A reader and tipster (send in your tips here) has forwarded me a document which is alleged to be the emails and documents of Countrywide regarding the mortgage loans they were initiating.
There are a number of foretelling and interesting statements contained in this document. One point in particular, after the pay option sub-prime loans exploded, is the statement about why loan modifications are just not going to be available for most people.
The emails and documents are purportedly from and/or include: Angelo Mozilo, Dave Sambol, Stan Kurland, Carlos Garcia, Dan Tarman, Andy Bielanksi, Eric Sieracki, Sandy Samuels, John McMurray, David Spector, Steve Bailey, Craig Baingo, Kevin Meyers, Lisa Afsharian, Svetlana Keslin, Bill Endicott, Kevin Bartlett, Jim Furash, Jeff Speakes, Jim Furash, Andrew Gissinger, Ron Kripalani, Jack Schekett, Mark Elbaum, David Bigelow, Lew Renieri, Mike Muir, Tim Winnes, Alan Boyce, Paul Deitz, Steve Bailey, Jess Lederman, Brian Kuelbs, Adan Farinas, Amit Munjal, and Mark Fireman.
At the outset of this article, I must admit that my observations and summaries below are taken strictly from the alleged documentation provided.
August 1, 2005
Angelo Mozilo allegedly sounds a warning about Countrywide borrowers.
“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 but particularly relative to condos and specifically condos being purchased by speculators (non owner occupants). I have been in contact with developers who have told me that they are anticipating a collapse in the condo market very shortly simply related to the fact that in Dade County along 70% of the condos being sold are being purchased by speculators. This situation is being repeated in Broward County, Las Vegas as well as other so called “hot” area of the Country.
We must therefore re-think what assets should be putting into the bank. For example you should never put a non owner occupied pay option ARM on the balance sheet. I know you have already done this but it is unacceptable. Secondly only 660 fico’s and above, owner occupied pay options should be accepted and only on a limited basis. The focus should be 700 and above (owner occupied) for this product.”
In a moment of accurately accurate foretelling Mozilo forecasts:
The simple reason is that when the loan resets in five years there will be an enormous payment shock and if the borrower is not sufficiently sophisticated to truly understand this consequence then the bank will be dealing with foreclosure in potentially a deflated real estate market. This would be both a financial and repetitional catastrophe.
He expresses concern that the quality of loans being generated is a bigger concern to him rather than the growth of Countrywide. “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 a supporter of little to no growth.”
And again Mozilo predicts the future.
I feel strongly that over the next twelve months we are going to be facing one of the most difficult and challenging real estate and mortgage markets in decades and I want to take steps now to mitigate and hopefully avoid any damages to our Bank.
Angelo Mozilo relates a recent experience with a developer. “On Sunday I met with a mortgage broker from a town near Troy, Michigan who told me that he does all of his business with Countrywide. First I was pleased with the news until he told me why. He said that the area he serves is severely economically depressed and that the only way he can quality his borrowers is the via pay option ARM. I have heard this story many times over from mortgage brokers who utilize the pay option for very marginal borrowers for the sole purpose of creating volumes and commissions.”
We simply cannot and will not allow our Company to be victimized by this pervasive behavior and since we can’t control the behavior of others it is essential that we control our own actions.
August 2, 2005
Angelo Mozilo appears to say that it was his position Countrywide should place “less attractive loans in the secondary market” and that if they were retained by Countrywide there was “no idea what economic and repetitional losses we will suffer not to say anything about restrictions placed upon us by the regulators.”
Dave Sambol expresses concern about “cherry picking” which loans Countrywide retains.
Carlos Garcia states that no more lending to investors will continue “due to growing concerns over pay option and io [interest only] loans, rising rates, housing bubbles and ensuing regulator and lender actions.”
