King of the Hill Why

King of the Hill Why is Countrywide Chairman and Chief Executive Officer Angelo R. Mozilo licking his chops in anticipation that 2007, in his words, will be a year of "increased borrower delinquencies and continued credit deterioration"?

Because Countrywide, Mozilo told investors today, cut back on subprime lending and is well positioned to boost profit margins and market share as its competitors bite the dust in droves.

"There is substantial amount of consolidation (in the mortgage lending industry), either through acquisition or just going broke or bankrupt -- everything that's happening with the Ownits of the world and throughout the industry ... and a lot of it is happening below the radar screen that you're not aware of that we are."

Mozilo said there are probably 40 or 50 subprime lenders going out of business every day, "and I expect that to continue throughout the year." Countrywide, he said, "backed away from the subprime area because of our concern over credit quality."

(Never mind that delinquencies in Countrywide's $1.3 trillion servicing portfolio were 5.02 percent on Dec. 31, compared with 4.61 percent at the end of 2005, and that foreclosures were up 47 percent to 65 basis points. The company "believes its asset valuations and reserves for credit losses are appropriate for the increase in delinquencies.")

Mozilo said historically, subprime lenders would loan to borrowers with inferior credit, but require superior equity. "So people had to make a substantial down payment if they had marginal credit," Mozilo said. "Well, that all disappeared in the last couple of years, and you can get a 100 percent loan with marginal credit. And that doesn't work, particularly if you have any kind of bumps like we've had now in deterioration of real estate values, because people can't get out. So I think we've got a ways to go on that. There's no signs of ...the pressure abating on the subprime arena, and some signs that problems are accelerating."

Chief Operating Officer David Sambol chimed in that "consolidation is accelerating, and we are beginning to see that sector as a result beginning to rationalize." In other words, say goodbye to cutthroat profit margins that are the result of intense competition.

"We believe the shakeout is very positive for us cause it has been in the past," Mozilo said. "As we come out of the cycle, we will have a much cleaner landscape to operate within. Generally, margins improve, productivity improves. That's our view of it. We've got another 8, 9, 10, 12 months of headwinds, and then we believe that we'll have a much cleaner canvas to paint on for the next few years."

Countrywide will also continue to cut costs, Mozilo said, noting that it now employs 3,000 workers in Hyderabad and Mumbai, India, and continues to move jobs from California to Chandler, Ariz. and Tampa, Fla.

"Another trend I might point out ... we had, during the boom, the last couple years, quite a few of these sales people leave us, going for greener pastures, supposedly," Mozilo said. "And we're seeing a reversal of the tide, where they're coming back asking to be rehired. We're seeing it every day now. A real change in the competitive environment."
--Matt Carter, Inman News

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