Wall Street Crime And Punishment: Angelo Mozilo, The Tanned Face Of The Housing Market's Collapse

Does crime pay?

Wall Street Crime and Punishment is a weekly series by Benzinga's Phil Hall chronicling the bankers, brokers and financial ne’er-do-wells whose ambition and greed take them in the wrong direction.

Angelo Mozilo never tired of reminding people that his father was a first-generation Italian-American who ran a butcher shop in the Bronx, New York. In the program for the 2004 Horatio Alger Award ceremony, Mozilo’s childhood amid chopped-up barnyard animals was recalled in a mini-biography that cast a vaguely ignoble shadow on the elder Mozilo’s honest and worthwhile profession.

“When he was 12, Mozilo began helping his father in the butcher shop,” the bio stated. “He cleaned floors, made sausage, cut up chickens, and learned all there was to know about running the small shop. Even though it was tough work, he didn't mind helping his father. Still, he realized he did not want butchering to be his career.”

Yet Mozilo’s adult years detoured into a different type of butchering — in his case, by putting the U.S. economy through the meat grinder with toxic mortgages that failed spectacularly, thus triggering the greatest financial crisis since the 1930s.

Mozilo was widely blamed as being among the key culprits in collapsing the economy, although he angrily refused to accept responsibility or express remorse for his actions.

From Meat To Mortgages: Mozilo was born in 1938, the eldest of five children. His formative years occurred in a cramped domestic situation, with the Mozilo clan squeezed into a small home owned by Angelo’s uncle. For much of his youth, Mozilo slept on a sofa positioned in the dining room due to the lack of bedrooms to accommodate everyone.

Mozilo’s mother did not want him to grow up to become a butcher. She had been yanked out of school in her early teen years by her father and bitterly regretted being unable to secure an education. Although Mozilo worked in his father’s shop on weekends during his teen years to earn money for college tuition, he also snagged a second job as a messenger boy for a local mortgage company.

Mozilo opted to go to Fordham University primarily for its location — the Bronx campus was close to his family’s home, thus saving money that would have gone to dormitory costs. He graduated in 1960 and became a loan officer with the mortgage company where he was the in-house messenger. That company was merged with another owned by David S. Loeb, a colorful character who was a navigator in the Merchant Marines during World War II before getting into the residential mortgage business.

Loeb was 15 years older than Mozilo and initially viewed him as a protégé, sending him on assignments to Virginia Beach and Orlando to stake out new business opportunities. In 1969, Loeb tapped Mozilo to become his second-in-command in a new venture called Countrywide Credit Industries. The company was originally based in New York City, but was relocated to Pasadena, California, to take advantage of the housing boom in the Los Angeles area.

Over time, the California weather had a highly visible impact on Mozilo, who discovered a new fondness for sunbathing and outdoor sports that gave his olive-skinned complexion an uncommonly tanned appearance.

Countrywide exploited a niche as a nonbank mortgage lender in a field dominated by depositories. The company was an early adopter of automated technologies that would reshape the paper-driven financial services industry, and this high-tech edge enabled the scrappy Countrywide to stay competitive against its larger rivals.

Through the early 1980s, Countrywide attracted deep-pocketed customers who acquired luxury properties, but these jumbo loans could not easily be collateralized for secondary market sale to Fannie Mae FNMA and Freddie Mac FMCC. In 1985, Loeb and Mozilo created Countrywide Mortgage Investment as a vehicle to collateralize these loans for sale to investors. This endeavor would become IndyMac Bank, which was spun off as a separate company in 1997.

Loeb retired in 2000 and Mozilo took the leadership reins, at which point Countrywide’s growth and influence went into overdrive.

Related Link: The complete Wall Street Crime and Punishment series

Good Intentions, Bad Business: When Loeb was at the Countrywide helm, the company initially stayed away from the subprime mortgage market that began to gain popularity in the 1980s. Loeb considered the product too complex and risky, an opinion Mozilo did not share. Loeb eventually compromised by creating a subsidiary called Full Spectrum Lending in 1996 to focus exclusively on subprime, thus keeping the product off Countrywide’s books. But that endeavor barely made a dent in the subprime market.

