Never Seen Before Mozilo E Mails Posted by

Angelo Moziilo/Man giog Directors{CF/CCI

08/021200501:08:4 PM


cc bee

Dave SambolfManaging DirectorsfCFfCCI Stan Kurland/Managing Directors/CF/CCI;Carlos GamiaiManaging DirectorslCF/CC:1

., Subject ~e: FW: Bank AS_sets I I ~bsolutely u.nderstand your, POj' Ilion howe~er there ~sa price we will pay no matter what we do. he difference being that by placinq less attractive loans In the secondary market we will know exactly the economic price we will pay whe the sales settle. By placing" even at 50%" into the Bank we havei no idea what economic and repute anal losses we will suffer not 10 say anything about restrictions pl~ced upon us by the regulators.


Dave Sambol/Manag ng Directors/CF/CCI 08/02/200508:46 A


To Carlos Garcia/Managing DirectorsfCF ICCI@COUNTRYWIDE cc Angelo MozilolManaging Directors/CF/CCI@COUNTRYWIDE, stan, bee Subject Re: Fw: Bank Assets

While it ~~ke~ se:nse~or us to 'tje selective ~st? the loans which the 8an~ r~tains, we need to ~nallyze the S~~ufl,tlzatlo~lmp,II"catlons o~,what re.mal~,sif tb~ b" nk IS, nly,cherry plckmg and what rema;I~S, be, a o Ito secuntized/sold ISoverly conce ltrated With higher risk loans. This concern and Issue gets magmfled as we put a bigger percentage of ur pay option production into the Bank because the remainin9 prohuction then increasingly looks like an atlversly selected pool.

Carlos Garcia/Mana ing: Directors/CF ICC I 08/021200507:31 A

To Angelo Mozilo/Managing Directors/CF ICCI@COUNTRYWIDE ee Stan Kurland. Dave Sambol

Subject Re: Fw: Bank Assets

No lending,to investors in any market is the direction we ar.efOIiOWing/imPlement,'09 Immediately ..I"out waiting on analyses or deliberation. When we complete analyses if it supports any diifferenf actio~lwe will share and get concurrence f?r Jny ~djus~ment t.o your guidance. I do agree with your ~ocern parti5ularly given the fact that credit avallathlty ISgomg to tighten or atleast get a lot more expensive due to t~e growing concerns over payopti nand io loans, rising rates, housing bubbles and ensuing regulatory and lender actions,

From: Angelo Mozilo
Sent: 08/02/2005 06 48 AM

To: Carlos Garcia Cc: Stan Kurland
Subject.: Re: t"v<: Bil. k


I appreciate your response how ver we should not be making any pay options to investors anywhere. This is not the business that a f edgeHng bank.of our size should be involved with. Pay option loa~s being

Confidential Treatment Req.ues ed




used by investors is a pure cOlmerCia! spec loan and not the traditional home loan that we have successfully managed through ut our his1ory. When investors want to arbitrage with a loan of this nature they should go to Chase or W Is not to us. !t i~ al~o important for you and 10ur team to understand from my point of view that there is nothing lntrtnsically wrong with pay opt on loans themselves, the problem is the quallty of borrowers who are being offered the product and t e abuse by third party originators. There are other more traditional products in the marketplace th t you can fund to meet your needs and as I said in my previous memo, if you are unable to find sufficien produ ct then slow down the growth of the Ba nk for th e time bei ng..

Carlos GarcialMana DirectorslCF ICCI 08/021200501 :00 A

To Mike Muir, Clifford Rossi, Dave Walker. Timothy Wennes, Marito Domingo cc Jim Furash, Stan Kurland, Angelo Mozilo Subject Fw: Bank Assets


Pursuant to Angelos direction, lease make every effort to further accelerate the assessment of low fico borrowers and appropriate acti n on payoptions. Also are there additional markets besides south florida and vegas that merit discontin ation of lending to investors or condo borrowers? We still have south florida and vegas lending shut own for all products, right? I want to get with stan and back to angelo this week. In the meantime pendin the completion of analyses and deliberations we should now stop investing in payoptionloans Ie s than 660 fico unless the cltv is 70 percent or lower or they have mi. Likewise stop lending on heloc with underlying payoptions unless the cltv is under 70 and the fico is over 660 unless we can buy rni eco omically. Also discontinue investor properties in all markets pending completion of analysis. Also pi ase take s1epsto sell high risk payoption loans in the portfolio such as 80 ltv loans with ficos less than 66 . Please also propose any additional steps you deem appropriate. Again we need to move fast to cut ris and not be paralyzed by analyses that can follow.

From: Angelo Mozil Sent: 03/01/2005 1 :13 PM To: Carlos Garcia Cc: Stan Kurland subject: Bank Asse s I am becoming increasingly co the pay option loan and the pri specifically condos being pure developers who have told me t related to the fact that in Dade speculators. This situation is "hot" areas of the Country. We must therefore re-think wh put a non owner occupied pay it is unacceptable. Secondly 0 and only on a limited basis. T simple reason is that when the the borrower is not sufficiently dealing with foreclosure in pot cerned about the environment surrounding the borrowers who are utilizing e level of real estate in general but particularly relative to condos and ased by speculators (non owner occupants). t have been in contact with at they are anticipating a collapse in the condo market very shortly simply ounty alone 70% ot the condos being sold are being purchased by ing repeated in Broward County, Las Vegas as well as other so Crlled

t assets should be putting into the bank. For example you should never ption ARM on the balance sheet. I know you have already done this but Iy 660 fico's and above, owner occupied pay options should be accepted e focus should be 700 and above (owner occupied) for this product. The loan resets in five years there will be an enormous payment shock! and if ophisticated to truly understand this consequence then the bank will be ntiallya deflated real estate market. This would be both a financial and I

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reputational catastrophe. Frankly I am no longer concer ed about the pace of growth of the bank. In fact if there was little ,10 no gmwth over the next six month until we can assure ourselves of high quality performing assets Il",ould be the supporter of little to no rowth. Since we own the assets of the bank and responsible for tre long term performance of those ass ts we must focus on quality and not quantity if that's the choice we have to make. I feel strongly that ov r the next twelve months we are going to be facing one at the most difficult and challenging real es ate and mortgage markets in decades and I want to take steps no~ to mitigate and hopefully avoid a damage to our Sank. On Sunday I met a mortgage b oker from a town near Troy, Michigan who told me that he does al) of his business with Countrywide. Fi st I was pleased with the news until he told me why. He said that the area he serves is severely economi ally depressed and that the only way he can qualify his borrowers is the via the pay option ARM. I hav heard this story many times over from mortgage brokers who utilize the pay option for very marginal bo owers for the sole purpose of creating volumes and commissionsl We simply cannot and will not allo our Company to be victimized by this pervasive behavior and sinqe we can't control the behavior of ot ers it is essential that we control our own actions. I therefore want you to meet wi h stan and I to review the actions that you are putting in place 10 secure the financial integrtty of the Sa k.

Confidential Treatment Reques ed


Angelo Mozilo/Ma aging Directo rs/C F/CC I

To cc bcc Subject

Dan TarmanlManaging Directors/CF ICCI@Countrywide "Andy Bielanski Pager" <3815762@Skyreply>@Countrywide Re: Today's American Banker: Pay Options

You should know that we have made major changes in the Bank this week relative to placing substantial restrictions for pay option loan . For example we will not accept pay option loans for speculators 6r on second homes. Pay option loa s will be offered at the Bank only on owner occupied properties where the borrowers Fico is 660 or above You should speak to Carlos G week. In my opinion there is n very wrong as to whom the pro utilizing the loan to squeeze bo borrower, and speculators are consequences which would be made should substantially miti importantly this change in polic are being set up for foreclosure cia to fully understand all of the major changes that we have made this thing intrinsically wrong with pay option loans however there is soinething uct is being sold. Third party originators such as mortgage broke1s are rowers into homes without regard to the future consequences to t~at sing it as an arbitrage product These events could lead to catastrophic xacerbated if real estate values begin to decline. The moves we have ate any damage to the bank irrespective of future events. More is positive for your shareholders as well as to borrowers who, most likely,

Dan TarmanlMana ing Directors/C FICC I 08/03/200507:59 fJ,'.

To Angelo MozilolManaging Directors/CF/CCI@COUNTRYWIDE, Kurland/Managing DirectorsfCF/CCI@COUNTRYWIDE, Sambol/Managing DirectorslCF/CCI@COUNTRYWIDE, SierackilManaging Directors/CF ICCI@COUNTRYWIDE. Samuels/Managing Directors/CFICCI@COUNTRYWIDE cc bcc Subject

Stan Dave Eric Sandy

A quick note to bring to your at The article focuses on the eme both CFC as well as some of 0 posture vis a vis disclosure. Th out there reinforcing similar me some concerns among ratings on the earnings call is position

ntion a piece in today's American Banker regarding the pay optiop issue. ging trend toward greater transaparency around this issue and refErences r competitors. I believe we are positioned relatively well in terms 0lf our ee particular things in the piece 10 note: 1) once again, Herb sandler is saging to what we saw from him in the WSJ piece; 2) a reference Ito gencies around this issue; 3) our discussion of this topic during thr Q&A d in a relatively positive light in the article.


