WHEN ANGELO MOZILO, CEO of Countrywide Mortgage, told this to investors some months ago, he was sure he was right. Now he wasn’t so sure. Recently he had told a friend:
“Ameriquest changed the game. If you had said: ‘Nope, I’m not going to do this because it’s not prudent,’ you would have had to tell shareholders, ‘I’m shutting down the company.’”2
It was January 2003. Countrywide Mortgage was now the second largest U.S. mortgage originator. Its market share had grown until Countrywide was producing $400 billion a year in new mortgages. Profits had skyrocketed, rising from $180 million in 1994 to $842 million in 2002 (See Attachment 1).3 Countrywide’s stock price had responded in kind.
Yet Mozilo was worried. The mortgage business was tough; it was surprising how few people truly understood its business model; margins on prime mortgages were thin, and the health of the business depended on growing volume. Having been in the business for decades, Mozilo understood these things. What he also understood was that mortgage volume was now shifting to the subprime sector. More specifically, it was shifting to the offering of “Affordability Products” to less creditworthy borrowers. Margins and fees on these products were high. Moreover, Wall Street’s ...