All the Devils Are Here [16]
Instead, securitization itself became the essential form of funding. Which meant, in turn, that all kinds of new mortgage companies could be formed—companies that competed with banks and S&Ls for mortgage customers, yet operated outside the banking system and were therefore largely unregulated. Not surprisingly, these new companies were run by men who were worlds apart from the local businessmen who ran the nation’s S&Ls and banks. They were hard-charging, entrepreneurial, and intensely ambitious—natural salesmen who found in the changing mortgage market a way to make their mark in American business. Some of them may have genuinely cared about putting people in homes. All of them cared about getting rich. None of them remotely resembled George Bailey.
These new mortgage originators were of two distinct breeds—at least at first. One set of companies originated fairly standard loans to people with good credit, which they sold to Fannie and Freddie; Countrywide Financial was a good example of that kind of company. The second group had very different roots. They grew out of what was known as hard-money lending—lending made to poor people, primarily. (“Hard money” refers to the large down payments its customers had to make, even for a basic item such as a refrigerator.) These new companies moved hard-money lending into the mortgage market, making loans that would eventually become known as subprime. They couldn’t sell to the GSEs, because, for a long time, the GSEs wouldn’t buy such risky mortgages. On the other hand, this influx of new lenders created exactly what Wall Street had been searching for: mortgage products it could securitize without Fannie and Freddie.
There is much irony in the fact that Countrywide Financial began life in that first group of companies, since it would later become the mortgage originator most closely associated with the excesses of the subprime business. But it’s true. Its founder and CEO, a smart, aggressive bulldog of a man named Angelo Mozilo, believed strongly in the importance of underwriting standards—that is, in making loans to people who had the means to pay them back. In the early 1990s, a big competitor, Citicorp Mortgage, was forced to take huge losses, the result of making shoddy loans in a drive to increase market share. Mozilo’s reaction was pitiless. “They tried to take a shortcut and went the way of every institution that has ever tried to defy the basics of sound underwriting principles,” he told National Mortgage News in 1991.
There may have been another reason for Mozilo’s withering dismissal of mighty Citigroup. Citi represented the establishment. Mozilo, Bronx born and Fordham educated, spent his life both wanting to beat the establishment and harboring a burning resentment toward it. “I run into these guys on Wall Street all the time who think they’re something special because they went to Ivy League schools,” he once told a New York Times reporter. “We’re always underestimated.... I must say, it bothered me when I was younger—their snobbery and their looking down on us.” When he was starting out, the business was “lily white,” Mozilo’s former partner Howard Levine recalls. Mozilo was an extremely dark-skinned Italian-American, and very sensitive about that heritage. He once told a colleague about returning from his honeymoon with his new wife, Phyllis, and stopping in Virginia Beach on the way home. They went into a restaurant to have dinner. “We don’t serve colored,” the waiter said. “I’m Italian,” Mozilo replied. “That’s what they all say,” said the waiter.
Born in 1938, Mozilo was the son of a butcher who had emigrated from Italy as a young man. The Mozilos lived in a rental flat. “I saw my dad struggle all his life,” Mozilo later explained. “He lived to be fifty-six and died of a heart attack.