This article is yet another exale of how the media herd is moving on this issue. It also states as, fact the notion that pay option products are inherently risky. Our cross-functional team is de eloping a recommended strategy, messaging expect to be able 10 present to au shortly for your review and consideration. Dan and set of actions that we


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Executives Giving More Details a 1 Option ARMs From: American Banker Wednesday. August 3. 2005 By J mil Shenn

Swirling questions sparked by tl e growth in adjustable-rate mortgages that allow for negative •.•. I amortization met With much mo e detailed responses from lenders during their second-quarter earni~gs discussions. ... . I Washington Mutual Inc., Golder West Financial Corp., IndyMac Bancorp Inc., and Firstf'ed Financial Corp. all volunteered ,eta~s on aspects of their originations and portfolios of "option" or ":MT A" ARMs that they had never before disclosed, previously tucked into securities filings, or revealed only sporadically. I In Wamu's case, last month's di lospres included completely new data on the level of its oPJ·on ARM activity in the supplement y ~nfonnation with its quarterly earnings press releases. The Seattle thrift company, not exactly a newcomer to the product, explicitly broke out the eact amount of option ARMs among its mortgage originations (37%) and in its loan portfolio (3S.vo). It had previously only hinted at su h dbtails in securities filings, or given them out occasionally 'during presentation Q&A sessions. I During the second-quarter call c iiefexecutive officer Kerry Killinger indicated that concernslabout housing prices motivated its sal 5 of about three-quarters of its option ARM originations - ancpther increase in tbe percentage. Chie fintncial officer Thomas Casey followed up by talking abOUt its portfolio. He said only 8% of its option ARMs started with loan-to-value ratios above 80%, ahd he stressed that none were made to subprime borrowers. For Golden West, IndyMac, and Firstf'ed, the new level of candidness also included the amount of negative amortization their barr we,s are actually using. Whether the round of disclosure will satisfy calls for more information, or last beyond the q arter, is uncertain. What's clear is that more and tougher questions about option ARMs are being lotbed at lenders, even those on the West oast that have regularly made the loans as far back as the early 1980s. Many of the tr.aditional players nd the new interest somewhat perplexing, but some have cLe~arlY decided they cannot ignore it. "It seems to us if everybody is t lking about something, you ought to be giving them the info mation they need, said Herb Sandler, t e co-chief executive at Golden West, an option ARM pioneer that began to disclose the negative a o~zation in its portfolio only this year. J A main reason for the attention 0 such loans is the danger posed by the combination of grow,ng loan balances and frothy home prices in some markets, as well as what is widely seen as generallYllooser mortgage underwriting. Anothe reason is the increased recent use of tile negative amortizatiJon feature by borrowers. Still another reason has to do wi h the increased pessimism by Standard & Poor's Corp. and r·tCh Inc., which has cut into the pro ability of securitizations. There is also competitive pressure, which until recently was not impacting the loans' sales margins as much as those for other loan typef.



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On their conference calls, exec tives at both IndyMac and Wamu talked about the product in their prepared statements. Even so, t ey then spent a good deal oftime answering questions about it "No closing remarks - I'm won out here," Michael W. Perry, IndyMac's chairman and CEO,I said at the end of his call, after he had iscussed its option-ARM origination metrics, insurance and underwriting policies, and borr wers' payment choices, among other things. I "As you can see, we are trying ur very best to be fully transparent and address the key issue'S," he said. "We came a long way tov ard addressing people's concerns, so they can understand thisl option AR1v1product a little better. I In their quarterly releases, Gol eo West and FirstFed included information on what some analysts call one of the loans' key data pints: the amount of deferred interest created by borrowers' ure of negative amortization. This IlU ber shows both how much of a lender'S interest income was noncash and how much of its loan grow 11came from partial payments, not new loans. Firstf'ed, of Santa ~onica, Cali ., ~reviously offered the information in its annual reports, b.~t no~ in other releases or filings. Golder West, the Oakland parent of World Savings Bank, began disclosing the figure in the lO-K it filed in March for last year. In an interview, Mr. Sandler said it was I responding to questions stemmi 19 from what he agrees is the lax underwriting of some new entrants, and their extremely low teaser res. I TndyMac also provided a glimp e into the issue by describing the deferred interest on the loans it services. (A spokeswoman said its own loan portfolio has behaved similarly. Considering the level of questioning, it expects to bre k Gut extra details on the ARMs "for a while," she said.) I Wamu, on the other hand, offer d no details on its deferred interest during the quarter, though Mr. Casey did say only 4 basis poin s of its option ARM balances was above the principal amount of the loans when they were made. Responding to a question, he d fended the decision not to disclose deferred interest Wamu 'r0uld "continue to look at that and se if it's relevant, but we think the more appropriate assessment of the risk is the amount above the ori inal loan value," he said A spokesman said last week t.h it received no follow-up questions and presented a "fair and], meaningful picture" of its book Paul Miller, an analyst with Fri dman, Billings, Ramsey & Co., said be cares less about see~g the amount of negative amortizatio than he does about making sure the loans' underwriting is sound, and that they can be sold. Wher such disclosures are lacking, "we'll just keep on asking," he! said. Tl:e earnings call for Countryw de F~ancial Corp. of Calabasas, Calif, whose ent~ into the Imal:ket a tew years ago helped make th option ARM a standard product, was a case in point. Countrywide, the nation's top home lender, a in disclosed no specific information on the loans in its relea~e or any other prepared remarks, bu executives were peppered with questions, and they were ob liously ready with quantitative answers Among other tl!ings, they talke about the amount of the loans it holds in its ban~, the.use o~ negative amortization, and how much of the demand for the loans came from California Angelo Mozilo, Countrywide'S CEO, v lunteered that the average FICO score of its option ,t\RM bo~rowers was above 700. Stanford Kurla d, its president, said the delinquency rate on the option ARMs in its portfolio was just over 1%. I For years Downey Financial C p. of Newport Beach, Calif., has provided more details in itsi filings than others: the amount of its .s with the negative amortization opt jon, the percentage o~ loans that cap negative amortization 110% or 125% of the origi nai princi pal, and the net amount: of deferred interest.

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Thomas E. Prince, its chief op rating officer and CFO, said he is definitely getting more questions about the loans, which he attri~uted to a widespread lack of understanding of them - in particular among analysts and investors ased on the East Coast. Downey mayor may not say a ything more in future quarters, Mr. Prince said in an interview'. "We haven't hidden it or anvthing, ut whether we do it in the earnings release remains to be seen. rr J" _ _ \

Confidential Treatment ReqUejted

BAC-FC IC-E-0000767822


Angelo Mozilo/M naging


Stan Kurland/Managing Directors/CF/CCI@COUNTRYWIDE;Dave Sambol/Managing Direc!orslC F/CCI@COUNTRYWIDE; Eric Sieracki/Ma naging DirectorslCF/CC1@COUNTRYWIDE;David Spector/Managing Direc!ors/CF/CCI@COUNTRYWIDE;John I McM urray/Manag in9 Directors/CF/CC l@countTde

cc 03/27/2006 Based upon our meeting 08:53: bcc Subject HSBC e agreed to the fallowing:

of today


1. Stan will oversee all of the corr ctive processes that will be put into effect to permanently avoid tHe errors of both judgement and protocol th t have led to the issues that we face today caused by the buybacks mandated bY.HSBC. .


2. Sambol WIll make certarn that t for adhering to the guidelines for 1 existence and there can be nothin permitted irrespective of the circu

e people responsible for the origination process understand the necessity 0% LTV sub-prime product. This is the most dangerous product in more toxic and therefore requires that no deviation from guidelin~s be stances.

3. In addition Sambol, Spector an McMurray will coordinate with Bailey to assure that the loans originated are immediately put in the hands f our best sub prime collectors in order to avoid the EPD issue that we are currently facing. I 4. Spector is to review the buyba ks and to take every step possible to correct the deficiencies and look for another secondary sale opportunit in order to reduce the loans of this type on our balance sheet. 5. McMurray is to assure that the recess of assessing risk is re-examined to make certain that there are absolutely no holes in the assemb y line of risk assessment and contractual obligations which could cause this situation to repeat itself. 6. Spector is to take a fresh look t all of our contractual obligations relative to secondary market requirements to assure that we do 't commit ourselves to subordinate the balance sheet of the Company to a th ird party. That is what we have one relative to au r commitments to H SSC. We simply ca nnot tal erate trailing indemnifications which are infinite in time and nature. Again, this was a juvenile mistake that can never be repeated. 7. Sieracki is to keep me apprise of the ultimate financial offs, etc. relative to the HSBC proj ct. impact on the Company including reserv,ls, write

Again it is important that we take II of the corrective measures to resolve the outstanding issues wit~ this product but more important is esta lish aU of the necessary protocols to assure that we are originating these loans in a manner which takes us ut of harms way and that the loans are sold in a manner to avoid further and unnecessary exposure to the ornpany, Let me know if you have any ques ions concerning any aspect of this e-mail.


Treatment Requested


Angelo MozilofMa Di.rectorsfCF ICCI



cc 04/03/2006 09: 13: 5 PM

StanKurland/Managing DirectorsICFICCI@COUNTRYWIDE;Dave Sambol/Managing Direetors/C F1CCI@COUNTRYWIDE Steve Bailey/Managing Directors/CF ICCI@Cauntrywide


This is important data that coul to make the lower payment it a amount of resets and therefore otherwise we could face both fi -. Forwarded by Angelo Mozilol.

S~bject ,Fw: PayOption Arm Information You Requested I portend serious problems with this product. Since over 70% have opted pears that it is just a matter of time that we will be faced with a substantial . uch higher delinquencies. We must limit this product to high ficas anclal and regulatory consequences anaging DirectorslCF/CC I on 04103/2006 09: 11, PM~· ~

Steve BaileylManag ng DirectorsfCFICCI 04/0312006 05:27 P

To Angelo Mozilo/ DirectorsJCF ICC I@COUNTRYWIDE cc bcc Subject Fw PayOption Arm Information You Requested

Angelo, Here is the information questions. --

on Pay

ption Arms as we discussed.

Please let me know if you have any:

Forwarded by Steve B8i,eY/Ma

aging Dlreetors/CFfCCI on 04/03120060524

PM --

Bill Endicott/Loan Admi nJCF/CCI 04/031200605.20 P


To Steve Bailey/Managing DIrectorslCFICCI@Countrywide cc Craig Baingo/Loan Admin/CF/CCI@COUNTRYWIDE,Kevin Meyers/Loan AdminICF/CCI@Countrywide, Lisa AfsharianlLoan AdminlCF fCCI@COUNTRYWlqE, SveUana KeslinfLoan AdminICF/CCI@CountryvJide bec Subject PayOption Arm Delinquencies

The following PayOption

is a quick re-cap ARMs make up

n the PayOption

ARM portfolio

as of February


41,841 loans or $118 billion UPS representing

CHL volume and dollars re pectively.

