan with a higher probability of default than a government Federal Housing Administration (FHA) loan. 

“There is a very, very good, solid subprime business and there is this frothy business,” Mozilo told investors. “[It] is very important that you understand the disciplines…that Countrywide has.”

Over time, though, Mozilo’s standards slipped. By 2004, he was offering 180 different products to appeal to all types of borrowers. “We have ARMs, one-year ARMs, three-year, five-year, seven- and ten-year. We have interest-only loans, pay option loans, zero-down programs, low or no-doc programs, fast and easy programs, and subprime loans.”

His chief operating officer told investors that “it’s our intent to carry every product or program for which there is reasonable demand… [I]f your customer can legitimately qualify for a loan anywhere else in the US, they’ll qualify at Countrywide.” Internally, they called it the “supermarket” strategy: to widen underwriting guidelines to match any product offered by competitors. 

The strategy reflected a premise Mozilo had developed years earlier: “If you ever stop trying to make your division the biggest and the best, that’s the day you die.”

In 2004, Countrywide originated $363 billion of loans; one year later, it did $500 billion. 

By 2005, Mozilo was torn. He could see the risks brewing in the market, but was drunk on the returns. “I’m deeply concerned about credit quality in the overall industry,” he said in the spring. “I think that the amount of capacity that’s been developed for subprime is much greater than the quality of subprime loans available.”

In an email in August 2005, he went further: “I am becoming increasingly concerned about the environment surrounding the borrowers who are utilizing the pay option loan and the price level of real estate in general… Frankly I am no longer concerned about the pace of growth of the bank. In fact, if there was little to no growth over the next six months until we can assure ourselves of high quality performing assets I would be the supporter of little to no growth.”  

Sadly, Mozilo didn’t pay heed to his own advice. While in 2001, Countrywide would only issue subprime loans less than $400,000 in size, at a maximum loan-to-value of 90% and with stated-doc loans reserved only for the self-employed, by 2006, the company was issuing $1 million subprime loans at a loan-to-value ratio of 100% with any “wage earner” eligible for a stated-doc loan. That year, 36% of Countrywide’s loans were stated doc (versus 13% in 2001), many of them fraudulent.

According to a lawsuit brought by mortgage insurer, Mortgage Guaranty, “by about 2006, Countrywide’s internal risk assessors knew that in a substantial number of its stated-income loans – fully a third – borrowers overstated income by more than 50%. Countrywide also knew that many appraisers were overstating property values to drive originations by making loans appear less risky.”

Mozilo could have left at that point. He’d long planned to retire at the end of 2006. It wouldn’t have made a difference to his legacy any more than Jack Welch or Sandy Weill influenced theirs by exiting at the top, but it would have spared him the contortions of attempting to reconcile growth with risk. A feud with his designated successor, Stan Kurland, led to Kurland leaving and Mozilo staying. Kurland himself died in 2021 after founding PennyMac Financial Services, a mortgage company that’s still going. He was replaced as president and chief operating officer of Countrywide by David Sambol, a salesman.

Mozilo emailed him. “I want you to examine our risk profile,” he asked. But also: “By the way, we must continue to grow our sales force and all other businesses that keep the top line increasing particularly in the origination channels.”

Countrywide kept going. By the end of 2006, it had $20 billion of home equity loans on its balance sheet, $32.7 billion of pay option ARMs, and $2.8 billion worth of securitisation residuals – the riskiest tranche of a loan securitisation. 

Maybe he thought he was too big to fail. At an investor presentation in 2006, Mozilo read out the names of companies that had exited subprime. “These are the very ones that equity analysts told me that I should be fearing … all gone,” he said. “And ten years from now when we read this list, you’ll see that most of the players today will be gone. Except for Countrywide.”

Within a year, as it was all unravelling, Mozilo went on CNBC: “At the end of the day, we’re the only game left in town.”

It was funding that did him in the end. To finance its balance sheet, Countrywide was heavily reliant on market funding. In July 2007, Countrywide reported that delinquency rates on its subprime loans had shot up to 23.7%, from less than 10% three months earlier. In addition, it was taking write-downs on some of the assets on its balance sheet. Funding counterparties took fright. In early August, some of Countrywide’s lenders refused to roll over commercial paper and mid-month, Bank of New York, which processed a lot of Countrywide’s funding via the tri-party repo market, threatened to leave money market lenders with the Countrywide collateral they had lent against overnight rather than return them their cash. 

Mozilo called the Fed for help. “We thought about it, conferred with Washington, and said no,” recalls Tim Geithner, President of the Federal Reserve Bank of New York at the time. “We hadn’t lent to a nonbank since the Depression, and it was too soon for such extraordinary measures.”

Geithner continues: “I talked to Mozilo for the first time that night… Mozilo seemed overwhelmed and unclear about what was happening. Like many of the more desperate CEOs I would deal with during the crisis, his main focus was what the government could do to help his firm, and what we could say to get markets to stop fretting about it. He seemed more concerned about the critics pointing out Countrywide’s weaknesses than about those actual weaknesses.”

Bank of America helped out instead, making a $2 billion investment in Countrywide in August 2007. With the firm still struggling, BofA announced the acquisition of the whole thing for $4.1 billion in stock in January 2008. CEO Ken Lewis thought he was getting a steal; less than a year earlier, Countrywide’s market cap had been $25 billion. But the deal would end up costing Bank of America $40 billion in real-estate losses, legal expenses and settlements with state and federal agencies, making it a contender for the worst deal in the history of American finance. “Obviously there aren’t many days when I wake up and think positively about the Countrywide acquisition in 2008,” said Bank of America’s CEO three years later.

Despite the losses, Mozilo did OK financially. He took out $470 million in compensation between 2001 and 2006. He reconciled his concerns of risks in the industry with his ambition for growth by selling stock before its collapse. The Securities and Exchange Commission charged him in 2009 for engaging in insider trading in the fourth quarter of 2006 while he was aware of material, non-public information concerning Countrywide’s increasing credit risk and the risk regarding the poor expected performance of Countrywide-originated loans. He was fined $67.5 million although Bank of America covered almost a third of that. 

Angelo Mozilo didn’t cause the financial crisis, although as the biggest player in subprime, he bears some responsibility for the decline in standards that prevailed. “Somehow, for some unknown reason, I got blamed for it,” Mozilo told delegates at a conference in 2019. Sadly, his story is not unique. Patterns of miscalibrated incentives and of trading risk for growth recur regularly in financial services. Angelo Mozilo may no longer be with us, but his story lives on.

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