Once Loeb was no longer in charge, Mozilo redirected Countrywide’s focus and ratcheted up the company’s participation in the subprime market. Mozilo had two reasons for pursuing this strategy.

The first reason was strictly business-focused. Countrywide was losing market share as its competitors embraced subprime mortgages in the 1990s when the Clinton administration aggressively sought to raise the nation’s homeownership rate.

The second reason was purely personal. Mozilo was haunted by the memory of his family living as tenants in an uncomfortable home owned by his uncle and he sincerely did not want that situation to be shared by others.

He was also appalled at the mortgage industry’s treatment of minorities. Even though the Fair Housing Act of 1968 prohibited discrimination based on race, religion and ethnic heritage, many minorities were still finding it difficult to secure mortgages. When he was made aware that some of Countrywide’s loan officers actively worked against minorities who applied for mortgages, Mozilo personally reviewed the rejections and overturned many of the decisions made by his underlings.

Because many minority borrowers did not meet the credit standards required for prime mortgage borrowing, subprime mortgages seemed to be the route to widen and diversify the path to homeownership. When originated and underwritten correctly, subprime mortgages were a fine product.

But in his eagerness to dominate this market, Mozilo became less obsessed with underwriting standards, which resulted in too many loans being originated with borrowers who should not have been approved for financing. Even worse, many borrowers who qualified for prime mortgages were aggressively steered into subprime mortgages by unscrupulous Countrywide loan officers.

The ruthless and sloppy business practices grew Countrywide’s corporate prominence. Fortune magazine hailed Countrywide as the “23,000% stock” because it provided investors a 23,000% return between 1982 and 2003.

Mozilo’s prominence extended from Wall Street down to Capitol Hill, where he became closely acquainted with many legislators and their families. When the elite in the nation’s capital needed a purchase loan or refinancing, they were given access to a secret V.I.P. program with Mozilo as their personal loan officer.

Mozilo Stumbles: By 2006, Countrywide began to experience tumult. Mozilo had intended to step down as CEO that year and transition to the role of chairman, with the goal of retiring in 2011. Unexpectedly, his designated successor as chief executive, Stan Kurland, demanded that Mozilo step away completely. Kurland wound up being ousted and Mozilo renegotiated his contract to remain as CEO through 2011.

The contract renegotiating period was thorny due to the exorbitant $140 million compensation package that Mozilo wanted and ultimately received. During this time, a great deal of media attention was focusing on the excessive compensation enjoyed by the leaders of the nation’s major corporations, and Mozilo’s demands gave Countrywide negative publicity.

And then, the bottom fell out. The careless nature of subprime mortgage origination came back to haunt the financial services world as a record number of borrowers began to default on their home loans. Nonbank lenders began to go out of business and panic reigned at Countrywide with Mozilo hastily and unsuccessfully attempting to merge with an investment bank in order to diversify into the more secure capital markets sector.

Throughout 2007, investors shunned mortgage-backed securities and Countrywide’s prominence evaporated rapidly. No major bank would finance its short-term debt and the company patched together $11.5 billion from pre-established lines of credit from a constellation of 40 banks.

On Jan. 11, 2008, Bank of America Corp BAC announced it was buying Countrywide for $4 billion dollars in stock. Kenneth D. Lewis, the bank’s chairman, issued a statement declaring that “Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers.”

By the summer of that year, Mozilo was out of a job, but not out of the spotlight.

Collateral Damage: On March 7, 2008, Mozilo testified before the U.S. House Committee on Oversight and Government Reform as part of a hearing on excessive executive compensation. Mozilo’s multi-million-dollar compensation package, which included having Countrywide pay his hefty membership dues at several exclusive country clubs, was raised, but Mozilo insisted his compensation was a reflection of how well he ran his company and claimed media reports of his pay were “grossly exaggerated.”