4.5% and 10.4% it;! total .. I

Concentration of loans with negative amortization is currently at 62%. The neqative amOr1ize~ balances are in the early st ge of ramping up and are still relatively low. Please note that once a balance reaches 115%, the loan resets to a full amortization term. See the stratification of balances below.


Treatment Requested


Loan Bal.

101 102 103 104 105 105-109 11 0-115

62% Portion 146,209 62,899 2,857 12 4 12 1


68.97% 29.67% 1.35% 0.01% 0.00% 0.01% 0.00%
Pa yment selection in February 06, up from 60% in August '05.

72% of customers chose ~inimum
The delinquency rate has February '06. The rise in PayOption ARM delinque Subprime portfolios with,

increased i n th e last six months from 1.19% in August 'as to 2.21 % in delinquency is mostly attributed natural seasoning of the portfolio. The [lcy is relati vely low when comparing to Conventional, Government, and .75%, 14.0 4% and 16.45% delinquency rates respectively. ARM portfolio

CLD and WLD origination channels a ccount for 39% and 38% of the PayOption volume, respectively; Ca ifornia repr esents 45%.

When comparing PayOpt on Arm perf ormance to Interest Only, 3/1 and 5/1 ARM products, it consistently outpertormec 3/1 produc 1. Over the past 6 months, PayOption ARMs under-perfonmed both 5/1 and Interest Onl loans with the exception of February when PayOption ARMs outperfonmed the Interest Only product.


Trea tment Requested


Angelo Mozilol Oi rectors/CF IC

To cc

eric sieracki sIan kurland;dave sambol;David Spector/ManaJing DirectorslCF/CCI;John McMurray/Managing Directors/CF ICC I@Countrywide

bcc As per our conversation ofth must be addressed relative t analyze the losses incurred t our future expectations as to

Subject Re: 1Q2006 Earnings s morning it appears to me that there are several important lssues'wnich our 100% sub prime seconds business. In that regard I would like you to date specifically from the HSBC transaction and equaUy important what are asses. about


Not necessarily in the order 0 importance here are my key concerns. about the product itself ani how we conducted ourselves in the origination and delivery of the product to HSBC:

1. The negotiations with HS C was very flawed and as I stated in my memo several weeks agd extraordinarily juvenile. Spe ,fically we gave every option possible to HSBC to kick back to us dillosses while they maintained all of t~e gains. At this stage of our corporate lives we should know better. 2. The loans were originated hrough our channels with serious disregard for process, compliance with guidelines and irresponsible ehavior relative to meeting timelines. As a result we delivered loars with deficient documentation, did ~ot respond timely in correcting those deficiencies which resulted il) extreme time delays thereby permitlin loans to have a greater chance for early payment default. 3. The field people and ever one involved in the origination chain received substantial compensation for the origination of this product ut have yet to suffer the consequences of unnacceptable conduct relative to every aspect of originating, documenting and delivering the product to HSBC.
Frankly I don't want to hear h w much we made on the premium that we were paid by HSBC because I b€lieve (Sieracki is doing the nalysis) that the net of this transaction when you consider all of the executive, managerial and ad inistrative time that we have expended in putting out the fires, is negative to the Company. This quarte alone we have had to take a .19 write down because of the hits we have taken to date. Bottom line, from the negotiat on of the deal with HSBC through the delivery of the product we have compounded one error after another. Therefore I want Sambol to take all steps necessary to assure that our origination operation "foil s guidelines" for every product that we originate. I have personally observed a serious lack of co pliance within our origination system as it relates to documentation and generally a deteriation in the uality of loans originated versus the pricing of those loan. In my conversations with Sambol h calls the 100% sub prime seconds as the "milk" of the business. Frankly I consider that product line to b the poison of ours. Obviously as CEO I cannot continue the santtioning of the Origination of this produ until such time I can get concrete assurances that we are not fa([;ing a continuous catastrophe. The fore I want a plan of action not only from Sambol but equally trorn McMurray as to how we can anage this risk gOing forward. I

Eric SierackifMana ing o irectors/C FICCI 04/13/2006 03:26 M

To Angelo Mozilo/Managing Directors/CF/CC I@COUNTRYWIDE, stan_kurl, Dave Sambol/Managing Directors/CF/CCI@COUNTRYWIDE cc





bcc Subject 1Q2006 Earnings

This note is primarily for the enefit of Angelo and Dave since you're both out of lawn. Stan, you already know most of this. The 1Q2 06 forecast on April 3 indicated $1.08. The final earnings number will be $1.10. Significant differences were bserved from the April 3 forecast to the preliminary flash. March prime margins came in $0.16 bette than expected. The $0.16 was comprised of $0.08 from final servicing values being higher than sec ndary marketing original values, $0.06 from a hedge gain (pipe h~dge was a net short during a selloff), a d $0.02 from secondary executions better than expected on late March deals. While the April 3 fore st already included $0.08 of provision for loss reserves, an additional $0.08 was charged to earnings afte the preliminary flash. More on reserves later. GGM came in $0.03 higher than expected, Insurance was $0.01 better than expected and there were $0,02 of other. That math all comes out to $1.22 for the pr liminary flash. ALGa met Tuesday and cone uded that certain CAS and discount rate changes were required for MSRs and other retained interests b sed on pertinent data. Identical to last quarter, ALGD repeated the elimination of the "muter" tec nique in detennining DAS (cuts indicated DAS changes in half to reduce volatility). The elimination of he muter increased MSR DAS in 102006, the opposite of 40200~: Discount rates on nonprime, IMs and fixed rate seconds were also adjusted. The net effect of these changes was to decrease EP by $0.09. Further review of credit loss r serves also indicated an additional provision of $0.03 was required. The preliminary flash of $1.22 wa reduced by the $0.09 and $0.03 to $1.10, which is the final number. The bottom line is that prime Major offsets were additional On the topic of reserves, the t 1Q2005. The dollar amount i of HSBC loans and loans acq became further delinquent, $ (new whole loan reserve & ov course of business. argins for the month of March far outperformed expectations by $0.16. ss provisions of $0.11 and ~AS/discount rate adjustments of $0.09. tal credit loss provision for 102006 was $0.19, which compares to $0.02 in $192MM. According to John McMurry, $9SMM was from a mark to market ired through dean-up calls, $37MM was from loans never sold that MM was from the bank, $21MM was for reps & warrants loss provision rail port growth) and $12MM was for serviCing advances in the ordinary


Treatment Requested


Angelo Mozilof anaging DirectorsfCFfC I
04117/200605:5 "49 PM

To cc bcc

dave sarnbol stan kurland.JohnMcmurray

Subject Sub-primeseconds I have asked Stan to conduct at orough review of our sub-prime second business. I have asked him to look at the following: 1. On a cumulative basis have w made any money in this business and if we did, were the rewards related to both the financial and reputationa risks that we have taken. 2. On a going forward basis what performance of this business. re we facing relative to margins, reserves and overall financial

3. Where were the breakdowns i our system that caused the HSBC debacle including the creation of the contract all the way through the assive disregard for guidelines set forth by both the contract and corporate. 4. To review the compensation t the sales force in light of the overwhelmig hits taken by the Company on this product. In all of my years in the business have never seen a more toxic prduct. It's not only suboordinated to the first but the first is sub-prime. In ddition the fico's are below 600, below 500 and some below 400 compounded by the fact these ar 100% loans which must always be written off in the event of foredosure .. Wrth real estate values coming do n and interest rates rising this product will become increasingly lorse. There has to be major changes in the program including substantial increases in the minimum fico. No margin, no matter how high, caul ever cover the inevitable losses on loans with ficos uner 600. Whether you consider this busine s milk or not I am prepared to go without milk irrespective of the consequences to our production. ur financial and reputational integrity is too important to me and should be to all of us.. Please feel free to participate with Stan on his efforts to get to the truth on this matter.

Confidential Treatment Requested


Angelo MoziloiMa Di rectorslCF/CCI





Dave SambolfManaging DirectorsJC F/CCI@COUNTRYVVIDE Kevin Bartlett/Managing DirectorsJCF/CCI@Countrywide;Eric Sieracki/Managing Direclors/CF/CCI@COUNTRYVVIDE Re: Reducing Risk, Reducing Costs

This market is unbelievable wit rates coming down sharply today. Irrespective of the volitiliy I believe that the payoptions continue to present a longer term problem unless rates are reduced dramatically from this level and there are no indiations, absent another terrorist attack, that this will happen. Your continued feedback to me woud be most helpful.

Dave SambortMan ging DirectorsJCF/CCI 05/18/2006 08:39 M

To Angelo Mozilo/Managing DireetorslCF ICC I@COUNTRYVVIDE ec bee Subject Re: Reducing Risk, Reducing Costs

I'll keep you informed of steps aken.

From: Angelo Mozil




0 :29 PM Bartlett;



Cc: Stan Subject:

Kurland Reducing

i5k, Reducing


As we are all aware Stan has egun a major undertaking to assure that we r-educemidline expenses as rapidly as possible and to be r duced at least in concert with expected revenue reductions from our production divisions. In addition, per our conversati ns of this week, I want you to examine our risk profile as it relates to the assets of the balance sheets 0 both CFC and the Bank. Although all asset should be reviewed including exposure on our residuals and excess servicing we must pay special attention to helocs and pay options. With interest rates continuing t rise unabated helocs win become increasingly toxic in that mortqaqors win be and ar: .facing sUbstant~allYhigher paYn:e.n1s then when the loan was origina1ed. We should attem pi to effiCiently O.ff loan thiS product eve.n If it means a much slower growth .for th,. Ban. , Fr,?m.many e k perspective this might be an o~portune time to take a breather and slow down the Bank. As for p,ay options the Bank faces potentil unexpected losses because higher rates will cause these loans to reset much earlier than anticipated nd as result causing mortgagors to default due to the substantial increase in their payments: Per some of the suggestions balance sheet risk by:

ered during our meeting we should take every step possible 10 reduce

1. Taking steps to encourage ray option mortgagors 10 refinance into lo's. 2. Where deemed appropriat~ the Bank should forgive the prepayment penalty if it appears obvious that the borrower will potentially delault upon reset, 3. Through our payment coupon we should alert all payoption borrowers what could happen upon reset.





