All The Devils Are Here: Unmasking the Men Who Bankrupted the World (7 page)

That’s when Mozilo met Levine, who today is the president of ARCS Commercial Mortgage Company, a subsidiary of PNC Financial, the big Pittsburgh-based bank. “We were very anxious to be successful,” says Levine. “Angelo in particular. This was our break.”

By the time he graduated from high school, Mozilo had worked in every part of the company, and he continued to work there while attending Fordham. In 1960, the same year Mozilo graduated from college, the company merged with a larger company, United Mortgage Servicing Company, which was based in Virginia and run by a man named David Loeb. Though also from the Bronx, Loeb could not have been more different from Mozilo. “His parents were into ballet and opera,” Mozilo later recalled. “He was fifteen years older, and I was frightened to death of him.” But Loeb took a liking to Mozilo, to his scrappiness and ambition. Mozilo enrolled in night business school at New York University, but dropped out when Loeb decided to send him to Orlando, Florida. He was twenty-three years old.

Brevard County, on the coast not far from Orlando, was the perfect place to be in the housing business in the early 1960s. A few years earlier, the Soviet Union had launched the Sputnik satellite, and the space boom was on in the United States as America frantically tried to outdo its cold war rival. Brevard County included a small speck of land called Cape Canaveral. Space engineers flocked to the area, only to discover there was no place for them to live. As Mozilo would later tell the story to reporters, he remembered seeing people living in tents on the beach.

Mozilo met a group of developers who hoped to build one of the first subdivisions in the county. But they needed money. Mozilo wanted 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 already
had 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 percent
of 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 documentation.” At least, that was the rap. And nonstaff brokers had no skin in the game; once they’d sold their loan to Countrywide and gotten their fee, they were out. “I think it’s going to be a big mistake,” Loeb said, according to
Chain of Blame
.” But with S&Ls closing down by the hundreds, there was a cheap, ready-made workforce: out-of-work loan officers. Using them could help Countrywide grow faster. Loeb’s resistance faded as brokers’ reputation began to change, and as the company got aggressively behind this idea, all its competitors began using independent brokers as well. It soon became standard practice.

By 1992, just twenty-three years after its founding, Countrywide had become the largest originator of single-family mortgages in the country, issuing close to $40 billion in mortgages that year alone. Just as rising rates had crushed the S&Ls a decade before, so did falling interest rates now turbocharge Countrywide’s growth. Lower interest rates helped more people afford homes, of course. But Countrywide began advertising a technique that allowed people who already owned their home to take advantage of lower rates. Refinancing, it was called. Often borrowers didn’t just refinance their home, they pulled out additional cash against the equity in their homes. For the fiscal year ending in February 1992, refinancings accounted for 58 percent of Countrywide’s business; two years later, they accounted for 75 percent of its business. Although refinancing allowed consumers to take advantage of lower interest rates, it really didn’t have much to do with homeownership. Countrywide wasn’t putting people into homes so much as it was making it possible for homeowners to use their homes as piggy banks.

During 1991 and 1992, Mozilo served as the chairman of the Mortgage Bankers Association. It was a sign that whatever lingering resentments Mozilo still felt, Countrywide was now part of the in-crowd.

What everyone remembers about Mozilo was how passionate he was about the business, about its success. He cared deeply about every aspect—he
wanted to know everything,
had
to know everything. If he walked into a branch and saw that a fax machine was broken, he would stop everything and try to fix it himself. According to the
American Banker
, the thrift H. F. Ahmanson, desperate to compete with Countrywide, commissioned a report on the company in the early 1990s in an effort to understand its secret sauce. Mozilo, the report concluded, was a “hands-on manager, totally consumed by the business, a perfectionist.” It also said he was a “dictatorial” boss who “is known to fire employees the first time they make a mistake.” If this wasn’t exactly true—longtime Countrywide executives often said that Mozilo’s bark was worse than his bite—it was all part of his aura.

