Funny Business

Angelo Mozilo

The SEC has released portions of emails it claims Angelo Mozilo wrote in 2006, part of its case of fraud and insider trading against the former Countrywide CEO. Investigators charge that Mozilo knew Countrywide was in big trouble, but didn't let investors know.

So what exactly was Mozilo saying publicly in 2006? I went back and pulled transcripts of earnings conference calls with analysts from that period.

Judge for yourself.

WHAT HE SAID IN PRIVATE

First, here are some email excerpts the SEC claims Mozilo wrote in the spring of 2006.

On March 28, 2006, Mozilo writes about the 100 percent loan-to-value subprime product:

"The most dangerous product in existence and there can be nothing more toxic and therefore requires that no deviation from guidelines be permitted irrespective of the circumstances."

April 13, 2006:

Loans had been originated "through our channels with disregard for process [and] compliance with guidelines." (Mozilo) "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 [sic]."

Four days later, on April 17, 2006, Mozilo emails then President (and now co-defendant) David Sambol concerning Countrywide's subprime 80/20 loans:

"In all my years in the business I have never seen a more toxic prduct [sic]. It's not only subordinated to the first, but the first is subprime. In addition, the FICOs are below 600, below 500 and some below 400, With real estate values coming down…the product will become increasingly worse. There has [sic] to be major changes in this program, including substantial increases in the minimum FICO. … Whether you consider the business milk or not, I am prepared to go without milk irrespective of the consequences to our production."

WHAT HE SAID IN PUBLIC

Ten days later, on April 27, 2006, Angelo Mozilo answered analysts' questions during the company's earnings conference call. He doesn't mention "80/20" or "100 percent" subprime loans, instead referring to a product which can include those types of mortgages, pay option ARMs:

"We continue to believe that pay option loans present very attractive investment alternatives for the Bank, with high margins accompanied by low interest rate risk and low credit risk profiles...It's important to note that our pay option loan quality remains extremely high. Original CLTVs and original loan to values are 78% and 75% respectively. Average FICO scores on the pay option portfolio are over 720. At 13 basis points, pay option delinquencies remain low relative to other loans of similar credit quality and vintage. The moderate increase in delinquency rates results to the seasoning of the Bank's portfolio and is in line with expectations. The amount of cumulative negative amortization remains relatively small at $169 million or approximately half of 1% of the portfolio."

WHAT HE SAID IN PRIVATE

Later that year, on Sept. 26, 2006, the SEC says Mozilo wrote this email regarding Countrywide portfolio of pay-option ARMs, which he apparently wanted to sell, despite the "extremely high" loan quality referenced back that previous April:

"We have no way, with any reasonable certainty, to assess the real risk of holding these loans on our balance sheet. The only history we can look to is that of World Savings however their portfolio was fundamentally different than ours in that their focus was equity and our focus is fico. In my judgement [sic], as a long time lender, I would always trade off fico for equity. The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales. …pay options are currently mispriced in the secondary market, and that spread could disappear quickly if there is an foreseen [sic] headline event such as another lender getting into deep trouble with this product or because of negative investor occurance [sic]... "timing is right" … to … "sell all newly originated pay options and begin rolling off the bank balance sheet, in an orderly manner, pay options currently in their port[folio]."

WHAT HE SAID IN PUBLIC

Here was what Mozilo told analysts on the earnings call exactly one month later, on October 26, 2006:

"Pay option loans, which have historically provided higher margins, are declining as a percentage of our total production and have experienced margin erosion, and this trend may continue...while we expect the continuation of a traditional environment in the near term, we are bullish on the positive long-term growth prospects for the mortgage lending industry and for Countrywide in particular as a result of the proven power of our business model and our strategic positioning. We believe Countrywide's core strategies, our profitable marketshare expansion, growth in our mortgage loan investment portfolio and associated spread income, continued synergistic diversification and ongoing capital optimization will continue to deliver long-term shareholder value....I'm looking for 2008 to be the breakout year."

UP NEXT... Some interesting notes on the q-and-a from that call in October 2006.

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