Obviously there is much more hat we can do to manage risk much more carefully during this period of uncertainty both as to the rate nvironmenl and untested behavior of payoptions. Work closely with Carlos and Stan on the execut on of the strategies that we pursue. The combination of effectively shape until the storm clears. anaging our expenses finessing off potential risks should keep us in good

By the way we must continue t grow our sales force and all other businesses increasing particularly in the ongination channels. Keep me apprised of actions t at you take or any other suggestions

that keep the top line

that you might have.

Confidential Treatment Requested


From: Angelo_Mozilo@Count Date: 06/01/2006 10:38:21 P To: Cartos , Garcia@countrywi, CC: Stan_Kur1and@countrywi Subject: Bank assets; Jim_Furash@Countrywide.Com;

In a discussion with both Stan nd Dave it came to my attention that the majority of pay options being originated by us, both wholesa e and retail, are based upon stated income. There is also some evidence that the information that the bo rower is providing us relative 10 their income does not match up with IRS records. As rates continue to climb it is balance sheet: ident that two things are going to happen relative to the loans on the Bank's

1. That the time of reset is 90i1g to accelerate reached must sooner that scheduled.
2. That the reset payments in the initial qualification. ar

because the 115% of the original loan amount will be

going to be substantially

higher than the buyer expects and what was used

We h ave at Ieast 20% or more f the Ba n k's pay optio n loans at a fico of 700 or less. It is clea r that th e lower fico borrowers are going to ex erience a payment shock which is going to be difficult if not impossible for them to manage. Since we know or can reliably redict what's going to happen in the next couple of years it is imperative that we address the issue now. First and foremost the Bank should not be accumulating any loans below 680 unless the LTV is 75% or lowe. Secondly we should comb the assets to assess the risks that we face on Fico's under 700 and determin if we can sell them out of the Bank and replace them with higher quality paper. Thirdly we should take careful look at our reserves and begin to assume the worst. Please let me know how you i end to handle this matter.




BAC-F CIC-E-0000665546

From: CN=Angelo Mozilo/OU~Managing Directors/OU=CF/O=CCI Date: 08/10/200602:16:18 P To: "cclark" <cclark@chapelm> Subject: Re: Po Arms

We have to continuously educate ose mortgagors who already have this type of loan and those who are applying for one as to the potential conseq ences, This product should only be offered to high fico sophisticated borrowers. We cannot control or be accounta le for buyer behavior. ---- Original Message ----- From: "Clayton Clark" [cclark@chapelmortgage.comJ Sot: 08/10/200611:00 AM To: Angelo Mozilo Subject: Po Armsl was

reading your comments on te performance of the Pay Option Arms and couldn't agree more. As one of your Mortgage Carr pondents for many years I discouraged many of my brokers from selling this product. Broker are selling tbis product to borrowers that are not financially savvy and do not understand the r ercussions of going into a negative amortization situation. I am glad to see that even at the t p level of management this is being witnessed. What can we do is the question. Clayton M. Cl rkVPCbapeJ Mortgage Corporation593 Rancocas Road,PO Box 550Rancocas, NJ08073-055 Phone: 800-242-7351 ext. 168Fax: 609-265-0750E-Fax 866-2571021 Cell 609-220-6324


Treatment Requested









Angelo Moziio/M Directors/CF/CCI 08/11/200603:54:




john mcmurray dave sambol; kevin bartlett;eric sieracki

bee Subject Pay Options Members of the CFC Board are raisin) questions about how we intend to manage the issues surrounding our pay option loans in the Bank and in our Servicin Port as well as new originations. As a result of these and other inquiries relative to this product I want you to prepare a memo. under my name. to the Board. covering tile following: L TIle steps we are taking in informing pay option Bank istorners of the potential consequences of the reset and encouraging them 10 either refi out of the product or make princi I curtailments (0 reduce or eliminate neg am, I had instructed botli Steve Bailey and Carlos to send these notices out w th the monthly coupons to continuously remind all of our pay option customers of the consequences of their behavior. P ease check this out to make certain that my mandate in this regard is being carried oUL2_ That we have a policy in effect 0 provide a clear and bold notice upon the origination of a payoption loan of the consequences of negative amort and r set, Again I instructed Sambol to put this in effect in Cl\ID and 00 third party transactions that a notice with the first payment coupon contain the issues surrounding negative amort and reset. Please make certain that this mandate is bein executed.I. That you prepare a write up included in tills notice to the Board incorporating everything that vou, Can as and Kevin are doing to mitigate tile potential risks to the Bank and to om reputation relative to surrounding our redit risk. I would like you to get this done by the middle of next week so that I will have a working document to diSCI 5S with the Board.Please send a copy of this e-mail to Carlos Garcia because •ve have another Carlos Garcia in the COl pany and CWinsider cannot distinguish whose who and therefore I cannot send it to him directly.Let me know if you ha 'e any questions relative to tills request.

Confidential Treatment Requested


From: Date:

Ange I0_ Mozilo@ooun\ =Managing DireolorsIOU=CFIO=CCI@COUNTRYWlDE; CN=Kevin : CN=Jeff SpeakesJOU=Portfolio MgmIlOU=CFIO=CCI@COUNTRYWIDE' BartietUOU=M."aging jim furash '

09126120(16 02: 14: 1 B PM To: dave sambol; CN=Canos GarcialO,
D.rectOr>fOU=CFIO=CCI@CoumJ)"Wld Subject: Fw: The Bank

In addition,

w~h respect 10 this matter,





wam the bank to stop all third party bidding lor this product DiredorslCF/CCI on Q:9f26f2006 , 1:12 AM: ~

by tile Bank to cease eff&:tive


John McMurTaylMal14lging Direa.ors/CF/CCI 091261200610:45 AM To Angolo MOZlloiMon "9,ng

Di,ectrnslCF lCCr@COUrnRYWIDE

Subj.><:! Re: The Sank

!was very happy to see your-email bee use I personally snare the same sentiment (that we should be shedding rather than adding Pay Option credit risk 10 the portfolio). Here is a verbatim excerpt Ir man email I sent last week on tms topic (in blue italics) where I argue against adding more Pay Option risk (either from
retaining loans we ori{linate or buying osec loans from other lnsthuttons). credit spreads lWnain very tight. We'r(1 not galting paid as much

ability to

1. Tlgi1r Credit Spreads_ Despite d teriorating fundamentals, wi(/) tire deteriorating dil Bnvronment COnstraints_ ~

10 take on /he &.scalating risk

2. Financial

forgo eamings

win be limit d.



to divert loans to tf1e Sank portfrJllo.

Given tf1e

diftiGuJt prarJuction


ff seems likely

tnes me near-term
It's plausible

3. ':":7""<:<"....

~ .... 'C"---'=!J"""7'='"I

The extremely favorable enviro/lment we've had for crOO# seems to have peaked and is be more severe fhan previous downtums.



s, iJllerest-only

dn guide,lines aggress;vely dwing the favorable envJi'onmenL There are a 101mOf., loans with ,""ry hig/l CL or peymeflt option 'ealures, higl! levels of investor propet1ies, etc" etc. favorable - iI's

TVs, staled

S. The recent hDusing environ ent has boon extraordinarily suggest a fairly adverse hOUSinr market_

been "long, strong and wide.'

At, adjustmeflt

back to the "mean" could

C. The recent weake1ling wevf, seen in housing was not triggered economic factors suH favorfle by I,is/arieal stanriwris,


by adverse



Interest rates, unemplOyment

and other relevant

Wm,1d it make more sense to follow a ,Ian"" shee: strnlsgy where were taking advantage of marl<et conditions (lJo~J spreads and enviromnent)? be lollo-wing e strategy lhal's eJ<actly op osile 0/ this approaC'IJ.

We appear to




0!ll26l2Q06 10015 AM

dav@£ambol carles G[lrcia/Managing Directc:JrslCFfCCt@OOUNTR'r'VII'IDE, erio'Siera'cki

Subject TO" Bank

As per our discussion




like you, Carlos and Erie to seriously loans".


the Iollowing: 01 rating aqencles, regulators and the press.

t. Pay Options have become the light

ing rod in Ihe arena 01 "exotic

It is getting the attenuon

2. We have no way, with any 1>'''''000 e certainty, to assess Ihe real risk of holdtog these loans on our balance sheet. The only hislory we ron look to is thai of World Savings however their portfolio as lundamentBlly different than ours in that their locus was equity and our focus fico. In my jLJdgem'T0I, as a long time lender, I would always trade off lico for utty, Tne bonorn une is that we are flying blind on how mese loans will perform in a stressed environment 01 higher unemployment, reduced values anti slo 'ng home sales,



3, It appears to me that pay options


SUCh as enoth er Ia ncer g etti ng into deer
It therefore I bellwe the 1iming ;$ oumently in their port. This move responsive and dUigent manager and more importanUy will capture

currently mispriced in the secondary trouble with this product or because

rnarset and that spread could disappear of a negaUve investor oceuran ce.


if there is an lo.iseen



right I r us to sell all newly originaled pay will s4.d a message to the world 1hal we of cre~iI risk. will ease the angSl cunren\ly gains n sale 1hat might not be available

opucns and begin rolling off the bank balance sheet, in an o{deny manner, Jl!lY options are listening to the conoerns 01 regulators and others abOut this product, that we are a expressed by the regUlators, will make it easier 10 tranSItion trom t~e Fed to the OTS to us in the near future.

Confidential Treatment Reques ed



I would appreciate yourthoughts_

ConfidentIal TreatmentRequesed


dnllctemp_O.rtf (Read-Onl )


I 1


Confidential Treatment Reques ted



From: Angelo_Molilo@cQuntrywide. Oate: 021271200710:49:24 AM To: Dan_ Tannan@Counlry ..... ide.Co Subj ect: He: 2

WSJ stortes today a

Press Re Ie ase RE: F fwd i e


what I said almost slx mo ns ago. "In my 53 years in the business

I have never seen a soft lantling",

This one is going to be as hard 8S they come.

