Countrywide Chief Fears Crowd Could Sink Subprime Market

On the heels of a new report that found one in four home loans originated in last year's fourth quarter were subprime comes a renewed warning that one misstep by a mono-line nonprime lender could cast a pall over the entire mortgage business.

"I'm deeply concerned about what's happening" in the subprime sector, mortgage luminary Angelo Mozilo cautioned at the 2005 Midwinter Housing Conference here.

"This is the one aspect of our business that bothers me," the chairman of Countrywide Financial Corp., Calabasas, Calif., said. "It is spinning out of control and it could become a catastrophe."

Mr. Mozilo, a former president of the Mortgage Bankers Association, said his uneasiness is twofold - the rush to subprime by the lending community in general and the types of loans many are pushing.

"Everybody's in subprime," he said, citing an old Yiddish proverb that warns the ship could sink if too many people shift too far from the middle.

"When everybody goes to one side of the boat, the boat tips over," he said.

Ironically, Countrywide was the third-largest subprime originator in the fourth quarter, according to figures compiled by National Mortgage News and its affiliate, the Quarterly Data Report, funding $11 billion in B and C class loans. Countrywide is also the country's largest servicer of subprime loans, with a portfolio totaling $89 billion at year-end.

But Mr. Mozilo said his company does not make the no-documentation, stated-income and "way low" FICO score loans he is worried about.

According to Debbie Rosen, who is managing director of Countrywide's Specialty Lending subsidiary, the company's subprime division, her unit's average FICO score is 640.

And Mr. Mozilo told the conference that every application Countrywide takes is run through its proprietary electronic underwriting system, which automatically kicks those that start out as higher-rate subprime loans down to lower-rate prime loans if they qualify.

The Countrywide executive said the mix of "super-subprime" products some originators are offering are a dangerous brew, not just for borrowers but their lenders.

"I'm very concerned with the quality of loans being originated today," he warned.

"All it would take to send the subprime sector into a fatal fall is just a little blip in interest rates or unemployment rates," he said. "And it would impact not just the subprime sector but fine, quality lenders like Wells Fargo, Bank of America and ourselves."

At the same time Mr. Mozilo stressed his discomfort with the trend toward "lower-echelon" loans, the mortgage maven emphasized the need for more targeted lending to minorities, immigrants and other underserved markets.

"Without homeownership," he said, "the economic and social problems our country face will persist."

The Countrywide chairman also said that as they are currently calculated, FICO scores are useless in determining the likelihood that minority borrowers will make their payments as promised.

"FICO scores are meaningful for whites, but not for minorities who haven't had the opportunities the majority has had," he said.

Simply owning a home "changes most people's behavior," he added. "There's no way a FICO score can tell you that."

And as he has in the past, Mr. Mozilo said again that it is worthwhile to make more loans to borrowers with less-than-sterling credit, even if it means more late pays.

"Even a 10% delinquency rate is a risk worth taking," he said. "That means that the other 90% are paying on time."

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