What did Mozilo know, versus what he told investors?
The Securities and Exchange Commission's civil fraud case against Angelo R. Mozilo and two other former senior executives of Countrywide Financial Corp. centers on allegations that they knew the lender was making increasingly dangerous mortgages from 2005 through 2007, but pretended to Countrywide’s investors that the loans were high quality.
The agency zeros in specifically on so-called pay-option adjustable-rate loans, which allowed borrowers to pay so little each month that their loan balance increased.
The SEC, obviously going for the biggest shock effect in presenting its case, is playing up excerpts from a series of e-mails it pulled from Countrywide’s computers.
As the setup for one of the e-mails, the SEC quotes from a speech Mozilo gave on May 31, 2006, in which he said that "Pay-Option loans represent the best whole loan type available for portfolio investment from an overall risk and return perspective," that the "performance profile of this product is well understood because of its twenty-year history, which includes stress tests in difficult environments[,]" and that Countrywide "actively manages credit risk through prudent program guidelines … and sound underwriting."
Yet just one day later, on June 1, 2006, the SEC says, Mozilo sent an e-mail to other Countrywide executives "in which he expressed concern that the majority of the Pay-Option ARM loans were originated based upon stated income, and that there was evidence of borrowers misrepresenting their income. Mozilo viewed stated income as a factor that increased credit risk and the risk of default."
In the e-mail, the SEC says, Mozilo also "reiterated his concern that in an environment of rising interest rates, [loan] resets were going to occur much sooner than scheduled, and because at least 20% of the Pay-Option borrowers had FICO scores less than 700, borrowers ‘are going to experience a payment shock which is going to be difficult if not impossible for them to manage.’ "
As for what Countrywide’s investors were told, the SEC complaint says:
On April 27, 2006, Mozilo stated in an earnings call that Countrywide’s "pay-option loan quality remains extremely high" and that Countrywide’s "origination activities [we]re such that, the consumer is underwritten at the fully adjusted rate of the mortgage and is capable of making a higher payment, should that be required, when they reach their reset period."
Could Mozilo’s views have changed that dramatically between April 27 and June 1?
-- Tom Petruno
Photo: Angelo R. Mozilo. Credit: Jay Mallin / Bloomberg News