D~n T.rman/M ana glng DireclorslCFICCI 0212712007 0;: 16 AM To Angel¢ MoziiolMaM9mg DiredorsICF/CCI@COUNTRYWIDE, Dave S.mbollMan.ging OirectOrsICFICCI@COUNTR'lWIDE, Andrew GiSSingerlM.n"glng OirectorsIC=ICCI@Coufltryv.;de, K",," SartieWManoging OirectorslCF/CIJ;I@Covnlrywide, Eric Siera ~ki/Mii] ag ifIQ Dir:ectorsJCF'lCCI@ COUNT~ YWlOE, Ron Kri,pala~I/Man ng n tI,gi DirectorslCCMlCC '@Countrywide, J ack S<:haketl!Man aging OlrectorslCc/CCI@Country'Mde, canes GarCiaIManaging DirectorslC"/CCI@CCUNTR'lWIDE. Sandy S.m ueI.IManaging Direc:torsICF/CCI@COUNTRYWIDE,John MoMu'",yJManaEing

Dlr&etorsICFICCI@Gcu.t')/'Mde. Mark E ElboumlCorporate AdmlnlCF/CCI@Cc.untryMd.,
David 8igelowlManagi.g OirectorolCFICCI@COUNTRYlNIC£,Andy OireclorsICFICCt@COUNTRY'lNIDE.



:2 WSJ stones tOday and Press Reeese RE: FreCldle

Heard on the Slree!: Subp,; Deals & Deal Makers: Does

Game's Reck.oning Oay - RiSky Lending uaprtme Index Ampllfy Rlsk? - ABX Bond

Fa.llout Tnraatens 10 Spread; Tracker Depending on View,

Uncertain ARM Sirenglh Is On Mark, Off Base


on the Sire"', to Spread;


prime Ga

e's ReCkoning
Sttenglh -

Day -

RiSky Lending Richar<lson

Fallout and Gregory

Threatens Zuckerman The worsl


By Katen

may be yet 10 come for m rtgage lenders. And that could add to

investor nervousness.
Shares of companies unco nventional mortgages If these mat specialize n

lending to riskier borrowers

or offer

I(Ian shave

tumbl ed b co use of conce ms ave r h<)Wrapid

Iy these

are going sour.

so-called subprime



\0 have

problems paying their

deb.Is, the tenders that

Terg. Them.lii<j'Y will have to boost how much money eI
0 their bcnorn

they set aside for bad loans, cutting i even lower stock prtces, There also is a concern borrowers payments

'nes. That could mean

Ihal if the re t-estate market rem ai ns cool, some

with better credit histories on certain popular, bUI uno

also t>egin stl1J~)gling to make
These types teasel (If loans rates or such

hodox, mortgages. nts,

allow borrowers don~ require

to skip montllly financial


carry low short-term
If that



happens. companies

as BankUnaad

Financial Corp. and CClUntrywide Financial Corp. could suffer,
keeps its reserve to increase its I , it makes its earnings look better ana seus

When a company because it continues

aslets from roans it originales

off. That holds d <)Wnexpenses. But when a company beefs up those eserves and tile change hilS its earnings,

Confidential Treatment Requested


that can impair its ability to

borrow the sno -term funas needed 10 wrile new rv es to coy er any possl bla losses wh en

mortg aqes. Lend ers need to set aside re
borrowers fail \0 make payments, tenders generally


se I most of their loans to investors, out

many kee p some loons as investments, T esa portton os h ave grown as the n umber
of new mortgages New Century h as

Corp, and NovaS r Finaneial lnc. hold billions of


d Qllars of loans for mvestrn e nt. \NIlile they have been Increasing
provisions, NovaSta(s investment Clelinquencies reserves

thel r loan-tnss

have be .. n corm 9 faster Ihan antlcipated.

were 1,05% Of"S $ ,1 billion in loans held for up from 75% in the third quarter. but still

in the tourtn quarter.

ranked among the lowest in the indostry,
the Center for Finanei.1 of the third quarter. Scott Hartman, Research

ccording to Zacih GaSl. an analyst 8,

"nd An lysis, New Century's aSSign alings on SlOCkS,

was 1.4% as

CFRA doesn't

chief executive

of NovaS ar. says the lender made"
rese • e" in Ihe past q us rte r, and lin at performing

"suostanti a I increase about haK oflhose very

to ou r lean-toss

loans "tend to be of hi her Quality and generally


New Century. wh Icih has said tl wi.11resta e ea ml ngs fon he fi rst Ih ree
quarters declined of 2006 to correct 10 comment. tenders are likely to accounting err rs regarding repurchased


in their Honold,

art reporting "ignnic"nl
several artners. at

shortlells David

IDSSreserves 'as soon as the net
an an al ySI at Turner Investrnent lenders,

Quarters," predicts
Wh i en manages

523 billion and

has avoided shares of subprime
lenders could

is partly because some of the
some JXlorty perfomling Thai

place lnlo their investment-

oan porttollo

rna ngeg es Ihat they have bo ug hi baGl< u
would requlrec Subprime them 10 boost loan-loss r

er te rms 01 the ir sa Ie ag reemeot.

leOders already

have seen Ih ir shares tumble

and New Century If Iheir credh-hnes shares

is down 12% in the dry up because


- NovaSlar

is off S()'.!.

10 days - and lhey couto fall further loan-loss provisioning, NovaStar

of poe

are trading at aboul 12 times esti ated per-share

earnings, bullhal nt

val u alien

,$ likely

10 change

as analysts

djusl thei r prole clio ns 10 accou 10 5 and poor earnings outlook,

for Ihe company's Cenlury

steep fourth-quaner

shares also are lrading

at aboul12 times eSt[mated earnings for 2007, with better

Some investors

U'1le caenon abOLJ!len ers thaI cater 10 borrowers
tnst may . !fer if w .. akness in housing

creon but focus on mortgages such as option rnultipla

acijuSlabl&-rate mortgag
options. including

or ARMs, These loons give borrowers
Ihat mighl not cover all is lacked


a mi imum payment

of the monthly

interest cost. The remai

er of the intereSll'aymenl

n nto th e outstandl ng ba lance, ca using About 59% of BankUniteC!'s approxlma


0 rise. ely Sl 1.5 Oiliion loan portroto more ottllern as il expands, funding just S2.7 is made

up of these loans and the bank Count<yWide

is rnakm

has been outtlng baGl< on out

"y·opl.iDn mortgages, in new mMgages,

billion in January

of a total $37 billia

Still, i1 has

Confidential Treatment Requested


"significant declined

exposure" to COmme

to these risky

nans, CFRA's

Mr. Gas! says. Countrywide


BankUnited interest

acl<ncr.,ledges as interest

bOlower. paying less of their monthly higher, and abOut 50% of the market iflhe




bank's loans have

00.." made to resrents

Am! since Ban.United borrowers

keeps about 10% of these loans in its own porttollo, rt could the company's earnings.

run rnto problems


of FJolida, a weak reel-estate

BankUnHed trading

Shares, whiCh roll 83

nts, or 3.2%. to 525.05 in 4 p.rn. composite are trading at almost nine times


on the NaSdaq Sto k Markel, earnings ove

its expected


Under accounting revenue, however.

rules, BankUnil So

counts the unpaid iotereSl ys the contractual a



if a borrower


5500 S month,

rather than the 51,000 lrnerast-only $500

cum, the bank can assumed

me remaining

as revenue That is because II'

it will be repaid down the road. by

This reve n ue is • nsing sll ce of lts ea Keefe, Bruyelt. Humberto borrowers purchase & Woods, 8ankUofted's

ings. accorcl ng to an a nal~sis



financial generally

Officer, says the bank focuses put down at le8s12O% of the


with high cred~ scores wh price on a home. "Our barf

wers have the financial


they've ea med the right to have optio

of payments:

Mr, Lopez says. "We

!leven' seen any weakness

in their a 'lily 10 pay."


& Makers: on View,

Does 5ubpri ," Is On Mark, risky mortgage

Index Base -


Ris~? -


Bonl1 Tracker, R.. Hagerl}


By Serena

Ng lIfld James

The cost Of insuring index has investors market's

onds as measured ears of increasing

by a closely watclled ~efaults, rattling some the


rn recent weeks on

while prompting woes.

a debate 0 whether

the index is exaggerating

At issue is an index that tracks how BBB-minus-rated hlstortes, bonds backed subpnrne by mar

uCh H costs 10 insure a group rtgages to borrowers


with weak credit

the so-called

et, The index, part of the ABX family of
in value wh en the COs! of In surance alue of the undenying the bonos,

bond indexes,

is a derlvatlve

t hat fall

rises. so it is seen as a proxy for the The index has sunk nearly 30% sine decline in February, Thai drop sugge


of this year, with most 01 tile believes riskier mortgage rise in the loans

the market

bonds Sland 10 lose a large chunk 01 I eir value as defaults backing them,

"It reflects


in the making Roul>lnl,


suborfme, airman

and IlIlink

~'s Just going research Web she

to get worse," Roubini

says Nauriel

Of economics

Global EconomiCS

and a prof nav

ssor at New York Universrty. CI<lsed shop atter repurchasinq bad loans.

