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Straight shooter.

Straight Shooter

Angelo Mozilo has blazed a successful trail through a highly competitive business by practicing his own forceful brand of take-charge leadership. This month he will top a unique career by becoming president of the Mortgage Bankers Association of America.

You wouldn't expect him to take ordinary vacations - say, take the family to some theme park for a week. But bone fishing in the wilds of Central America with survival-style provisions, no newspapers to check the fed funds rate and three doctors along to spark the conversation? What kind of person would do this to relax?

Well that's Angelo. Angelo R. Mozilo clearly relishes competition and the thrill of macho sports that pit man at his best, against nature at its best - or maybe worst, depending on how you perceive things. That's why he picks the bone fish as a friendly adversary. He notes for the record that this muscular and tenacious fish is a noble competitor - that's why the fish gets tossed back in after the victory is secured.

Bone fish pack more might per pound than any other fish and they can run for hours. But that's all part of the fun for Angelo, who clearly relishes the ethos of competitive sport. On yet another relaxing excursion last year, he went helicopter skiing in the Canadian Rockies. The first day out he slammed into an ice wall and broke two ribs. He concedes that conditions were really bad - lest you assume he was skiing out of control, or just not up to the challenge.

Although we are told he does take regular family vacations with his wife Phyllis and five kids, somehow it's the more exotic sporting treks that seem to typify what sets Angelo apart from the crowd.

He talks about a level playing field frequently. He likes competition but the rules have to be fair. That's why he gets so riled up about things in the competitive environment for mortgage lending that he finds unduly favor one competitor over another. He's candid beyond belief, a true believer in housing; he still gets a personal thrill when he's able to tell a family his company approved its loan, and on top of all that, he's a capitalist and proud of it.

Who is he doing battle with these days? Well let's just say HUD and the bone fish have something in common. Except the fish gets tossed back, whereas he is still battling HUD. The severe clamps put on the FHA single-family program under the direction of HUD Secretary Kemp have got Angelo angry on behalf of those Americans who he feels could and should be homeowners but for the philosophical bent of the current administration.

With typical candor he recalls the time that he had Kemp as a captive audience in a 747 coming across the country debating the administration's "reforms" to the FHA single-family program that Kemp later won from the Congress. Angelo recalls telling the pinned HUD secretary: "Look, I deal with these people every day. And they absolutely can make the monthly payment, but they cannot make the down payment. And in that environment, you [HUD] are increasing the closing costs?" And Angelo says the secretary replied, "Let them wait and save money."

Angelo recalls shortly after that conversation HUD "really pushed the housing bill through." He says it's not just HUD, but "that it appears to be the attitude of the administration - 'Let them eat cake."

Mozilo this month becomes the elected head of the only industry he has ever worked in - mortgage banking. Mozilo, as president and CEO of Countrywide Funding Corporation, will serve for a year as the president of the Mortgage Bankers Association of America, the national trade organization for just over 2,300 firms - large and small - that make their business by making mortgages that can be sold in the secondary market.

The HUD secretary and other financial policymakers in Washington, D.C. probably would be wise to steel themselves for a year of verbal shots - because one of the things that bothers Angelo most is regulatory inequities. And, these shots are likely to be direct hits and throw off some sparks in the process, because if Angelo is anything, he's a straight shooter.

Armed with a B.S. in marketing and philosophy from Fordham University in 1960, Angelo Mozilo entered the business after working part time during school with a mortgage banking company, starting as errand boy and quickly working up into the production side of the business. Born and raised in the Bronx, Mozilo had another job offer right out of college from a chemical company, but he was attracted to the business of mortgage banking with its real life connection to people and housing.

While he concedes he was somewhat attracted to Wall Street and investment banking early on, he felt at the time that without an Ivy League diploma he probably would have been handicapped. Now, in the wake of the scandals that have riddled the top firms on the street, his view is that outright greed is too much of a motivating force in the world of investment banking.

Mozilo has forged a lot of new ground in the field of mortgage banking. Angelo spent his first 15 years in the business with a company called United Mortgagee Servicing Corporation. Then he and partner David Loeb cofounded Countrywide Credit Industries, Inc. (CCI) - as the parent firm is called, in 1968. Countrywide Funding, the mortgage banking subsidiary, is distinctly different from many in the retail side of the business. First, there are no commissioned loan officers in Countrywide's 96 retail branches. Not only did that cut against the industry grain, but his company chose that departure long before it became clear to many that commission costs were seriously devouring retail production profits and needed rethinking.

What further sets apart Countrywide's now almost perfectly humming mortgage banking machine is that it is just about the only "pure" mortgage banking corporation that is publicly traded and stockholder owned. They have a small thrift within the Countrywide family that provides one of the highest returns on investment in the parent company's empire. But this time the thrift is the subsidiary of the much larger parent mortgage banking company, rather than the other way around, which is far more typical in this business.

