As one of the chief architects of the housing bubble, Angelo R. Mozilo deserved prison time and loss of wealth for his nefarious deeds.

Most people don’t understand how the housing bubble was actually inflated. Many incorrectly believe the degradation of home lending standards caused a surge of demand that bid prices up to unsustainable levels. While that’s partially true, that isn’t the full story.

While mortgage standards were nearly eliminated, and millions of unqualified borrowers were allowed to buy homes, that isn’t why prices got so high. If bankers eliminated lending standards today, but used conventionally amortizing 30-year loans, prices would go up a little as people substituted downward in quality to obtain housing, but overall house prices would remain tethered to incomes and price levels wouldn’t rise far above any reasonable value. In short, bubbles don’t inflate with conventionally amortizing mortgages.

For the housing bubble of the early 00s to inflate like it did, borrowers needed to be provided loan balances far in excess of what they could ever pay off, and to accomplish that, lenders needed special loan programs commonly known as affordability products. And by far the worst and most toxic of these affordability products was the negative amortization or Option ARM loan.

Borrowers utilizing negative amortization and teaser interest rates borrowed more than twice the amount they could repay with a conventional 30-year fixed-rate amortizing mortgage. The Option ARM loan is primarily responsible for inflating the housing bubble.

To their credit legislators recognized this fact. When Dodd-Frank was enacted to prevent another housing bubble, they wrote into law the ability-to-repay rules. And one of the key features of the ability to repay rule is that loan qualification must be based on a fully-amortized loan schedule. This was done specifically to prevent the proliferation of negative amortization (Option ARM) loans. That’s how toxic those loans are.

It’s easy in hindsight for people to claim they didn’t realize how bad these loans were. Many people in the industry believed these loans could be used safely by ordinary Americans. The may be criminally stupid, perhaps even willfully ignorant to the damage they were doing, but their behavior is far less egregious than the ones who knew exactly what they were doing and did it anyway.

So is it reasonable to assume everyone in the industry who peddled these loans was ignorant to what would happen if they were unleashed on the American public? Did anyone at the time know these would go bad? Many people looked at these loans as recognized them as Ponzi schemes. I did. And I was not alone.

Angelo Mozilo knew these loans would go bad. He wrote several internal emails expressing concern over lending standards and in particular the Option ARM. Yet, despite knowing these loans were toxic, he chose to underwrite millions of bad loans because he would make millions personally.

Mozilo and Greenspan: Architects of Armageddon

The only person perhaps more responsible for the housing bubble is Alan Greenspan. If he hadn’t let the Ponzi virus out of its vial, and if he didn’t allow unregulated insurance “swaps” to encourage dumb money to flow into what they thought were riskless transactions, the air that inflated the housing bubble would not have found its way into Option ARM loans being peddled by Mozilo. Greenspan and Mozilo are my nominees for the fools most responsible for the housing bubble.

Alan Greenspan was clueless, incompetent, and philosophically blinded to the mess he created. In my opinion Mozilo is worse because he recognized that he released a monster and did nothing about it.

Let’s be very clear on this point: Anthony Mozilo made a fortune while running his company into bankruptcy. While his company profited hugely as the Ponzi Scheme took over, Mozilo divested himself of his options and shares so that very little of his personal fortune was lost when Countrywide went under.

Why did Mozilo approve the Option ARM? Guys like him approach the end of their career and say “WTF, I will maximize short-term gains, make a fortune, and walk away when it all crashes.” He is old enough, he probably couldn’t spend his fortune if he tried. Like Greenspan, his reputation will never recover, but perhaps a couple of hundred million dollars makes you care less about that sort of thing.

June 17, 2016, Ben Lane

One of most notorious people at the center of the housing crisis is reportedly off the hook for any supposed malfeasance, as Bloomberg is reporting that the Department of Justice is abandoning its attempt to sue Angelo Mozilo, the founder of Countrywide, for his company’s lending practices in the run-up to the housing crisis. Countrywide originated more mortgages in this country from 2004 to 2007 than any other lender. During that time, Countrywide closed so many subprime mortgages it remained a top-5 producer for that home loan product. The same goes for other loans, such as Alt-A. The DOJ first began seeking a civil suit against Mozilo two years ago, after the statute of limitations expired for any criminal charges that could have been filed against Countrywide’s founder. Mozilo long held that Countrywide “didn’t do anything wrong” when it came to the lender’s underwriting and origination practices.

