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Mozilo Misses the Mark


Providing more credit to the mortgage market will simply delay an inevitable day of reckoning.

Editors Note: This article was written by Andrew Jeffery of the Minyanville Editorial Staff. Andrew worked in the mortgage finance business during the boom and bust of the past five years.

In an opinion piece for this morning's Wall Street Journal, Countrywide (CFC) CEO Angelo Mozilo says the immediate solution to the mortgage mess bogging down the American economy and global financial markets is to "[stabilize] mortgage markets by expanding credit to current homeowners and prospective buyers."

Providing more credit to the mortgage market will simply delay an inevitable day of reckoning. Although Mozilo's plan provides a short-term panacea for firms that borrow short and lend long as well as investors who didn't kick the tires of their structured debt investments, it prolongs the healing process the mortgage industry so desperately needs.

Years of low interest rates, exotic mortgages, Wall Street and Main Street greed, and complacent regulators pushed home values in the United States to unsustainable levels, and Mozilo's attempt to paint his solution as one that would benefit the American taxpayer and economy alike is truly sad. Without proper readjustment of home prices to affordable levels, American families will wallow in mortgage debt for years and be forced to rent for want of a home they can afford.

This necessary adjustment process will erode the value of Countrywide's balance sheet and lead to potential insolvency – something Mozilo knows better than anyone. Of the many solutions Mozilo proposes, it is no accident he suggests an increase to the jumbo loan limit – a market whose seizure has dramatically affected home prices in California and Florida, the two states where Countrywide is most exposed.

If Mozilo were genuine in his desire to do what's best for the country, he would propose selling the 3900 California bank owned properties in Countrywide's portfolio at a deep loss. These are homes Countrywide took via foreclosure and is now looking to unload. As a result of tightened loan underwriting standards, borrowers must now put up a 10-20% down payment - something inflated home prices have made virtually impossible for most prospective buyers. Similar to recent actions by Lennar (LEN) and Hovnanian (HOV), if Countrywide were to offer fire-sale prices for these homes, it would signal a willingness on the part of the bank to take its fair share of the pain to make home ownership affordable again.

Mozilo proposes that Congress increase loan eligibility limits to $625,000 (from $417,000) for Fannie Mae (FNM), Freddie Mac (FRE) and FHA to widen the availability of credit for home purchases and refinances. In addition to ballooning the balance sheets of the already struggling Fannie and Freddie, the direct beneficiaries of this plan are financial institutions like Countrywide, AIG (AIG), Citibank (C) and others with loads of mortgage-related debt on their books. Struggling borrowers could use this new liquidity to refinance rather than default, thus propping up the values and cash streams of the mortgage backed securities tied to these loans.

In short, Mozilo proposes a plan to bail his firm out of the current mess by providing a quick fix to re-grease the wheels of his broken loan machine, while posturing as a spokesman for the American homeowner.

Last week, Professor Depew likened credit to a narcotic:

Similarly, after a period of time of credit expansion out of thin air …the financial system begins to deteriorate as false signals of economic health send the drug (credit) coursing through the wrong veins, boosting investment in areas with less substance than meets the eye. Increasingly, in late stages of addiction, more of the drug (credit) is required to sustain the system.

The mortgage market just checked into rehab after a nasty addiction. Even though its begging for one last fix, don't we owe it to our patient, and ourselves, to endure a bit of pain for a chance to live drug free?

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