Countrywide Funding is a breed apart in another significant way - there is no parent financial institution to provide low-cost deposits to fund the cashflow needs of the mortgage operation. That fact has imposed a crucial discipline on the company that has meant it must live within its means through the ups and downs of a very cyclical business. But now that the company has established a remarkably profitable track record, it can raise considerable equity funds with ease. This year alone, Mozilo said, the corporation was able to raise approximately $250 million of new equity. The credit crunch that hit many mortgage companies this year, as a result, was not felt inside the corporate walls of Countrywide's home office.

Countrywide is headquartered in Pasadena in the Countrywide Building on North Lake Avenue. A cover story in the business section of the local newspaper this summer crowed about the success of this hometown employer of roughly 1,200 people. The feature in the Star-News carried a front-page photo of Mozilo standing in front of the Countrywide Building with a headline that read "Loan Ranger."

CCI has several subsidiaries in addition to the mortgage banking operation. There is the $250 million asset thrift called Countrywide Thrift and Loan, a subsidiary that sells mortgage-backed securities called Countrywide Securities Corporation, a subsidiary that brokers servicing packages called Countrywide Servicing Exchange and a company that manages a real estate investment trust called Countrywide Mortgage Investments, Inc.

Even with all these various operations, the company's official biography terms Mozilo a "hands-on manager." By all accounts, particularly a slew of positive press accounts this year, he and his company are doing a great job. A Financial World magazine writeup appearing March 5, 1991 in the "Company Watch" section touts Countrywide and says, "Analysts estimate Countrywide's earnings will hit $22 million in fiscal 1991, up 68 percent from the prior year on $104 million in revenues."

Still the combative spirit in Angelo will make the new post of industry spokesman a real challenge, perhaps even more difficult than leading his company to a profitable year in the midst of a housing recession. In a wide-ranging interview, Mortgage Banking asked him for his candid assessment on a number of topics and that is exactly what we got.

Q: At what point did you realize that the large-scale buying and selling of servicing was going to be such big business and such an integral part of the mortgage banking business?

A: I think it goes back to the time when we realized as mortgage bankers that we had to maintain maximum financial flexibility. The volatility of interest rates, the difficulty of obtaining adequate warehouse lines from banks and the problems caused by the continuous contraction and expansion of business clearly required a new business strategy.

Based upon my recollection, the problems began as far back as the early 1960s when the country fell victim to the "guns and butter" policy of the Johnson administration. At that time, United Mortgagee Servicing Corporation, my first employer, began selling loans servicing-released to one of the New York savings banks. To my knowledge that was the first time loans were sold by a mortgage banker where servicing rights were released. In fact, we came under substantial criticism from many members of the mortgage banking community for doing so. However, as the financial affairs of the nation became increasingly more critical, and when, during the Carter years, interest rates skyrocketed to unprecedented levels, the sale of servicing by mortgage bankers became relatively commonplace. In fact, the primary reason why most of us survived during those difficult years was due to our ability to stay liquid by either selling our servicing portfolios directly or by selling our loans with the servicing released. It's important to note, however, that up until the middle part of the 1980s, the sale of servicing by a mortgage banker was perceived to be a sign of weakness, and it sent a signal to banks and other creditors that there might be financial problems that were prompting the sale of servicing rights. In recent years, primarily through the simplification of the servicing sale process, the sale of portfolios and servicing rights are now considered to be part and parcel of a sound business strategy. So relating back to your original question, we realized that the sale of servicing was a viable weapon in the arsenal of a mortgage banker as far back as 1963, and it has proven to be clearly a very important and permanent part of the mortgage banking business today and beyond.

Q: How did that development change the way you ran your business operations?

A: Well, one of the things it did was it permitted us to survive during difficult periods, because unquestionably, without the ability to sell servicing rights, we probably wouldn't have made it through the most difficult periods, especially during the last three decades. Frankly, it was the only means of coping with the severe market swings and it was the primary means of subsidizing our origination operations. On a going-forward basis, we utilized servicing sales to change the mix in our servicing portfolio, to alter geographic concentration and finally, to manage earnings.

Q: So does it seem odd now that what you did in the beginning is now such a standard part of the business?

A: Absolutely. We've gone from an era where the sale of servicing was, at best, a questionable practice to the current universal belief that the sale of servicing, is, in fact, a sound and intelligent business strategy. And by the way, the ease in selling servicing has created an entirely new business within itself. As an example of this dramatic change in business practice, many operations have been formed to facilitate the buying and selling of servicing. In fact, Countrywide has added a new company to its family, operating under the name of Countrywide Servicing Exchange, which exclusively deals with the brokerage of servicing rights and servicing portfolios.

Q: Do you believe that the industry will ever return to a strategy of building servicing portfolios predominately through retained originations versus acquisitions?