More than 20 subpIime


a. ",quired

by the terms under whiCh HSBC Holdings PLC and N m onga9"'"

hey 541ldthem. Some large lenders, Century Financial Corp., have reported I:>ig

losse S on lh eir subpnrne

Confidential Treatment Requested


"The riSk the ABX is implying managing direOlQr at Nomurn between

is wa secun

too pessimistic;

argues Mark Adelson. in New Yorlc a bubble "There's a




huye difference bursting."

the slow hi sing that deflales

and a bubble

The index. administered than a year ago 10 give

by Marl<~

roup of London, was launched

a lillie mere

investors a wy to bel On defaull trends and to hedge
aga,j bonds. and sell a deCline in the value 01 the

their risks by buying protection "ndenying cheaply



the index can proF" when the,'

t>uy such orotacucn only a

,,( a higl1er rate. The index is one 01 sentiment lor subprime mortgages, and

few visible indicators of mark

Wall Street has become fix.aled with' The problem: "tt's very. very widely
than trade in it: sa~s Peter Nolan," ASSOciates, ;; Ilowed, but more people ond-mvestmem manager look at the ABX at Smith Br"eden

lixed~nrome asset-rnsn agement firm in Chapel Hill N.C. When there sellers in a rnsrxe . pricescan
jump around a lot. as has

are few buyers and happened with

thos month's fall,
it-deraun swaps -- essential~y

The ABX index reflects the cost of c
insurance policies tnat

pay Dfi ",'hen

nos drop in value -- on 20 S"bprfm6


that are selected

by a group 01 Wall
fhms eha e investors approximately $1.6

In couar terms, Wall streel annually


to insure the value of $10 mt ion in BSS-minus-raled six have performed ecurities. er at J.P. Morgan


tssued in 2006. up from 5240.000

Critics sBy 1M ABX's 20 bond issue overall rnarket Ior subprime-mortgage Chris Flanagan, measure a ffi()rtgage rasearcr

more weakly

than the

Chase & Co" repricing

says the of

isn't perfect but is

"a good re ection of long-overdue

risk" 01 defaults.

Mood)"S Investors Service, a subsidl

ry Of Moody's corp., nas lowered


on nine bonds from two su~p<ime res. ential-mortgage-Mcked
that were possible

securmes deals
0 deals lor

issued in 2Q06. It is revl"",i
downgrades. bonds Together, the.

30 mUngs on another' comprise ear. 1= than 1%

of the total number

01 subpfime

Moody's rated last

nCih Ra~ngs, a unil of Firnalac SA

of Pans, and Standard

Poor's Ratio s SeNices, " unn of McGmw-Hiit cos.,
(If rs willing to sell protection problems against


small number

The ASX's decline detau~s

means that invest

can potentiaRy reap gains if t

In the subprime-mOl1gage

m a rket dont escalate, For those with a bllnish view On the h using market abi[ity to pay "probabl~ portfolio

and U.S. borrowers' level is a

their mortgages,



at the current

a good manager

bet but nOI n"""ssarr
at Pacific Investmeni

a. slam dunk: Management

says Daniellvascyn, Co" or Pimco,

in Newport

BeaCih. Calif. Making that bet at thiS tiie
because Christian lately the A8X index has bee stracke, an analySl at dellt-

would talle guts, Ihough. moving like "a one-way

he says,

in New York, 01

esearen firm CreditSights

savs, "I think Ihe ABX is accurately


the panic b~ing leH by some

Confidential Treatment Requested


tne Ng mortgage


and Ihe he ge funds shorting fi1Bnciai rnarxeis

H have increased be


panic. But investors

in tile broader





Freddie Of Future Company MCLEA today

Mac Announces Borrower Also ,Va.,





to Help Reduce

the Risk

Default M.odel bprime M.ongages Mac (NYSE: FRE)

to Develop

Feb. 27 f?RNewswire

FirstCalV - Freddie

an n ou n ced that H will cease bu 109 su bpMme mort,g

8g es thai have a h ~ h Fi"'i,
(ARMs) - and

likelihood Freddie

01 excessive payment shoe
Mac will only huy subprirne

and passlble foreclosure.

a, justable-raie

mortgage-related borrowers protect

securities backed


subprime rate.

loans - that qualffy The goal is to

at the luny~ndexed

and IUlt,·amOr1lZing

future borrowers from the pay!ent
rate mortgages the company increase. wlillimit these

shock that could Occur when their

adjustable Second,

of luw-oocumentanon nsure that future borrowers In addition.

und:erwriting have the

for these types of mortgages Income strongly necessary recommend

to help

to anorn their homes. that

Fneddie Mac will for

mort!lage leters
pavrn respon nts.

COiled escrow accounts


taxes and insurance with its statutory

In keeping

ibilily to provide stability

to the

mMgage market, Freddie Mac will im .Iement the new investment rilquirements
for mortgages originated on or after S ptember 1, 2007, to avoid marl<el

d lsrupuons.
TO help lenders better serve borrov ers with impaired and hyb ARM products borrowers. credn, Freddie that will provide For example, in Mac

is also develapin!llixed-rate lenders with more choices contrast to the payment

to offer su rime

structures of rany

of today's ",2128" ARMs, Freddie by offering reduced adjustable
Freddie Mac

Mac's new hyorh:i ARMS will limit PB rate margins: will require amortizing longer lixed-rnte terms:

ent shock

no longer reset periods. t ese products commi!

origlnators rate.

to underwrite

at the fully indexed and
capsal to

The company


"Freddie Mac has long played a le and putting families into homes they
syron, chairman and

ing role in combating



n afford and keep," said Richard F.

CEO of Frednie
to consume

'The steps we are laking today will
the level or underwriting

provide more protecuon

and enhance

slandards in the market."
Freddie Mac's new


er what are ccmm 0 nly referred to "S 2128
comprise roughly three-quarters thall>orrowers and also 01 the

and 3127 hyMd suopnme applying

ARMs. which specffically,


lh. co

pany is requiring

for these products rate, as opposed

be unoe'ren

at 100 fully-indexed rate.

amorUzing wiltlim~ loans.

to the inittaJ 'teaser" products

The company

the use

of low-documentation
the company

in cornblnation

wfth these

For example,

will no longer

purchase "No Income, No Asset-

Confidential Treatment Requested


d ocu mentation borrowers employed

loans and wi

II Ifm~ "SIred I ncom e. Slated Assets" prod u CIS to
Mrd-Io-verify There sources, such as the self-

whose incomes

oenve fro

and these in the "cash ece orny."

.~IJbe a reasonableness

standard for stated incomes.
In addition. F redOie Mao willreq aoo ~ir, thallaa ns be Uooclwri\ten to

lncsuoe taxes and Insurance Industry sector. coil eO! escrows


for taxes and nsuranca, of

Because the matntenance


rongly recommend

tflat the SU.bprime

as is the norm in the prime requires significant

scrow accounts

infrastructure not believe

and is not widely usee i the

subprhne sector, Freddie Mac does
rt as a purchase

it is practical 10 unilaterally


requirernant at thls tim a.
"Escrowing COnsumer practice lending for taxes and insurance clea~y provkies an added la:ter of

protscton," SYfOfI said. "II

Our bope that Ihis uorversa: s the universal practice In subprime

In prime lending today becom
tomorrow." mortgage market

As a secondary

in ester, Freddie

Mac works closely


its customers

in the primary market to

mbat predatory

lending ami promote
and m~del

foreclosure prevention.

Tile higher un elWfiting standards


products aanounced loday build on F
arena. include: - refusing lending to co business practices; wilh instij The company's previously

Mac's long-temn leaden>hip In this
anti-predatory lending practices

Imp ernented

tions that engage

in predatory

- no! investing - refusing

in mortgages

that or hi h-fee mortgages as defined by lhe

to invest in high-rale

Hom e Ownc rshi p a nc

Equity Prot ction Ad of 1 1>94 (H OEPA), as w~11 "S

with prepayrn em penalty terms of - requinng borrowers Ina! lenders jlI'Ovide co

ore th an I h nee ye a rs: and, plele credrt information and reporting age n cles. abolll

t a all the credit bureau

Fredeli e Mac also promotes Cred~Smart(R). Trouble, preventon origination lending


r ed ucanon Ih rotIQ n prog rams such as curriculum, Oon't Borrow

its award-winning

flna dal education ca

an ann-predatory inftiatives. process,

paign, as well as

its man)' foreclosure
the mortgage

These program the,r housing flna

help borrowers


and how 1.0a\loid abusive

practices. Mac is a stockholdar-owne homeownership residential and rental mortgages company ousing. established

Freddie 10 support

by Congress

in 1970

Frec.!die Mac fulfills its mission securiljes. whioh it

by purchaSing finances

a d morlgage-relaled securmes


~y issuing mortgag",related Over Ihe

and deb! instillments for

in the capital markets. more than 50


Mac has made home possible

milUon families.


SOURCE Freddie Mac
CONTACT: SIloron McHale of Frnrldie Mac. +1-703·903·2438

Confidential Treatment Requested







Treatment Requested


Angelo MozilofMa Directors/CF/CCI 03/221200709:05: AM

To cc bcc

dave sarnbol

This is the background info tha contract. It is of utmost import Kripalani, Bartlett, Hale and all minimizing losses and maxirni

Subject Fw: Board Agenda 3,122107 I will be sharing with the Board this morning as well as dealing with your nce that you mobilize Schakett , Gissinger, Bailey, Sieracki, Sandefur, ther senior executives to assure that they leave no stone untumed in ng returns to our shareholders.

Forwarded by Angelo Moziloll anaging DirectorslCF/CCI on 03/2212007 10:01 AM-

Angelo Mozilo/Man ging Directors/CF ICCI 03/221200706:39 A

To Angelo Mozilo/Managing


Subject Board Agenda 3,/22107

Page 1.

