Angelo Mozilo Offers A Lesson On Fannie & Freddie

angelo mozilo

Angelo Mozilo is down in the dumps these days. The SEC is close to bringing civil charges against him, he’s on trial in Florida, and the whole practice of subprime lending is being described as “reverse redlining”.

But it wasn’t always so. At one point he was a kind of a hero. In 2000, for example, a Hispanic magazine La Opinion named Countrywide its “Corporation of the Year” for the firm’s aggressive lending to Latinos. Given the way the housing bubble has played out in minority communities, we’d be curious what La Opinion feels towards Mozilo these days. Probably not too fondly, we’d guess.

In a search of articles to see how Mozilo was viewed prior to the housing collapse, we came across this 2005 NYT article called “The Mortgage Maker vs. The World”, which was basically about how Mozilo walked around with a big ol’ chip on his shoulder. He didn’t like the way established, Ivy-league bankers viewed him or his business. He didn’t like that giving out mortgage to any all comers was looked down upon, and he took great pride in stealing market share away from his competitors.

Mozilo viewed himself as something of a populist, fighting for the little guy — as did the editors of La Opinion.

So in addition to learning that Mozilo was incredibly insecure, the article also offers a gem about Fannie Mae (FNM) and Freddie Mac (FRE) and their role in Countrywide’s success:

NYT: While he is sanguine about the stock price, Mr. Mozilo remains volatile about so much else. Particularly irksome are calls by Alan Greenspan, the Federal Reserve chairman, to shrink Fannie Mae and Freddie Mac, the quasi-government institutions that buy huge numbers of mortgages from financial institutions, notably from Countrywide.

“Fannie and Freddie are a threat to his banks,” Mr. Mozilo said of Mr. Greenspan, whose agency regulates big bank holding companies. By buying his mortgages and thus freeing up his capital to solicit even more business, Fannie and Freddie are a big reason Mr. Mozilo has driven Countrywide past the Citigroups and the Wells Fargos to the top of the mortgage heap. “If it wasn’t for them,” he said of Fannie and Freddie, “Wells knows they’d have us.”


Now this is damning on a couple of levels, one simple, one a bit more complex. The obvious phenomenon was that Countrywide made a gigantic business, winning market share by turning itself into an organ of the government. Courtesy of Fannie and Freddie it had an extremely low cost of capital (even Wells Fargo could barely compete, and as Warren Buffett will tell you, Wells’ cost of capital is very low), and a toilet down which to flush all the loans it wanted to make.

That alone is bad.

But it’s not quite true that Countrywide just saw Fannie and Freddie as trash receptacles. Countrywide was a big believe in aggressive lending, and it thought that it was engaging in good, profitable lending to people that other banks wouldn’t go touch. Remember, Mozilo was a populist. He had a chip on his shoulder. And he obviously was extremely proud of the fact that he, along with some other lending pioneers, had discovered that lending to poor people with marginal credit — people that bankers had tradtionally turned their noses up — were profitable. Mozilo didn’t see himself as just a salesman and packager of trash.

Fannie and Freddie allowed Countrywide to get big, but Mozilo thought that the core business was inherently profitable, which is why, Countrywide held onto some of its loans in order to “smooth” (read: goose) its earnings. If Mozilo just thought he was selling garbage, he wouldn’t have held onto a penny of it;.

So the effect here, as Steve Sailer has discussed with WaMu’s rise and fall, is that the government created a scenario in which the bankers who really believed that aggressive lending was inherently profitable could grow market share incredibly fast. If you sipped the Kool-Aid, you became a major player in the mortgage market. Had Fannie and Freddie not existed, Countrywide likely would’ve grown for a while (simply because for a long time reckless lending was profitable), but they would’ve been nowhere near as large as they ultimately became (as Mozilo himself admitted, when he said that Wells would’ve killed them).

Thus we can see that the defenders of the GSEs set up straw man arguments to take on its critics.

Said Paul Krugman last November:

Yet it’s now clear that the phony account of the crisis — that it’s all due to Fannie, Freddie, and nasty liberals forcing poor Angelo Mozilo to make loans to Those People — is setting in as Republican orthodoxy, part of what you have to believe to be a respectable member of the party.

No. Fannie and Freddie didn’t make poor Angelo Mozilo to make loans to Those People. Rather they allowed a banker, who wanted to make loans to everyone, come to be the biggest mortgage salesman in America.

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