A: In my judgement, the industry is utilizing both strategies of origination and acquisition in order to build their servicing portfolios. Whether one strategy is used more than another is simply a function of economics. In other words, if it's less expensive to put servicing on the books through originations, then that will be the dominant methodology. If bulk acquisitions prove to be the more efficient means, then obviously the industry would trend in that direction. As a practical matter, however, when you're attempting to build a servicing portfolio, it is most likely that you will be originating as well as buying bulk simultaneously.

Q: How big a role do you see wholesaling playing in the origination markets over the next three to five years? And by that I mean what percentage of overall originations do you anticipate coming through the wholesale side of the business?

A: The wholesale side of the business will play a major role in the origination of loans for at least the balance of this decade and probably beyond. The third-party originator is now a permanent part of the mortgage banking industry and many members of our association depend heavily, and in some cases, solely, upon wholesale business. I believe more than 50 percent of the originations today are being done on a wholesale basis.

Q: Will it ultimately be 100 percent?

A: No. Simply because many of us in the industry understand the importance of always maintaining a sound and viable retail operation. In fact, I foresee a reversal of the current trend - that is, companies will be reestablishing retail operations that they formerly had abandoned. So, if I see any trend, it would be a growth in retail operations; however, there would still be a strong commitment to third-party originations. It's important to note that if your strategy is to build a servicing portfolio, you must maintain retail origination capability in order to protect that portfolio. The only way you can be a master of your own fate, relative to maintaining your retail customer base (that is, those loans in your servicing portfolio) is that you must have the structure, as well as the resources, to refinance those loans when and if appropriate. So, therefore, in my judgment, there will always be a delicate balance maintained between wholesale and retail originations.

Q: Do you expect to see some major consolidation among the wholesalers over the next five years or maybe sooner than that?

A: You're going to see some consolidation because of two primary factors. First, we've had such an explosion in the wholesale business in the past four or five years, that some correction is inevitable; second, because of the desire to compete for market share, some wholesalers will experience certain problems relative to loan quality, and this, therefore, will cause contraction and consolidation. We have already seen some of this activity take place with the sale of Travelers to GE, with the dismantling of Citicorp's mortgage program and with other similar types of change in business strategy. There are going to be some new players entering the wholesale business, and as night follows day, there will be those that will be exiting the wholesale business. So yes, there will be a continuing metamorphosis as the wholesale business evolves.

Q: We're still seeing new wholesalers coming in, right?

A: Yes. As I stated previously, there are more coming into the wholesale business than are leaving at the moment, and my concern is that as competition stiffens and overcapacity begins to develop, that serious quality control issues could be the inevitable result of the current trend.

Q: You've made a lot of statements about HUD and its lack of commitments to housing. Do you believe the administration intends to basically dismantle FHA as a moderate-income person's housing program?

A: No question about it.

Q: Do you believe that Fannie and Freddie together could replace HUD as the primary housing agency?

A: Fannie and Freddie can clearly play a major role in the scheme of housing middle-income Americans, but they absolutely cannot and should not replace FHA. It's most unfortunate that the role of FHA has been seriously lessened over the past decade, and now it has been further damaged by the 1990 reform orchestrated by both the administration and Congress.

Philosophically, as well as operationally, publicly held companies such as Freddie and Fannie cannot completely and adequately satisfy all of the housing needs of the American people. Their efforts must be complemented and supported by a focused and disciplined governmental agency such as FHA. Therefore, it is essential that the FHA aggressively move forward to create programs which encourage homeownership rather than discourage it. It is my opinion, based upon 37 years in the business, that FHA could lower down payments and substantially lower MIP premiums and increase maximum loan amounts, and at the same time, maintain and strengthen the soundness of the FHA fund.

The continuous efforts of the private mortgage insurance industry to reduce the impact of FHA on housing is a serious, and unfortunately, short-sighted strategy. I trust, and frankly, hope, that they will soon realize that expanding FHA's role is vastly more important to the welfare and stability of our country than is the [mortgage insurers'] perennial quest for market share.

Q: Why has the industry, if you believe it has, turned so decisively against government lending? This is the industry that has always done the vast bulk of FHA and VA lending. And yet, even before the recent legislation tightening the program, mortgage bankers were clearly moving away from government lending.