If he denies it repeatedly and aggressively, does that make it any less true? Or does that just make him more of an asshole?

In 2014, Mozilo told Bloomberg that he felt his company was not to blame for the subprime mortgage crisis. “You’ll have to ask those people, ‘What do you have against Mozilo, what did he do?’” Mozilo said in 2014.

What did he do? Really?

Okay, how about this: Angelo Mozilo, through a conscious and calculated decision, chose to proliferate a mortgage product he knew borrowers could not manage. He made this decision because he knew that he would personally profit handsomely and that he would cash out before the negative consequences of his decision would become apparent. Because he decided to push the Option ARM, millions of borrowers lost their homes, the investors in his company lost money, and his actions help precipitate the financial crisis of 2008.

That’s what I have against Mozilo.

“Countrywide didn’t change. I didn’t change. The world changed,” he continued. “No, no, no, we didn’t do anything wrong,” he said, adding that a real estate collapse was the root of the crisis. “Countrywide or Mozilo didn’t cause any of that.”

No. This is the biggest, bold-faced lie to come out of Mozilo’s testimony. Countrywide was one of the largest Option ARM lenders in America, and Mozilo approved and promoted this loan program at Countrywide. Since the Option ARM was directly responsible for inflating the housing bubble, and since Countrywide and Mozilo were largely responsible for the proliferation of Option ARM loans, Countrywide and Mozilo did cause the housing bubble — more than “any of that” — try all of that.

And now, it appears that the DOJ is unable or unwilling to proceed with its case against Mozilo. From Bloomberg: U.S. prosecutors have abandoned their case against Angelo Mozilo, a pioneer of the risky subprime mortgages that fueled the financial crisis, after a two-year quest to bring a civil suit against him. The Justice Department has decided not to sue Mozilo, the co-founder of Countrywide Financial Corp., according to people familiar with the matter. That effectively ends nearly a decade of U.S. scrutiny of a man who became a face of risky lending practices and later an emblem of the government’s mixed success in holding individuals accountable. As Bloomberg notes, the decision to abandon the case against Mozilo comes less than a month after the DOJ was handed a stunning rebuke by the United States Court of Appeals for the Second Circuit, which overturned a $1.27 billion penalty against the Bank of America in a fraud case over defective mortgages sold by Countrywide. In 2013, a federal jury ruled that BofA and Countrywide were liable for defrauding Fannie Mae and Freddie Mac by selling toxic mortgage loans to the government-sponsored enterprises.

A travesty of justice.

But the court of appeals overturned that ruling, stating: On appeal, Defendants argue that the evidence at trial shows at most an intentional breach of contract—i.e., that they sold mortgages that they knew were not of the quality promised in their contracts—and is insufficient as a matter of law to find fraud. We agree, concluding that the trial evidence fails to demonstrate the contemporaneous fraudulent intent necessary to prove a scheme to defraud through contractual promises. Accordingly, we reverse with instructions to enter judgment in favor of Defendants.

That decision also exonerated Rebecca Mairone, who the New York Times once referred to as the “face of the housing crisis.” Mairone, who now goes by her maiden name, Rebecca Steele, is a former executive at Countrywide and one of the few individuals whose actions during the housing crisis landed them in legal trouble. But the court of appeals also overturned the fraud charges and voided the $1 million penalty against Steele. And now Mozilo joins Steele as Countrywide execs that escaped the government’s crosshairs relatively unscathed.

Mozilo knew the Option ARM was going to end badly, and yet he allowed that product to grow to nearly half of his origination volume. Why would someone do that? To me it seems obvious that he knew he could make huge short-term gains and bail before it all crashed.

Mozilo should be forced to face every borrower who took out his toxic loans. These people lost their family homes, and they should be angry.

Mozilo’s legacy will be one of personal greed and foolishness. For his personal enrichment, he drove his company into oblivion and millions of Americans into foreclosure.

Years from now when Mozilo is gone, the only thing more fetid than his rotting corpse will be his reeking reputation.

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