All The Devils Are Here: Unmasking the Men Who Bankrupted the World by Joe Nocera, Bethany McLean Read Free Book Online Page A
Authors: Joe Nocera, Bethany McLean
his company to lend them what they needed to build the subdivision, which was a common tactic back then. Loeb agreed, though the tactic was not without risk: the money they loaned to the developers was more than the company was worth.
Disaster struck. On the night before the grand opening, a huge storm swept through the area. When Mozilo arrived at the site, he’d later say, he saw furniture standing in water because the subdivision had been built in a basin. His heart sank. Yet it turned out not to matter: people were so desperate for homes that the subdivision sold out anyway.
In 1968, United Mortgage Servicing was bought out. Loeb and Mozilo left to start their own business. Mozilo was thirty years old, but he had alreadyhad sixteen years of experience in the industry. What was striking about this new venture was the sheer, naked ambition of it. Nonbank mortgage brokers had existed for a long time, but they were small and local, niche players at best. Mozilo and Loeb had no intention of being niche players. They were going to be big and they were going to be everywhere. The name of the company said it all: Countrywide.
They struggled at first. Since Countrywide wasn’t a bank and couldn’t gather deposits, the only way it could make loans was by getting a line of credit—called a warehouse line—from a bank or a Wall Street firm or a group of investors. Then, to replenish its capital, it had to sell the mortgages it originated. But since the securitization market didn’t exist yet, that meant they were largely limited to loans that could be insured by the Federal Housing Administration or Veterans Affairs, since those were the only loans Fannie and Freddie were allowed to buy. It wasn’t much of a business.
Loeb and Mozilo tried to raise money by selling stock on the New York Stock Exchange. They hoped to raise $3 million, but got only $450,000, according to Paul Muolo and Mathew Padilla in
Chain of Blame
. Things got so bad, Mozilo later told reporters, that he and Loeb had to lay everyone off and start again.
But even as they were holding on by their fingertips, the massive changes that would transform the mortgage business had begun. Rising interest rates were starting to kill the S&Ls. More important, not long after Countrywide was born, Fannie Mae was granted the right to buy conventional mortgages.
Almost overnight, mortgage originators like Countrywide began to dominate the home lending business. From a standing start, the market share of nonbank mortgage companies rose to 19 percent by 1989. Just four years later, it stood at an astonishing 52 percent, according to Countrywide’s financial statements. By buying up the mortgages of companies like Countrywide, the GSEs made that growth possible, something Mozilo never forgot. As he once told the
New York Times
, “If it wasn’t for them, Wells [Fargo] knows they’d have us.”
Under the rules, Mozilo could sell only so-called conforming loans—those that met the GSEs’ strict underwriting criteria. Loans were underwritten based on what was known in the business as the four Cs: credit, capability, collateral, and character. If you had late payments on a previous mortgage, and maybe any other debt, you didn’t get a mortgage. The monthly payments for your home—the principal, interest, taxes, and insurance—couldn’t exceed 33 percentof your monthly income. All of which was fine by Mozilo. It was the way he’d always done business.
On the other hand, Mozilo also pushed Countrywide to begin using independent brokers instead of relying on its own staff to make loans. This was decidedly not the industry norm. It was also one of the rare times Mozilo had an open disagreement with his mentor, Loeb, who protested that if Countrywide began relying on independent brokers, it would be hard to control the quality of the loans. In the days before the collapse of the S&Ls, says one industry veteran, “brokers’ stock-in-trade was falsifying
Disaster struck. On the night before the grand opening, a huge storm swept through the area. When Mozilo arrived at the site, he’d later say, he saw furniture standing in water because the subdivision had been built in a basin. His heart sank. Yet it turned out not to matter: people were so desperate for homes that the subdivision sold out anyway.
In 1968, United Mortgage Servicing was bought out. Loeb and Mozilo left to start their own business. Mozilo was thirty years old, but he had alreadyhad sixteen years of experience in the industry. What was striking about this new venture was the sheer, naked ambition of it. Nonbank mortgage brokers had existed for a long time, but they were small and local, niche players at best. Mozilo and Loeb had no intention of being niche players. They were going to be big and they were going to be everywhere. The name of the company said it all: Countrywide.
They struggled at first. Since Countrywide wasn’t a bank and couldn’t gather deposits, the only way it could make loans was by getting a line of credit—called a warehouse line—from a bank or a Wall Street firm or a group of investors. Then, to replenish its capital, it had to sell the mortgages it originated. But since the securitization market didn’t exist yet, that meant they were largely limited to loans that could be insured by the Federal Housing Administration or Veterans Affairs, since those were the only loans Fannie and Freddie were allowed to buy. It wasn’t much of a business.
Loeb and Mozilo tried to raise money by selling stock on the New York Stock Exchange. They hoped to raise $3 million, but got only $450,000, according to Paul Muolo and Mathew Padilla in
Chain of Blame
. Things got so bad, Mozilo later told reporters, that he and Loeb had to lay everyone off and start again.
But even as they were holding on by their fingertips, the massive changes that would transform the mortgage business had begun. Rising interest rates were starting to kill the S&Ls. More important, not long after Countrywide was born, Fannie Mae was granted the right to buy conventional mortgages.
Almost overnight, mortgage originators like Countrywide began to dominate the home lending business. From a standing start, the market share of nonbank mortgage companies rose to 19 percent by 1989. Just four years later, it stood at an astonishing 52 percent, according to Countrywide’s financial statements. By buying up the mortgages of companies like Countrywide, the GSEs made that growth possible, something Mozilo never forgot. As he once told the
New York Times
, “If it wasn’t for them, Wells [Fargo] knows they’d have us.”
Under the rules, Mozilo could sell only so-called conforming loans—those that met the GSEs’ strict underwriting criteria. Loans were underwritten based on what was known in the business as the four Cs: credit, capability, collateral, and character. If you had late payments on a previous mortgage, and maybe any other debt, you didn’t get a mortgage. The monthly payments for your home—the principal, interest, taxes, and insurance—couldn’t exceed 33 percentof your monthly income. All of which was fine by Mozilo. It was the way he’d always done business.
On the other hand, Mozilo also pushed Countrywide to begin using independent brokers instead of relying on its own staff to make loans. This was decidedly not the industry norm. It was also one of the rare times Mozilo had an open disagreement with his mentor, Loeb, who protested that if Countrywide began relying on independent brokers, it would be hard to control the quality of the loans. In the days before the collapse of the S&Ls, says one industry veteran, “brokers’ stock-in-trade was falsifying
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