A: It became obvious as far back as 1980 that the Reagan administration was determined to diminish FHA's role in housing. If you recall, right after the 1980 election, there were major reductions in force (RIF) in HUD mandated by the Reagan administration. That RIF program alone impacted the morale of the employees of FHA, but just as important, it virtually strangled them operationally. As further evidence of the message that the administration was attempting to convey, [it proposed placing] FHA up for sale into the private market. With these concurrent actions, it was apparent that the administration was on a mission to turn all housing - single-family as well as multifamily - over to the private sector. It became incumbent upon everyone in our industry to alter their strategies to cope with this new and most difficult environment. Many of us began the process of redirecting our efforts, retraining our employees, and in some cases, starting from scratch to build a conventional loan operation. So the move of the mortgage banking industry away from FHA and toward conventional financing was one that was forced upon us. Unfortunately, the victims of this relentless attack on FHA are not only members of the mortgage banking community, but more importantly, the low- and middle-income homebuyers of our country who have suffered the most. Similar program changes have negatively impacted the VA home loan program by virtue of the implementation of the no-bid rule as well as continuously increasing the VA funding fee. Simply put, the governmental agencies, namely FHA and VA, have been adversaries to the process of encouraging homeownership, instead of partners.

Q: Where did the industry go wrong in swallowing the no-doc product line so whole? I know you were somewhat of a believer in that product early on.

A: Although the no-doc program on a theoretical basis makes great sense to both the mortgage banking community as well as the GSEs, the implementation of the program became increasingly problematic as it grew in size and scope. In simpler terms - it was abused, and unfortunately, the abuses led to the baby being thrown out with the bathwater. I was a strong proponent for the no-doc program, but frankly, when the abuses became pervasive, I felt and still feel that the program had to be modified. It was never my desire that the program be ceased in its entirety. I, therefore, would like to see programs developed that could accommodate those homebuyers who do not fit the traditional documentation and underwriting requirements. The primary example would be self-employed individuals who have extreme difficulty in documenting their ability to qualify. However, all other aspects of their financial picture [would have to] clearly indicate that they [could] qualify. Fannie and Freddie should be flexible enough in their program development to accommodate potential qualified homebuyers who don't meet the standard and traditional documentation requirements. Therefore, I was a believer in a modified-doc program in the beginning, and I'm a believer now.

Q: On the question of the credit crunch and the availability of warehouse lines, what impact on the availability of those lines will the recent spate of bank mergers have? Also, will the closing down and merging of several banks this year hasten some of the structural changes that are taking place in the industry?

A: There is no question that the merger activities of commercial banks are exacerbating the credit crunch and seriously hampering the operations of most, if not all, members of the mortgage banking community. So we are clearly, deeply involved in the phenomenon of the credit crunch and, in fact, we are an unfortunate victim of it.

The impact of these current events in commercial banking are both profound and far-reaching for our industry. Many mortgage companies are having to contract while others are having to sell off their servicing portfolios or their loans servicing-released in order to remain viable.

Preceding economic events such as interest rate volatility, compounded by the current crunch, have now bifurcated the mortgage banking industry. That is, we now have the larger, better capitalized companies who have adequate liquidity as well as credit facilities, and on the other side, we now have thousands of smaller, niche players operating as mortgage bankers but who also are feeding business into the larger companies. As a result, the middle part of our industry has contracted substantially because of all of the complex events of this past decade.

The structural changes, therefore, will continue to evolve, but it seems to me that the picture is now clear and that the mortgage banking industry will be primarily composed of a relatively small number of large originators/servicers and in addition, there will be literally thousands of smaller mortgage companies who will serve various markets throughout the country.

Q: Is table funding here to stay?

A: Yes. The credit crunch has obviously made it difficult for many mortgage companies and mortgage originators to maintain adequate credit facilities. Therefore, they have turned to those mortgage bankers who can provide them with the liquidity necessary to close the loans in their name. Basically, what's happened is that we are providing our fellow members of the mortgage banking community a portion of our warehouse facility. Whether or not this practice will continue will be based upon the availability of credit lines in the future.

Q: What will be the role for retail mortgage bankers? Who will they be?

A: They'll be those companies who, first of all, make a commitment to retail operation, a real commitment, not only in terms of dollars but a philosophical commitment. It must be a permanent part of their operations. Secondly, those who employ technology and have a realistic approach to the compensation of the field staff and who pursue every possible method of efficiency will be effective retail originators. Again, if they control their origination costs and enthusiastically embrace technology, their success in retail originations is virtually assured.

Q: So you're saying there's a place for commissions in this scenario?

A: Yes. A commissioned sales force is certainly an acceptable and effective means of originating mortgage loans. I have never quarrelled with the fact that mortgage companies can be built successfully through the efforts of a sales force. Companies such as ARCS Mortgage, Directors, BancBoston, Norwest and many others are clear evidence that a well-trained and well-

PHOTO : Mozillo meets with Gerald L. Baker, managing director, Production and Support Divisions.
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Title Annotation:Angelo R. Mozilo, president and chief executive officer of Countrywide Funding Corp., and will serve for a year as president of the Mortgage Bankers Association of America
Publication:Mortgage Banking
Article Type:Interview
Date:Oct 1, 1991
Previous Article:Scouting out new markets.
Next Article:Dodging the prepayment bullet.

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