Countrywide’s former CEO is predicting a luxury housing rout

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A decade ago, Angelo Mozilo was the face of the housing bust that preceded the financial crisis. Now the former chief executive officer of Countrywide Financial Corp. is predicting another drop, and for some homeowners it may be even worse.

High-end properties in coastal U.S. states may fall as much as 40 percent from their peak value because many people can no longer afford them after losing deductions in the U.S. tax overhaul that passed in late 2017, Mozilo said in an interview with Bloomberg Television. That compares with a 33 percent decline across major U.S. markets from the peak in 2006 to the bottom in 2009.

“There’s too much inventory in the market, and there’s going to be more inventory because this tax bill was devastating to the middle-to-higher-income homeowner who can’t deduct anything except $10,000,” said Mozilo, who’s attending the SALT Conference in Las Vegas. “The volume of sales has dropped dramatically, and values are coming down dramatically, particularly on the upper end.”

After the 2008 crash — and the accompanying meltdown of complex financial instruments containing nonperforming mortgage loans — the Justice Department opened widespread investigations into industry practices. Prosecutors in the U.S. Attorney’s office in Los Angeles dug deeply into Countrywide’s actions, including Mozilo’s stock sales in the months leading up to the bursting of the mortgage bubble. They brought no criminal case against him. In 2016, prosecutors decided against filing a civil case against Mozilo.

Tax Reform

President Donald Trump’s tax reform limited write-offs for mortgage interest and capped deductions for state and local taxes at $10,000 to help cover the cost of cutting rates for corporations and individuals. Mozilo said New York, New Jersey, Connecticut and California, states with a disproportionate number of multimillion-dollar homes, are suffering as a result.

A $10 million home in any of those markets could “easily” lose 40% of its value, he said, jeopardizing the recovery and recent highs in residential real estate prices.

Now 80, Mozilo co-founded Countrywide in 1968 and built it into the nation’s largest mortgage lender. He was forced to sell the company during the subprime meltdown, and Bank of America Corp. absorbed billions of dollars in losses and legal claims from Countrywide loans.

Last month, Bank of America CEO Brian Moynihan testified before Congress about the company’s efforts to resolve issues stemming from the Countrywide purchase, a takeover that predated his time at the helm. At its peak, Bank of America had more than 50,000 people working to address troubled mortgages and ultimately paid settlements of almost $40 billion, Moynihan said.

Mozilo rejects the notion that Countrywide or even subprime lending played a major role in the economic downturn and swoon in financial markets. In the interview, he said the blame lies with everyone from banks to politicians and bond-rating companies.

“Let them believe what they want to believe,” he said. “I never saw it coming. Never.”

While wealthy residents in the Northeast and on the West Coast may be directly affected by a drop in high-end home prices, Mozilo also predicted that the impact will reverberate throughout the economy. Housekeeping staff and gardeners will be fired, restaurants will lose business and the banks that own those mortgages will have to take writedowns and begin foreclosures, he said.

“The moral of the story is when you see things inflated and things look so good, it’s time to pull back and worry,” Mozilo said. “When you sense it, if that’s one of the options, get out.”

Asked why he’s resurfaced after 10 years of mostly lying low and staying out of the public eye, Mozilo said he “has great concerns for the country” and, at this point of his life, “it’s time for me to speak my mind.”

— With assistance from Lananh Nguyen

Bloomberg News
Mortgage interest deduction Tax deductions SALT deduction Tax reform Trump tax plan