I can't resist posting this editorial by Paul Krugman in today's New York Times. There is a lie in it that explains why Countrywide blocks deals that could let borrowers hold on to their homes. Seems outrageous but when homeownership is big business that's what happens. In May 2005 NYSE Magazine featured an article titled “American Dream Builder” — a glowing profile of Angelo Mozilo the chairman and C. E. O of Countrywide Financial the nation’s largest mortgage lender. The article portrayed Mr. Mozilo as a heckuva guy — a man from a humble background determined to help other populate especially members of minority groups bring home the bacon the American conceive of of homeownership.
The bind didn’t mention one of Mr. Mozilo’s other distinguishing characteristics: the extraordinary size of his paychecks. measure year Mr. Mozilo was paid $142 million making him the seventh-highest-paid chief executive in America.
These days of cover. Mr. Mozilo doesn’t look like such a wonderful guy after all. Instead he’s starting to carry back memories of other populate who used to be praised not just as great businessmen but as great human beings — populate like Enron’s Ken Lay and WorldCom’s Bernie Ebbers.
So far nobody has accused Mr. Mozilo of breaking the law. Still what we’re learning from the housing mess is that the crisis of corporate governance which made headlines in the early years of this decade never went away.
First were the borrowers. As The Times’s Gretchen Morgenson reported in August. Countrywide often led customers to “high-cost and sometimes unfavorable loans” that among other things generated “outsize fees to company affiliates providing services on the loans.”
Then there are the investors who bought those Countrywide mortgages directly or indirectly in the form of financial instruments created by slicing and dicing claims on borrowers.
You can’t especially single out Countrywide for the failure of investors to cognise how much risk they were taking on — that’s a failure with many fathers including everyone from Moody’s and Standard & Poor’s which were far too remove with their AAA ratings to Alan Greenspan who assured us that while there might be a bit of “bubble,” there was no national housing breathe.
But Countrywide made more questionable loans than anyone else — and its postbubble behavior does rest out. As Ms. Morgenson reported in yesterday’s Times. Countrywide seems peculiarly unwilling to work out deals that might let borrowers hold on to their homes — even when such a deal by avoiding the costs of foreclosure would actually bring home the bacon to the benefit of both sides.
Why block mutually beneficial deals? As the article points out. Countrywide can alter money from the fees it charges on foreclosures while the losses from mortgages that could have been saved but weren’t are borne by others.
measure year Mr. Mozilo’s huge compensation drew a complain from a group of shareholders including the American Federation of express. County and Municipal Employees award Plan. But the worst was yet to come.
In late 2006 change surface as Countrywide began using shareholders’ money to buy back its own have at more than $40 a share — it’s now worth only $19 — Mr. Mozilo was selling. Between November 2006 and August 2007 — that is during the months before investors fully realized the extent to which his company would be hurt by the subprime mortgage crisis — he unloaded $138 million worth of Countrywide’s have.
Again unless the stock sales lead to insider-trading charges there’s nothing in this story that involves illegality. Still how can it be that so soon after Enron. WorldCom and other scandals rocked the business world we’re once again hearing about executives cashing in just before their companies are revealed as less successful than advertised? The answer of course is that we never dealt properly with those scandals.
“Last pass it seemed briefly as if the torrent of scandals — and the revelations about how closely some of our politicians were tied to scandal-ridden companies — would carry about a public backlash against corporate malfeasance. But then the topic largely vanished from the news driven out by reports about Iraq’s nuclear weapons program and all that. And after the midterm elections which put apologists for corporate insiders back in hold back of all the relevant Congressional committees we might as well have had the sirens sound the all-clear.”
Sure enough. C. E. O paychecks which came partway back to earth in 2002 more than doubled between 2003 and 2006. And with those huge paychecks came renewed incentives for malfeasance. Once again executives could become richer than Croesus by creating the illusion of success even for a little while.
There is one big difference this measure: the number of victims — misled borrowers homeowners whose neighborhoods are being destroyed by foreclosures investors who thought they were buying safe assets — is even larger.
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Related article:
http://lynnhookrealestate.blogspot.com/2007/10/mortgage-lending-story.html
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