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Angelo Mozilo's Theory of the Financial Crisis: Zombie Homeowners!

Mozilo on Mortgages

The Big Picture this morning posted the transcript of the deposition of Angelo Mozilo taken in connection with MBIA's lawsuit against Bank of America over loans Countrywide originated.

Perhaps the most jarring moment in the deposition is when Mozilo lays out a completely self-serving and bonkers theory of the financial crisis.

This is a matter of record. The cause of the problems of foreclosures is not created by Countrywide, nor MBIA. This is all about an unprecedented, cataclysmic situation, unprecedented in the history of this country. Values in this country dropped 50 percent.

...And for the first time in the history of this country people decided that they were going to leave their homes because the value of their home was below the mortgage amount. Never in the history of this country did that ever happen,and that could never have been assessed in the risk profile.

These people didn't lose their jobs. They didn't lose their health. They didn't lose their marriage. Those are the three factors that cause foreclosure. They left their home because the values went below the mortgage. That's what caused the problem. So I have no regrets about how I -- how Countrywide was run. It was a world-class company.

Bravo to the attorney for MBIA who managed to provoke Mozilo into this rant. It really is revealing to see that the events of the financial crisis have not introduced even a sliver of doubt into his mind about the lending practices of Countrywide.

How has Mozilo managed to armor his conscience against the slings and arrows of reality? He's used a very self-serving narrative of the financial crisis. According to Mozilo, there was nothing wrong with the loans Countrywide made. Instead, something went wrong with the borrowers when home prices fell. Like in some kind of zombie movie, Americans somehow turned evil.

"These people didn't lose their jobs. They didn't lose their health. They didn't lose their marriage. Those are the three factors that cause foreclosure. They left their home because the values went below the mortgage. That's what caused the problem," Mozillo said.

I know there have been plenty of stories over the past few years about people walking away from underwater mortgages. There's some evidence that borrowers are now more likely do to this than in the past. But even at the height of the financial crisis, this behavior—which economists call "borrower ruthlessness"—only ever accounted for a small fraction of mortgage defaults.

A trio of economists—Neil Bhutta and Jane Dokko of the New York Fed and Hui Shan of Goldman Sachs—who looked into the question of ruthlessness in a paper published last year, found that borrowers mostly do not walk away unless they are very deeply underwater.

"While purely ruthless defaults have undoubtedly occurred, our results suggest such defaults probably do not account for a large proportion of all defaults in recent years," they explain.

In 2010 Fannie Mae conducted a national survey that found that 9 out of 10 respondents say it is wrong for borrowers who owe more on their house than it is worth to default on their mortgage. Americans still look at their mortgage obligations as moral obligations rather than as contracts containing a put-option. This change Mozilo says came over the American people just has not happened.

The real reason most people default on their mortgages is because they cannot afford to keep making their scheduled payments. Either they've suffered an income shock, their mortgage expenses have risen, or they have a mortgage that never really was affordable for them in the first place.

It would be a bit comforting if I could bring myself to believe that Mozilo is just being cynical here. That might make him a bad guy but at least then we'd know that the guy who ran America's biggest mortgage lender was in touch with reality. But I think Mozilo really, truly believes his fairy tale—which is even more disturbing.

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