1. Current events such as sub rime, liquidity, profitability, etc. that are impacting our Company.

3. David's proposed contract 4. Any questions that you mig t have relative to any of the issues discussed.

1. Current situations faced b the Companya. Assault by the media has een relentless and for whatever reason we have been lumped in with the monoline subprime lenders but also have been linked with GE and HSBC. In this regard we are appearing before Senator Dod's committee (Sandy and Lloyd Seargant) to testify. We have a great story to teU but my guess is tha this will be mean spirited political theater in which we will be painted as the bad guy. In fact one of the dvocates is bringing in a 77 year old woman who is claiming the she has been duped and abused by Co ntrywide. We will attempt to bring our the fact that his woman was in foreclosure with another lende and we saved her from foreclosure, consolidated her massive delinquent credit card debt and lowered h r overall debt payment by approximately $300 per month. She went ahead and defaulted on our 10 n and is claiming foul. This is a loan we would make today under the tightest of guidelines and we w II do everything possible to get that story out. We will continue to tell our entire story which demonstrate Countrywide's desire to always do the right thing represented by our 40 year commitment to lower the arriers to homeownersh ip to African Americans, Hispanics and lower income families. We have mo ntains of evidence 10 support our long history relative to this commitment. b. The genesis of this next s bject is the irrational exuberance that existed over the past five years relative to the seeming y unending housing bubble- Basically three segments of our population entered the arena to seek hom ownership during the bubble and that was families who felt that they had


Treatment Requested


to doeverything possible to qulify for a home of their choice because the affordablility index was falling rapidly or speculators looking f r a quick buck or individual or syndicated crooks who looked for holes in the system. This all worked o. . as long as values were rising and the appreciation in real estate covered all the sins of those who were aming the system. As values beqan to recede then all the sins of the past were exposed and then some. What has clearly exacerbated the problems that we face today but is not totally responsible for all of the consequences are: 1. The17 draconian consecutive guidelines Congress to cut off traditional liquidity to first lime home buyers. incre


in the fed funds rate which materially

impacted ARM loan.

2. The actions by the Feci to virtually cut off the use of pay option and interest only loans by laying out
3. The proposed action of th

All of these factors and others : ave lead to a substantial slowdown in homebuying and refinance activny (liquidity), increase in delinque cies and potential substantial increases in foreclosures and REO's. Delinquencles.toreclosures an REO's are currently not at unprecedented levels but a case can be made that absent some positive eve t that we will reach historic highs. In this regard we have taken s veral important steps: 1. Substantially tightened un loans. 2_ During the past five years t undetectable under our pres The primary reason for the fra estate values which permitted values began to recede the fra the art fraud detection method Company. You will never com than the smartest lenders. In there is no longer the pot to go erwriting guidelines in order to stop the flow of additional problematic


ere has been a substantial amount of fraud of various types that was nt protocols and this fraud was perpetrated upon the entire industry. d staying under the radar screen was because of the ever increasing real he perpetrators to dump the property at a profit and pay off the loan. Once d became clearly evident In this regard we have now employed state of logy's which will substantially limit the flow of fraud loans into the letely eliminated fraud because, unfortunately, some crooks are smarter ddition fraud wi!! be reduced by the natural forces of the market because d at the end of the rainbow to steal.

3_ In addition we have substa tially beefed up loan administration in all of their functional responsibilities such as delinuency call centers, loss mitigation in order to modify loans, where po.s. lble, I.n order to make pay Illents more affordable as well as ma.king certain that our foreclosure s REO departments are operati·;g under both best practices and best of class methodology's ..


4. There are substantial probl ms in modifying loans in today's environment because most of the loans origtnatedin the past decade re contained in mortgage backed securities which for the most part are immutable under current law a d regulation. We could obviously reduce mortgagor's payments but the cash difference between the d .ficient payment and what we owe the security holder would eventually eat up our cash reserves. Lew Re ien, Dave and I are working on ideas that could potentially cause legislative changes to render it possible to modify loans within secunttzations. I will keep you apprised of any progress but don't hold ou much hope. 5, Residuals and liquidity-

a. There appears to b no liquidity issues for prime product in the secondary market nor is there spread widening at this time. here is also sufficient Iiquidrty for ALT-A but spreads are widening slightly because of the perceived risk f contagion from sub prime. b. 8BB including th

narrow and shallo..w an that liquidity has worsened as a res.ul.t of the real and perceived with sub prime. So the marke for sub prime residuals is now both shallow and heavily discounted: .. Therefore under the most extr me of circumstances, which is possible in this envtronment, which totals



residuals that we hold on the balance sheet have always experience



Treatment Requested



approximately $400 million co Id be wiped out. If th is happens it most likely would take place over a protracted period of time such s a year or more.

6. As for general rporate liquidity there appears to be no issues at this time. We have deep markets for our commercial pa er as well as for our MTN's. In fact Moody has not only recently upgraded the Bank but has put the Com any on watch for an upgrade.
6. CompetitionThere is ma sive consolidation laking place resulting in a substantial increase in our application flow of both purcha e and refinance business, dominated by refinances. The current application flow would indicate monthly funding volumes of $40 to $45 billion per month for at least the next several months. These I ns, for the reasons noted above are of higher quality and at healthier margins than in the past coupl of years.


line: hich we are currently doing, to defend ourselves against the bad guys,

1. We have much work to do, particularly mortgage brokers.

2. We have to continue to refi e, which we are doinq, all of our servicing majeure of delinquencies, fore tlosures and REO's

activities to deal with the force

3. We must explore every me ns possible, which we are doing, to keep legilimate families in their homes. 4. We must work diligently


and their

on he PR side of our business to protect and preserve our reputation. of carrying out our mission of lowering the barriers of entry towards ericans, Hispanics and lower income borrowers. and known or yet to be invented in the industry. in this current environment. These

5. We must stay on our cours
homeownership for African A

6. We must employ every los mitigation technique
are tile essence of our mandates


The Bank

a. Jim Furash, Mike Muir rep1 ced by Tim Winnes, Alan Boyce and Paul Dei1z. b. Reserves are being aggres ively set aside within the restrictions of GAAP and regulatory guidelines. c. Delinquencies are increasin but overall delinquencies remain low based upon historical standards. d. Reorganization is taking pi ce relative to the recent departures and because of the merging of the bank and the mortgage bank a well as the merging of the investment regime.

SituationI must alert you that the situati minimally or materially. I will k Dave Sambo!. will be a have financial results from the developed. n remains very fluid and everything that we have discussed could change ep you apprised of any material changes if and when the occur however complete report at our next Board meeting because at that time we will irst quarter as well as the other issues I have mentioned will be further


Treatment Requested


Angelo MozilofM naging DirectorslCF/CC'

To ce

bee Subject Re: (no subject) We are now.approaching our fost difficul1time in this liquidity crisis. This week will dictate the structure of the Company going forwar9. The team is in with Goldman and Citi all weekend. I have personal business today but will be in t e office all day on Sunday.


8 AM


om M

To ce bee SUbject (no subject)

We made front page of WSJ 0 line addition. You are aIldoing a fantastic job! Call you later.

Get a sneak peek of the all-new





Carlos Garcia/Ma Directors/CF/CCI



Tim Wennes/Administration/BanklCCI@Countrywide Dave Sambol/Managing DireetorsJCFICCI@COUNTRYWIDE;Dan Tarman/Ma naging Directors/CF/CCI@Countrywide;angelo mozilo Re: The Bank

bee Subject

I agree with paying higher rate . We need to put out the deposit run that ignited the last few days with an all out assault and restart gro h. Ideas that I feel will be helpful include the following: 1. Pay higher rate. Implement arefully to avoid perception of desparation. 2. Call customers to personally reassure them and to explain fdic rules related to coverage of deposit balances greater than $100K. 3. Place newspaper ads like M I TEL did to reassure customers and the public the Bank is strong. 4. Launch a broad marketing c~mpaign supported by a high/competitive deposit rate. The capalqn should be multi dimensional to maximire awareness and reinforce our message. Use PR, ads, local area marketing, etc. We need national and regional focus. I feel we can tell a great story and inspire
confidencce. My feeling is the. ~rst mes.sage is the size, safety and soundness of institution coupled with fdic insurance and clarifying th t issues in the press about countrywide are exagerated, pertain to affiliates, not the bank, and are not applicable to the bank as it has its own source of liquidity thru the banking system. The second essage is competitive rate. The third message is conveying the image of a unique, viiable and powerful alue proposition evidenced by one of the most remarkable stories of successful bank. For example and prompt: countrywide, the bank that provides a high and safe return to depositors made possible by a unique low operating cost model on both the deposit and lending fronts. Accordinly the bank can afford to extend high yields to depositors while investing in high quality reliable return assets. I think angelo ca tell a great unique success story that promises to to become even more sucessfull because our model if so efficient and meets the social need of providing retired seniors living on fixed income the highest sate retum available.

From: Angelo Mozilo Sent: 08/16/2007 09:40 PM PDT To: Tim Wennes; Car os Garcia Cc: Dave Sambol; Oa Tarman Subject: Fw: The Ba k The greatest advertisement is aying higher interest rates then your competition. Whatever promotions that you do you must incorpora e extraordinarily high returns to depositors. Many years ago one of the federal government ag.encies a ked me to serve on the Board of Beverly Hills Savins which was in receivership. We had no probl· m getting deposits because we were aggressive in our marketing of our higher rates on CD's and mone~ markets. The combination of effective and comforting ads combined with very competitive rates will bring depositors back into the bank. Advertisements alone will not accomplish our objectives. We need a full court press. -- Forwarded by Angelo Mozilol anaging DirectorslCF/CCI on 08/16/2007 09:32 PM--

Dan Tarman/Manag ng Oirectors/CF ICC I


To Angelo Mozilo/Managing Directors/CF/CCI ec dave sarnbol, Carlos Garcia/Managing DirectorsJCF/CCI bce Subject Re: The Bank

We should consider a multi-prong pproach: PR is obviously one. The other, however is the use of paid advertising


Treatment Requested


to help prompt new deposits. As a company, we have always shied away from this particularly "brand" advertising. Given the challenges we are facin ,perhaps the time has come to elevate the Countrywide Bank brand through this medium. Advertising is the best way to shout above the noise and control the message. A "campaign" that has the appropriately crafted message and execution can have, in my opinion, a very meaningful impact. While incurring costs for this type of activity is not optimal rightnow, the cost of seeing the deposit franchise is greater in my opinion. I'd welcome having sr managcme Angelo Mozilo/Malluging Direct discussion on this topic. slCFICC/ wrote:

Date: From: To: cc: Subject:

08/16/200706:50:2 Angelo MozilolMan

ging Directors/CFfCCl Directors/CFfCCI

dave sambol, Carlos GarciaiManaging

The Bank:

We have to put forth a full court ress on turning the reputation of the Bank around If you feel we should bring in world class outside help just go ead and do it. I will have Tim Wennes and Carlos work on more attractive rates for depositors for a short period 0 time to stem Ole tide.

