Countrywide Exec Warned The Fed On Toxic Mortgages

Well, this is interesting. If you’ve read the SEC complaint against Countrywide’s Angelo Mozillo and other executives you probably noticed the name John P. McMurray popping up several times. He was the chief risk manager at Countrywide who saw the problems coming, alerted management and was promptly ignored.

It turns out that Countrywide wasn’t the only concern that had the benefit of his analysis and chose to believe in the tooth fairy instead. In 2006 he offered some of the same advice to the Fed.

From Reuters:

At a time when many in the U.S. home loan industry were offering money to almost anyone who walked in the door, John P. McMurray publicly warned about the risks of such lax lending.

McMurray pointed out the risks at the Federal Reserve Bank of Chicago’s annual conference on bank structure and competition on May 18, 2006 — less than a year before the housing sector and mortgage lending industry began collapsing, leading to a credit crunch that spread around the world.

Such lending practices also eventually collapsed Countrywide into a fire sale takeover and led to charges of fraud and insider trading being brought against company co-founder Angelo Mozilo.

McMurray’s presentation on the home lending boom contrasted with comments Federal Reserve Chairman Bernanke had made in the event’s keynote address about 90 minutes earlier.

Bernanke said home finance innovation did carry risk but provided significant net benefits.

“Borrowers have more choices and greater access to credit; lenders and investors are better able to measure and manage risk; and, because of the dispersion of financial risks to those more willing and able to bear them, the economy and the financial system are more resilient,” Bernanke said, according to a transcript of his speech.

At the Fed conference, McMurray gave an almost academic presentation that included 29 slides packed with graphics and charts on the risks and causes of mortgage delinquency.

He explained how larger loans, lower credit scores, higher loan-to-value ratios, and less required documentation from loan applicants were coinciding with greater delinquency, wrote Cabray Haines, who summarized the conference for the Chicago Fed Letter.

“McMurray pointed out that this finding is particularly worrisome, given the recent popularity of loans that require little to no documentation of borrowers’ income and credit history,” Haines wrote.

There is a little bit of “gotcha” in the article which is unfair. It’s always easier to see the error in battle plans after the fight than it is in the middle of it, but that doesn’t alter the fact that some fair warning was given. I’m sure that as the history of this sad episode unfolds we’re going to find out about a lot more Mr. McMurrays. Men and women who saw the disaster coming, spoke up and weren’t listened to. Hell, Calculated Risk, Tanta, Krugman (I think) and others sounded the alarm when there was still time to do something. They got bupkus for their efforts.

For a while we will all have an ear out for the whistleblowers. It will do some good, their warnings will be heeded and might even thwart a disaster or two. In the not too distant future, however, we will be in the middle of something else that looks just too good not to work and the admonitions towards caution will once again be ignored. Maybe that’s part of being human and perhaps it wouldn’t be any fun if we always picked up on danger.

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