Later in 2008, news reports began to surface over Mozilo’s cozy relations with legislators. The “Friends of Angelo” list cast a wide net encompassing Democrats and Republicans, including Senate Banking Committee Chairman Chris Dodd, Housing and Urban Development Secretary Alphonso Jackson and Paul Pelosi Jr., son of Rep. Nancy Pelosi. These disclosures created embarrassing headlines for the legislators, although no one suffered a career derailment or worse.

Mozilo had his own media headache when responding to an email from a borrower seeking a loan modification. The borrower cut and paste much of his message from the Loansafe.org website, which offered sample letters that homeowners in trouble could use in negotiations with their lenders. Mozilo recognized the email was copied from the site and wanted to forward his observations to another Countrywide colleague, but he accidentally hit the “reply” function and informed the borrower what he really thought.

“This is unbelievable,” he wrote. “Most of these letters now have the same wording. Obviously, they are being counseled by some other person or by the internet. Disgusting.”

The borrower forwarded Mozilo’s email to Loansafe.org, which created a media firestorm in publishing Mozilo’s tactless response. However, this was the proverbial iceberg tip. Federal investigators combing over the collapse of Countrywide discovered Mozilo left behind a surplus amount of emails questioning the quality of the loans being originating, thus offering evidence that he was aware of the damage being created.

“In all my years in the business I have never seen a more toxic prduct [sic],” he warned in a 2006 internal email about Countrywide’s 80/20 loans. “In addition, the FICOs are below 600, below 500 and some below 400.”

In another email, he dubbed Countrywide’s subprime mortgage “the most dangerous product in existence … there can be nothing more toxic.”

In June 2009, the U.S. Securities and Exchange Commission filed securities fraud charges against Mozilo, citing his emails as evidence that he misled investors on the soundness of the company while issuing internal warnings that the company’s problems were getting out of control. The agency also charged him with insider trading by selling his Countrywide stock based on non-public information from November 2006 to August 2007, resulting in a $140 million profit that he pocketed just ahead of Countrywide’s collapse.

At the same time, the U.S. Department of Justice began a criminal probe into Mozilo’s actions.

Exile In Denial: In October 2010, Mozilo reached a $67.5 million settlement with the SEC that included a lifetime ban from serving as an officer or director of a public company. While the SEC trumpeted this was the largest settlement with an executive involved in the downfall of the housing market, there was widespread outrage that the settlement did not require Mozilo to acknowledge wrongdoing.

Adding insult to injury, Mozilo’s contract with Countrywide included an indemnification clause that required the company to cover legal bills — and since Bank of America inherited Countrywide’s liabilities, its funds covered much of the settlement. The bank would spend several years and hundreds of millions of dollars settling lawsuits generated by Countrywide’s mayhem.

Four months later, the federal criminal investigation into Mozilo’s actions was quietly dropped. Mozilo’s attorney announced the end of the probe with the Justice Department staying uncharacteristically quiet on the matter.

Mozilo mostly disappeared from public view, living his retirement years in a mansion in Santa Barbara, California, adjacent to the Montecito Country Club where he would be spotted playing golf.

On a few occasions, Mozilo would re-emerge to offer his view of what went down. In 2010 testimony before the Financial Crisis Inquiry Commission, he recalled Countrywide as “one of the greatest companies in the history of this country.” In 2018, the Wall Street Journal reported Mozilo said Countrywide was blamed for the housing market’s collapse “because we were the largest and because I was an easy target.”

In May 2019, Mozilo made a guest appearance at SALT Las Vegas, a hedge fund conference, where he expressed bafflement that anyone considered him to be irresponsible.

“Somehow, for some unknown reason, I got blamed for it,” he said, adding that time did not heal his wounds.

“A lot of years went by,” he continued. “My wife passed away, I turned 80 years old, and now I don’t care. There’s other things more important in life.”

Photo: Screenshot of Angelo Mozilo addressing the 2019 SALT Las Vegas conference, courtesy of SALT’s YouTube page.