Warming Up to a 15-Year Disaster Industry

Editor's note: The markets and our offices are closed on Monday, January 20 for Martin Luther King Jr. Day. Because of this, we won't be publishing Altimetry Daily Authority. Please look for your next issue on Tuesday, January 21.

Angelo Mozilo wanted his 'baby' to be No. 1...

And he was willing to sell to almost anyone to get there.

His company, Countrywide Financial, was briefly the top mortgage lender in the 1990s... before losing out to larger players like Wells Fargo (WFC).

That's when Mozilo decided he never wanted to lose again.

He publicly announced at a Lehman Brothers conference that he wanted at least a 30% market share, more than double what any company had reached before.

To achieve that goal, Mozilo turned to a deputy named David Sambol. Sambol told Countrywide employees to "price any loan"... meaning they should sell any loan they could, no matter how risky the borrower was.

It didn't matter if customers could actually afford their mortgages. Countrywide began offering loans that didn't require proof of income or assets – the infamous NINJA (no income, no job, no assets) and "liar" loans.

Countrywide even helped pioneer adjustable-rate mortgages and interest-only loans... the kinds that seemed affordable at first, until the low introductory rates expired.

Mozilo's relentless pursuit of market share pushed the company from handling $62 billion in loans in 2000 to more than $463 billion by 2006.

And he didn't stop there. He wanted even more growth.

Mozilo turned Countrywide into a giant machine that didn't just lend...

It sold securities to investors in the form of mortgage-backed securities ("MBS").

Countrywide and its peers would provide homebuyers with mortgages. Then they would "pool" groups of these mortgages together and sell shares of that pool to investors. It helped the MBS receive safer credit ratings than any individual mortgage would have.

In short, Mozilo and his team made these loans look safe... even when they were some of the worst of the worst. MBS were ticking time bombs.

And when they started exploding in 2007, Countrywide found itself on the verge of collapse.

Demand for its mortgages completely dried up. Banks weren't willing to give this business a penny. It had to rely on its backup credit lines, which instantly triggered a credit downgrade.

That wasn't enough to stop the bleeding, either. The company booked a $1.2 billion loss later that year – its first loss in 25 years.

It didn't take long for Bank of America (BAC) to dive into the scrap heap. It assumed (wrongly) that it could salvage Countrywide's loan book.

It bought the nearly $500 billion loan portfolio for just about $4 billion... and still lost money on it.

You see, Bank of America thought it would be able to insure any faulty mortgages by buying mortgage insurance, which protects lenders in case the mortgages they've underwritten go belly up.

But Mozilo's goal was never quality... It was growth at all costs. And its mortgages were nowhere near as safe as it claimed.

If only Bank of America had done its homework before diving in. It ended up with a lot of fraudulent loans. Insurers refused to pay for them. And the bank ended up on the hook for more than $50 billion in legal fees and faulty mortgages it had to buy back.

In fact, it took until 2022 – more than a decade after the financial crisis – for Bank of America to make its final payment related to the Countrywide acquisition.

Folks, I'm not telling you this story to scare you away from the mortgage industry...

It's the opposite, actually.

Mortgage insurers avoided paying out some of the biggest losses from the Great Recession because of fraud. But that's not a good long-term business plan. They've had to clean up their acts in the years since.

These businesses have gotten a lot more stringent about the kinds of mortgages they'll insure. That has made them much safer businesses.

Just know that while it has gotten much safer overall... there's still a range.

Most mortgage insurers publish the credit scores of their borrowers. We'd stick to lenders that focus on the very highest credit scores.

It has been a decade and a half since the financial crisis. The market is slowly getting comfortable with the mortgage insurance industry. This could be a good time to dip your toes in.

Regards,

Joel Litman
January 17, 2025