Mozilo states Countrywide “should not be making any pay options to investors anywhere. This is not the business that a fledging bank our size should be involved with.” He also notes that the issue with the pay option loans is, “…the quality of the borrowers who are being offered the product and the abuse by third party originators.” And Mozilo appears to want the bank to pull back on these types of loans, “If you are unable to find sufficient product then slow down growth of the Bank for the time being.”
Carlos Garcia notes there are problems in South Florida and Las Vegas “that merit discontinuation of lending to investors or condo borrowers.”
August 3, 2005
Angelo Mozilo tells Dan Tarman and Andy Bielanski that he believes, “In my opinion there is nothing intrinsically wrong with pay option loans however there is something very wrong as to whom the product is being sold.”
These events could lead to catastrophic consequences which would be exacerbated if real estate values begin to decline
More importantly this change in policy is positive for your shareholders as well as to borrowers who, most likely, are being set up for foreclosure.
March 27, 2006
Mozilo sends out an email regarding a meeting held regarding HSBC. In this email it appears clear HSBC is not happy with investments it purchased from Countrywide. “Stan will oversee all of the corrective processes that will be put into effect to permanently avoid the errors of both judgment and protocol that have led to the issues that we face today caused by the buybacks mandated by HSBC.”
He also makes what appears to be a rather alarming and definitive statement about the 100 percent loan to value loans sold to sub-prime borrowers.
This is the most dangerous product in existence and there can be nothing more toxic…
Mozilo scolds staff for making stupid mistakes on selling loans to investors. “Spector will take a fresh look at all of our contractual obligations relative to secondary market requirements to assure that we don’t commit ourselves to subordinate the balance sheet of the Company to a third party. That is what we have done relative to our commitments to HSBC. We simply cannot tolerate trailing indemnifications which are infinite in time and nature. Again, this was a juvenile mistake that an never be repeated.”
April 3, 2006
Mozilo revels, “Since over 70% have opted to make the lower payment it appears that it is just a matter of time that we will be faced with a substantial amount of resets and therefore much higher delinquencies.”
An email from Bill Endicott appears to revel a significant volume of negative amortization loans.
April 13, 2006
Angelo Mozilo is still scolding staff for “extraordinarily juvenile” mistakes. And he notes, “Specifically we gave every option to HSBC to kick back to us all losses while they maintained all of the gains. At this stage of our corporate lives we should know better.”
He then makes a bold statement, “The loans were originated through our channels with serious disregard for process, compliance with guidelines and irresponsible behavior relative to meeting timelines. As a result we delivered loans with deficient documentation, did not respond timely in correcting those deficiencies which resulted in extreme time delays thereby permitting loans to have a greater chance for early payment default.”
Mozilo appears to make a statement regarding the inducements that led frontline originators to push the poor performing loans, “The field people and everyone involved in the origination chain received substantial compensation for the origination of this product but have yet to suffer the consequences of unacceptable conduct relative to every aspect of originating, documenting, and delivering the product to HSBC.”
“Bottom line, from the negotiation of the deal with HSBC through the delivery of the product we have compounded one error after another.”
“I have personally observed a serious lack of compliance within our origination system as it relates to documentation and generally a deterioration in the quality of loans originated versus the pricing of those loan[s]”
Mozilo disagrees with Dave Sambol’s position on the loans.
“In my conversations with Sambol he calls the 100% sub prime seconds as the “milk” of the business. Frankly I consider that product line to be the poison of ours.“
April 17, 2006
In an email, Angelo Mozilo allegedly makes the following statement about the Countrywide sub-prime second mortgage loans, “In all of my years in the business I have never seen a more toxic product.”
May 18, 2006
Mozilo offers suggestions to get some borrowers out of the “toxic” pay option loans Countrywide originated.
“Per some of the suggestions offered during our meeting we should take every step possible to reduce balance sheet risk by:
- Taking steps to encourage pay option mortgagors to refinance into IO’s [assume this is interest only mortgages].
- Where deemed appropriate the Bank should forgive the prepayment penalty if it appears obvious that the borrower will potentially default upon reset.