He did drive his employees incredibly hard, or those who succeeded drove themselves incredibly hard. He was both highly emotional and mercurial, and he operated from his gut. It wouldn’t be uncommon for him to have “an allergic reaction to things,” as a former executive puts it, before eventually coming around. He was perfectly capable of telling an employee that what he’d just said was the stupidest thing in the world. He expected those who worked for him to take whatever he dished out in the heat of the moment— and then do the right thing, even if it contradicted his command. If they did the wrong thing, following orders wasn’t an excuse. Countrywide was not an easy place to work. “It was very, very competitive,” recalls one person who knew the company well. “The politics were brutal. You had to eat, sleep, and drink Countrywide. It was a boys’ club. There were a few women, but it was very autocratic.” But employees took great pride in the company—and Mozilo. At getaways for top producers, people would clamor for a moment with him. He was the classic underdog who had achieved big things, after all.

He instilled something akin to fear in the investment community. Mike McMahon, a Wall Street analyst who followed Countrywide for more than twenty years, once took a group of investors to see Mozilo. During the meeting, one of them said that Countrywide’s stock would be valued more highly if Mozilo disclosed more about its operations. Most CEOs would have dismissed the questioner with a platitude. Not Mozilo. He had a bad back that day, so he had to stiffly turn his whole body toward the man—“like Frankenstein,” McMahon recalls. “No,” Mozilo replied. “Fuck ’em.” Then, ever so slowly, he turned his body back, almost menacingly, as if to say, “Who else wants to take me on?”

What everyone could see, though, was that Mozilo drove himself harder than anyone. For a long time he had a classic case of entrepreneurial paranoia—that gnawing fear that, someday, everything he had built would
suddenly vanish. That’s why he couldn’t relax, even for a second. The company, after all, was in a boom-and-bust business, one that hit hard times when interest rates rose. It competed not just against other mortgage brokers but against giants like Wells Fargo and Bank of America. Margins were always tight. Securitization may have made the business possible, but it didn’t make it easy. McMahon says that mortgage origination was a “negative cash flow business,” meaning that the slim profits were eaten up by costs and commissions. There was profit in servicing mortgages, but that was realized over time. “The more they originated, the less cash they had,” he says. In addition, because Countrywide had to appease the rating agencies in order to borrow money at a good rate, the company actually had to put aside more capital than banks did. “They were in a really, really, really competitive, low-margin commodity business with one hand tied behind their back on capital,” says McMahon. Is it any wonder Mozilo’s motto was “We don’t execute, we don’t eat”? According to
The New Yorker
, he once told a Countrywide executive, “If you ever stop trying to make your division the biggest and the best, that’s the day you die.”

Over time, Loeb faded into the background. Early on, Mozilo had moved Countrywide to California; the state represented a huge percentage of the mortgage market and accounted for as much as 50 percent of Countrywide’s revenues in some years. Loeb, however, often worked from one of his homes in Manhattan or Squaw Valley, where he focused on managing Countrywide’s risks. Mozilo became the public face of the company—and in some ways the public face of the industry as well.

With his trademark tailored suits and crisp blue shirts with white collars—which accentuated his perfectly white teeth and dark skin—Mozilo would testify before Congress, give interviews to reporters, make speeches at conferences, and meet investors. He took great pride in the business model he had helped create; he had, indeed, “showed them.” By 2003, Countrywide was one of the best-performing companies in the country, with a stock price that had risen 23,000 percent in the twenty-one years since the start of the bull market that began in 1982. A glowing article in
Fortune
magazine noted that Countrywide had outperformed not just other mortgage companies and banks, but such storied stock market performers as Walmart and Warren Buffett’s Berkshire Hathaway. Mozilo would later describe the publication of that article as one of the proudest moments of his life.

At precisely the same time Mozilo was building Countrywide, another entrepreneur was building a different kind of mortgage empire. His name was Roland Arnall. He was never in the limelight like Mozilo, and he never wanted to be. But he made far more money; by 2005, he was worth around $3 billion, according to
Forbes
. Arnall got rich by making loans to the borrowers that had long served as the customer base for the hard-money lenders: people who had bad credit, didn’t make much money, or both. Though his companies never got the blame that would later be heaped on Countrywide, Arnall was the real subprime pioneer; in fact, his first company, Long Beach Mortgage, trained a slew of executives who would later go on to found their own subprime companies. “The Long Beach Gang,” housing insiders used to call them. One of Arnall’s subsequent companies was called Ameriquest. By 2004, it had become the largest subprime lender in the country.