"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]."