- Through our payment coupon we should alert all pay option borrowers what could happen upon reset.
June 1, 2006
Mozilo notes that “the majority of pay options being originated by us, both wholesale and retail, are based upon stated income.” This means borrowers had to provide no proof of income when apply for the risky loans, further compounding the risk.
He makes the statement or at least reassess the question that maybe Coutrywide should sell the bad loans out of the bank to others.
September 26, 2006
Mozilo makes a statement Country is still originating pay option loans. “Therefore I believe the timing is right for us to sell all newly originated pay options and begin rolling of the bank balance sheet, in an orderly manner, pay options current in there port.”
March 22, 2007
Angelo Mozilo appears concerned over the growing firestorm out outrage of the mortgage mess in the United States and expresses concern Countrywide has been lumped in with other banks. While he seems particularly upset that Countrywide is being made a target off by appearing before Sentator Dodd’s committee, in what he calls, “mean spirited political theater,” he appears to have lowered is alarm with the previous HSBC issues he was complaining about to staff.
Assault by the media has been relentless and for whatever reason we have been lumped in with the mono line subprime lenders but also have been linked with GE and HSBC.
Mozilo makes an observation about the troubles facing homeowners who want to modify their loans, “There are substantial problems in modifying loans in today’s environment because most of the loans originated in the past decade are contained in mortgage backed securities which for the most part are immutable under current law and regulation. We could obviously reduce mortgagor’s payments but the cash difference between the deficient payment and what we owe the security holder would eventually eat up our cash reserves.”
Mozilo appears to want to be a leader in helping to keep people in their homes, “We must explore every means possible, which we are doing, to keep legitimate mortgagors and their families in their homes.” He says, “We must employ every loss litigation technique known or yet to be invented in the industry.”
August 11, 2007
Mozil states the structure of Countrywide moving forward is in the hands of his team working with Golman and Citi. He says, “We are now approaching our most difficult time in this liquidity crisis.”
August 24, 2007
Angelo Mozilo wants out of the builder program and out of the subprime business unless it can be securitized by “Fannie and/or Freddie.”
The builder program “…is business neither the Bank or the mortgage bank should be engaged in during this crisis or at any time.”
August 30, 2007
The terms that Lehman is asking form are, “flagrant exploration,” according to Mozilo, “but we have few if any other options at this time.”
He is also worried about a bad deal that could signal to the investment community that “…we are being treated as a junk credit and that we are willing to trade as a non investment grade borrower.”
November 4, 2007
Mozilo is again trying to convince his staff, Carlos Garcia and Dave Sambol, of the terrible problems associated with the pay option loans. Mozilo says, “I do not like this product because they are not fixable in the event of serious default and also because they promote the worst behavior from the mortgagors who opt for this product irrespective of the fact that they are prime and super prime borrowers.”
It seems he’s finally learned the behavior economics lesson that borrowers will gravitate towards the lower payment, even if it is not in their best interest.
November 4, 2007
A memo from Jess Lederman says, “Since the inception, the bank has invested in $51 billion of POA loans including the $2.06 billion transfer from HFS to HFI as of Sept-07.
The Bank HFI portfolio has a total UPB of $28.2 billion in POAs as of Sept-2007; this represents a 22.5% YOY decline from $36.4 billion as of Sept-2006.”
Lederman goes on to say how the Pay Option ARM loans also have a significant number with Bank owned second liens as well. It appears that a total of 22% of the Pay Option ARM loans have a Countrywide second lien as well.
It appears from these emails released that the head of Countrywide, Angelo Mozilo, came to an early conclusion, according to the emails shared, that the pay option low doc loans were toxic and Countrywide should not be in that business. While being clear about that vision, for whatever reason, it appears Countrywide continued down a precipitous path and was still in the business.
Mozilo also identified that the underwriting standards for those loans encouraged people to take out the loans and that began the overall problem. He certainly appears to have sounded an appropriate alarm early, but did anyone really want to hear him?