The Mozilo Survey

While recently speaking to investors in New York, Mozilo revealed that he conducted the “little experiment,” according to a recording of the conference call with the investors.

“What we’re finding out is that they’re pretty smart,” Mozilo said on the call, which was reviewed by MortgageDaily.com. “It’s like voters: Individually they’re sort of idiots, but collectively they seem to make the right decisions.”

Mozilo said with an average age of 38 for pay-option borrowers, they have never “in their adult lives seen (housing) values go down.

“The concept is alien to them,” he said.

So many of the borrowers are convinced the value of their homes will rise and will make up for any costs added by taking a pay-option loan.

“The answer was, ‘I’m doing it because the rate of negative amortization is less than the increased value in my house each month,” Mozilo said.

As of Aug. 31 Countrywide, which reported third quarter residential originations of $114 billion — more than any other U.S. lender, had about 400,000 pay-option customers, accounting for 18 percent of the company’s $220 billion residential loan portfolio.

Countrywide, Mozilo said, goes to great lengths “to educate the buyer about pay-option products.”

The information given to borrowers when they are applying for a loan includes “cautions about negative amortizations, payment shock and the reduction taking place in equity as a result of negative (amortization),” he said.

After a loan is approved customers are sent a “welcome brochure that simply outlines the product in detail again, including the affects of habitually using the minimum payment option,” he said.

Warning letters are also sent to customers about potential payment shocks; it is included in their monthly mortgage statement.

“We are rewarded to keep people in homes,” Mozilo said.

Consumers will continue to utilize “interest-only and pay-option home loans to combat affordability issues,” according to Mozilo.

But as long as the unemployment rate stays relatively low the mortgage industry should not be greatly impacted.

Today’s report from the U.S. Department of Labor statistics show October’s unemployment rate was the lowest since before Sept. 11, 2001.

MortgageDaily.com photo of Angelo Mozilo

“History has proven people will go to great lengths to make their mortgage payments as long as they still have a job and the ability to pay,” he said. In a new report Fitch Ratings said that ARM performance has been strong this year. But the ratings agency is keeping an eye on the situation. “The bulk of the 2002-2005 vintage production has not reached the amortization start date, which is when the default risk is at its highest,” Fitch said in the report. “However, Fitch believes that performance is likely to trend closely to that of 30-year fixed-rate mortgages and therefore, depend primarily on the borrowers’ credit risk profile and other risk attributes.”

Patrick Crowley is a feature journalist and blogger for MortgageDaily.com. He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: PatCrowley@MortgageDaily.com