CNBC: Countrywide CEO Sees 'Overreaction' to Subprime Loan Problems

Countrywide Financial Chief Executive Angelo Mozilo told CNBC's Maria Bartiromo that there's been an "overreaction" to the subprime lending shakeout, though he believes the problem may get worse before it gets better.

"The severity of the impact can be materially helped by a very rational regulatory and legislative environment," Mozilo said. "There's been a rush to judgment and an overreaction. If everyone steps back and looks at the issue in a calm rational manner, this crisis, which appears to be a crisis, will pass rather quickly."

Mozilo said he's mostly concerned for first-time homebuyers: "The only way that lower income and minorities can get into middle income is through buying a home," he said. "And there is a real rush to judgment in cutting off the programs that many of these people have historically used for many years to get into their first home."

He said that much of the problem is tied not to this group, but to investors and speculators who used more exotic mortgages to buy investment properties. "They are not new products or exotic products, but some of them have been sold to people they shouldn't have been sold to."

"Clearly an Overreaction"

Now, he explains, there are first-time home buyers who need to refinance because their interest rates are resetting to higher levels. "They can't get refinancing because the rules changed on them after the game started," he said. "This is clearly an overreaction."

Mozilo also said the fallout from subprime lending -- the business of making loans to people with poor or spotty credit histories -- will largely be shouldered by the "monoline" lenders such as New Century, Novastar, and Accredited Home Loans and less so at more diversified lenders.

"It’s a mistake to apply what's happening to them to the more diversified financial services  companies like Countrywide, Wells Fargo and others," he told CNBC. In fact, "this will be great for Countrywide because at the end of the day, all of the irrational competitors will be gone."

But they haven't been able to entirely avoid subprime's reaches. On Monday, Countrywide, which is the nation's largest mortgage lender and fourth-largest subprime lender, said it eliminated 108 jobs in its wholesale lending unit's subprime division.  The company said in an e-mail disclosing the cuts that they "align the company's workforce with the recent changes in the mortgage market."

In addition, the company said that foreclosures rose to a five-year high and turmoil in the subprime market may hurt near-term earnings.

It was not immediately clear how many workers are in the subprime division. Subprime loans represent less than a tenth of Countrywide's overall lending. The entire company employed
55,311 people at the end of February.

Foreclosure Rate

Countrywide said the foreclosure rate rose to 0.70% from January's 0.69% and last February's 0.47%. It also said 4.71% of loans were at least 30 days past due, the same as in January and up from 4.29% last February. The rate matched the second-highest level over the last five years.

The company is the fourth-largest subprime lender. "Nonprime" loans in February fell 10% from a year earlier to $2.59 billion. Overall mortgage lending rose 10% to $34.57 billion.

"We are more concerned that the weakness has spread to other sectors of the residential mortgage market," wrote Wachovia Capital Markets analyst Jim Shanahan. He lowered Countrywide to "underperform" from "market perform."

Countrywide Chief Operating Officer David Sambol said the company has undertaken a "further tightening of underwriting guidelines."

Sambol said Countrywide should benefit as weaker competitors exit the market, but it "may experience short-term earnings volatility" during the shakeout. The company said it added 326 employees last month, bringing the total to 55,311.

Countrywide sells many of the loans it makes, and said its residual exposure for nonprime loans was $402 million on Dec. 31, or 0.2% of assets.

Earnings Impact

Credit Suisse analyst Moshe Orenbuch said first-quarter earnings would fall by 60 cents a share if Countrywide wrote off its subprime residuals and sold no subprime loans in the quarter.

Spokesman Rick Simon did not immediately return a call and e-mail seeking comment. Analysts on average expect quarterly profit of 98 cents per share, according to Reuters Estimates.

The company services $1.33 trillion of mortgage loans.

Countrywide on Friday told brokers to stop offering no-down-payment mortgages, according to a document obtained by Reuters. Other lenders have made similar changes.

According to UBS analysts, lax underwriting standards made 2006 perhaps the worst year ever for mortgage credit quality.

Countrywide shares have fallen by more than one-fifth from their Feb. 2 record high of $45.19.

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