Countrywide Financial: Who Didn't See It Coming? 6 comments
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But as I do reflect on it, and I do a lot, nobody saw this coming.
S&P and Moody’s (MCO) didn’t see it coming, but they simply just downgrade bonds. Bear Stearns (BSC) certainly didn’t see it coming, Merrill Lynch (MER) didn’t see it coming, nobody saw this coming.
Angelo, baby, you have to drop by Running of the Bulls more often. We certainly saw it coming here. And frankly, most of my colleagues in the investment business saw it coming, too, though, admittedly, we are a cranky lot, and see more bubbles in financial markets than a trophy wife sees in her morning bath.
The Fed, knowing that well over 50%, 60%, 70% of the loans made in 2003, 2004, 2005 and 2006 were indexed variable rate loans, indexed one way or another to the Fed funds rate, increased the Fed funds rate seventeen times… seventeen consecutive times with most of the product out there being variable rate product.
You never knew when they were going to stop increasing.
The fact that they did that had a material impact on affordability as people went to refinance or people went to buy… Major major impact.
After the Tech Bubble burst, the True Believers who handed their client's heads to them on a silver platter did not blame their own faulty analysis or their utter lack of understanding of financial and economic history. Instead, many of them blamed the Fed for raising interest rates. Of course, rising interest rates are a major, if not the main reason why bubbles deflate. However, the True Believers usually fail to see that their grand vision was a bubble to begin with, and that rising interest rates are often the catalyst that implodes the bubble.
Angelo Mozilo is an accomplished man for whom I have great respect, and certainly does not deserve to be cast in with the charlatans of the Tech Bubble nor the blind prophets of this real estate bubble, such as NAR economists. However, Mr. Mozilo's business benefited enormously from the multi-generation low in interest rates and enormously lax lending standards, which brought unqualified and unknowing home owners, investors and speculators into the housing markets, which pushed housing prices up to unheard of levels. Thus, it is no surprise that as credit tightens, the process is being unwound.
On delinquencies:
So far what we have seen in delinquencies to a great extent are not resets at all but people losing their jobs, loss of marriage, loss of health and the problem is that they either can’t refinance because the value of their homes have gone down, so their under water, or the program that they used to get into the home is no longer available to them. So right now the delinquencies are being driven by more traditional issues then they are about concern about resets.
On falling home prices
I do think it’s important to observe what happens going forward because we are experiencing home price depreciation almost like never before with the exception of the Great Depression [emphasis added] and so I think using standards or frames of reference on prime and the performance of prime in other environments may not be a fair comparison in light of what’s happening to real estate values.
On the quality of the "prime" borrower:
The spillover into prime I don’t think is something that should shock anybody once you understand the definition of prime.
The basic issue you see today, particularly with Countrywide is the spillover into the HELOC [home equity line of credit] portfolio.
At least for this quarter, it’s not really a subprime story, it’s a HELOC story and the deterioration in the piggy backs that were originated in order to assist the mortgagor to avoid PMI and all the advantages that that avoidance provided for the borrower.
On the Fed and tightening credit:
The bottom line is, as values decrease, the options for borrowers, homebuyers, the combination of limiting their product available to them is exacerbating the problem.
The fact that the Fed joint agency guidelines seriously restricted liquidity for borrowers to either refinance or for people to buy homes… I’m not making a judgment whether it was right, wrong, or indifferent it’s just that that’s what it did.
And then combined with a volatile secondary market… you know if you think about the perfect storm, that’s the perfect storm.
Mr. Mozilo has sold 1.4 million shares of Countrywide stock this year. He has been in the business 54 years.
Tighten your seat belts. There is more to come.
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This article has 6 comments:
Alachua County is fairing much better than many other Florida counties however there is now a rather large number of planned homebuilder communities now on line and they are having trouble selling homes. Even the amount of existing homes for sale is way up. And the reported numbers don't tell the truth because I know of a number of people who want to sell but have taken down their signs because they think they might as well wait till the buyers come back. Meanwhile the medium price has been edging up in recent months but in housed under say 300000 I think the average price is really beginning to fall. I think land prices should drop to at least 2003 levels but so far they have stayed very expensive. I think the rest of Florida's real estate problems are beginning to spread to here as well. Alachua county has an extremely low unemployment rate (
The demand continued past the time of prudence and senility began to set into the market. Had Wall Street not loosened loan quality standards to maintain ample supply of mortgage backed securities, the demand for MBS's would have diminished and those investment dollars would have gone elsewhere -- and it is because of these efforts that we are in this so called perfect storm, caused by an artificially grown and sustained housing market.
I agree that Mozilo knows what he's doing and he deserves all of the respect of the industry. Those who don't like him and the value that he has brought to his shareholders are either jealous or just don't know him well enough to make a qualified judgment.
The current market crisis (that should have only been a cycle) is far from over. The tightening of the purse strings on lending criteria is a long overdue correction to something that should have never happened to begin with. Remove greed from the equation and you will remove all of the entities and individuals who contributed to this perfect storm.
Somehow his prescience was magically enhanced when he was in communication with his broker.
Do you remember the summer of 2005? The New York Times Magazine (consumerist porn for rich pseudo-liberals) had a fawning, obsequious article about Bob Toll --- high-end homebuilder CEO. He went on and on about how the US and especially Toll was immune to any problems, how housing prices are bound to keep on going up, how Toll was so much stronger than the rest, with a rock and housing prices would equalize with Britain's. Remember that?
At the same time he was unloading oodles of stock. Hundreds of millions. He (or his company) bought the sponsorship of the Metropolitan Opera broadcast---yes it's now the "Toll Brothers"---not Texaco---Metropolitan Opera Broadcast.
Cynical "bitter renter" conspiracy theorists: 2
Words of "Captains of the Industry" CEO's: 0
What they got for not believing their propaganda: $$$$$$$$$$$$$$$$
The wholesale side is not to blame except for their loose guidelines but it's the "retention" side which our parent company a large tax firm (square heads) who runs it. The retention side of things "C.R.G" have rates which are 2 pts over that of wholesale, yet it’s our job to convince borrowers after we receive a payoff going with us a “lender” is better then going with a broker. Also stating we are competitive and to cut out the middleman would save you thousands of dollars. A broker with the same deal can take it through wholesale and save 2-3 pts in cost or equivalent in rate for the borrower.
The division has a purpose and that is to offer customers who want to stay with us a cost effective way to sat with us. This seems to have changed and now it feels like “how do we club the unsuspecting customers over the head before they notice and if we loose a few who cares they will come back through wholesale”.
Its sucks turning down so many people now a days because of the repercussions of our companies greed and others. A large portion of our clients could have received longer terms and lower rates but were enticed by brokers and us "CRG" to do 2/28’s. I feel this product is unethical and I still think they should be proactive with loan modifications to avoid further imploding of theirs portfolios.