Confidential Treatment Requested


Angelo MozilofMa aging DirectorsfCFfCCI

To cc bcc Subject


dave SamboliManagingDirectors/CFfCCI eric Sieracki/Managing DirectorsfCFfCCI; kevin Bartlett/Managing Directors/CFfCCI

1. I want you to take the necessary This is a business neither the Bank time. I realize that we have some t perform however I don't want any n greater hole for the Company. 2. I want to cease doing any subpri and/or Freddie,

Ceasingprogramsthat are problematicfor the Bank arid/or are at high risk, steps to wind down the builder program as soon as humanly possible. r the mortgage bank should be engage in during this crisis or at any rm commitments to builders and we will honor them as long as they w business under any circumstances because we would be digging a

e business that is not saleable or that cannot be securitized by Fannie

Our balance sheet, liquidity and ca ital are under stress and therefore it is not prudent to take any further risk of originating assets which cannot I) sold easily into the secondary market or would in any way cause regulators concem at the Bank leve . Therefore as you go through the ex rcise of downsizing please keep these initiatives in mind.

On another matter, I had a convers on the call. Calpers has an interest equity infusion of some kind, Both the discussions. Calpers want to c practices, which should be no probl breakthrough for us. Please stay cI that Calpers chooses to take a seri

lion with Russell Ried, the CIO at Calpers, and I included Kevin and Eric in buying existing and new production jumbos, AM and potentially an ric and Kevin will be contacting their counterparts at Calpers to continue me out shortly 10 do a one day due diligence on our underwriting m, and then come back to us with their proposal. This could be a major se to Kevin and Eric so that you can coordinate the activities in the event us interest in us. Let me know if you have any questions.


Treatment Requested


To Cap80b1225@aol.eom@CWEXTERNAL cc 08/30/2007 11: 31: 5 AM bcc dave Sambol/ManagingDirectors/CF/CCI Subject Re: (no subject) Thanks for your expression of c I ncern for my well-being. I very much appreciate it. We are working on a backup facility for our $5 billion i AM's to avoid the dangers of daily rolls. That facility is going to cost $25 million for a 6 month commi ment from Lehman. It's clearly a flagrant exploitation by Lehman but we have few if any other options at his time. As far as Citigroup's deal is concemed we simply could not accept the proposal because it rkquired a payment of $100 million for a $5 billion repo facility. The problems with this proposal is t~t if we accepted it we would signal to Moody's and the other rating agencies that we are bei.ngtrea~~d ~s a junk credit a nd thai w.eare willing to trade as a non investment grade borrower. We believe th t this would lead to an Immediate downgrade by Moody's which means that we would have to close do n our operations. We have to be careful as to how we negotiate these transactions because we must r main transparent to the rating agencies and at the same time not put ourselves in a position of being he architect of our own demise. Hopefully this explains our position in the matter that you raised. DirectorslCF/CCI

Angelo MozilofMan


Cap80b1225@ao1.G ,m
08/3012007 03:48 A



(no subject)

Dear Aoge: It is very important that you don t let these attacks by the press and the politicians affect )'ORr ability to focus on the critical issues. I realize these vicious attacks are aimed at you and your integrity .....and therefore very hurtful and debilitative . Your ability to lead the "baby" rough this difficult time will be determined by you maintaining your stamina and termination. HaVin~Said that you MUST force your self to get some REST and nourishment! You are not S_U1.)er human and if :o~ don't pace yourself you will not achieve y~ur goals. You and your team .• need to remain healthy and clea minded, You have performed at an extraordinary level and I am proud of you! Even Derek Jeter has to ta a rest during tbis pennant race! I. thin. " ~ you should reconsider w.~et~er or .. ot we should pay the fee's to t.hc banks to assure the da.s to day n liquidity we need. It may be w0'fb It to gIve you and your team the respite you need to get througb these next two months. I believe the terms rUld be structured properly so as not to cause more problems. Think about the cost as an insurance policy a well as the. positive impact on the regulators .employees and the markets, Mt. er all at the end of the day, tb,'e cost will be justified by the calming affect it wiJJ have on everyone. Just might be the bst money we spend.
In light of the potential write do ns we ,tbe industry and the investment banks et al win have to take in the 3rd quarter, the banks fee for a po line will just be another cost to absorb.

Never for a moment doubt you ability to get through this crisis and come out stronger. But you must pace yourself and your team! Whatever the future is I am wit you all the way!






Bob Bob

Get a sneak peck of the all-new AOLcom_




BAC~FCIC·E"()OIl066 1165

Angelo Mozilo/Ma Oirectors/CFICCI




Carlos Garcia/Managing Directors/C FICCI@COUNTRYWIDE dave sarnbol

03:35: 1

Subject Pay-Options In reviewing our servicing port with ..teve Bailey the issue of pay-options was discussed. Steve informed me that we have 350,000 pay option 10 ns on the books. He also pointed out that in his opinion the pay option loans were the ones most vulnerabl to foreclosure because of the neg am component and because the borrower has been paying at an intE1rest ate on average of 3%. Obviously these loans cannot stay at this r rate once the 15% threshold has been reached because the average rate is far below the cost of funds.


Here are my questions relative to th Bank's portfolio: 1. 2. 3. 4. 5. 6. 7. How many pay option loans do e have on the balance sheet? How many have a heloc behind em? What is the delinquency rate? How many are in foreclosure? What is the rate of prepayment 0 these loans? What are the prospects for futur delinquencies and foreclosures? Are we stili putting these loans 0 our balance sheet, and if so, why?


Treatment Requested



Angelo MozliolM Directors/CFfCCt


To cc

11/04/200708:25:··2 AM

Carlos Garcia/Managing OireclorslCFICCI@COUNTRYWfDE Dave SambollManaging DiraclorslCF/CCI@COUNTRYWIDE Re: QUestions on POAs

bee Subject

Pay options have hurt the Company and the Bank t>adly despite your belief that it is a viable product. Wortd Savings culture permits hem to make these loans in a sound manner and our culture does not. You and Dave should sit dow with Steve Bailey to ~ully understand. the problems with pay options and the fact that fico scores are no indication of how these loans will perform. The only way these loans can work out is with stable to ever ncreasing real estate values. I do not like this product because they are not fixable in the event of seri us default and also because they promote the worst behavior from the mortgagors who opt for this p duct irrespective of the fact that they are prime and super prime borrowers.

Carlos Garcia/Man ging DirectorslCF/CCI 11/041200706:05 M

To Angelo Mazilo/Managing DirectorslCF/CCI@COUNTRYWIDE ee Dave SamboVManaging DirectorslCF/CC1@COUNTRYWIDE bee Subject Re: Questions on POAs

In August we implemented de of the portfolio became ineligi per month of POAs. CHL also loans (a fixed rate loan for 5 y send you a comparison of the guidelines and POAs meeting delinquency performance of P

p guidenne cuts that eliminated close to 90% of POA production (i.e. 90% Ie under the new guides). In Q4 CHL expects to originate appx $25 million xpects to Originate appx $110 million per month in Payment Advantage ars similar to a hybrid but with payment options similar 10 a POA). We will elinquency perfonnance of POAs in general, POAs meeting the new our delineation of sound loans. This comparison will show you that the As meeting the new guides has been very acceptable. guides from the Bank, CHL will need to stop offering the product. This

If we cut out the remaining P

will hurt the mortgage franChiS~ and the Bank. Keep in mind the Bank has ge erated o. er $3 billion pretax income since inception, while giving back v only $400 million this QTR, an that was after recording a provision for losses of nearly $800 million and btlilding reserves over $1 Billio ,most of which covers perfonning loans. This reserve was calculated assumming delinquency keep~ increasing at a faster pace than we saw in Q3 for six more QTRs. In addition, 71 % of the POA po 0110 is covered by MI.

Angelo Mozil, .11/03/2007 0, :33 PM PlYI' To; Carlos Garcia Cc: Dave Sambol Subject: Fw; Quest~on9 on POAs


I don't want any more Pay QPtns originated tor me Bank. I also question whether we should touch this' product gOing forward becaus~ of our inability to properly underwrite these combined with the fact that these loans are inherently unspund unless they are full doc, no more than 75% LTV and no piggys. Forwarded by Angelo Mozito vlanaging Directors/CF/CCI on 11/03/2007 05:32 PM -

Confidential treatment recueeted by Co

'de Financial Corporation

CFC2007B039050 SEC_ENF _FCIC_010360

To Angelo MoziloJManaging Directors!CFfCCI@COUNTRYVIIIDE: cc Carlos Garcia/Managing DirectorslCF/CCI@COUNTRYWIDE, Adan FarinasfBanklCF/CCI@Countrywlde, Mark FiremanIBa.nk/CF/CCI@Countrywioe, Brian KuelbsiManaging DirectorsfCF/CCI@Countrywide, Dave SambolfManaging DlrectorS/CFfCCI@COUNTRYWIDE, Amit MunjaIlBank/CF/CCI@Coun1rywlde bee Subject Questions on POAs

Iv! emo_Angelo_Q


A questions posed to Carlos

Brian Kuelbs, Adan Farinas, Amit Munjal, Dave Sambol

In response to the questions

posed to Carlos, I've provided a summary followed by more detailed answers to each cuesuon.

Summary Loans 90+ delinquent as a p:er'cerlta!~e the Bank's $28 billion portfolio of POAs increased of nearly ten-fold over the year, from .3% to 2.91%. Since significant recast activity will not begin until 2009, has not been the issue. The primary drivers oftbe increase were loans in areas that the greatest declines in home values since origination, as well as low-doc loans with CLTV' in excess of 80% (typically involving a piggyback HELOC rather than mortgage insurance). example, 90+ delinquencies in California increased 12-fold over the past year, 14-fold in (which accounts for ~Io of the POA portfolio), and 12-fold for alliow-doc high-Cl, TV. surface, delinquencies on non-owner-occupied properties appear to be substantially lower on owner -occupied loans. However, it is my opinion that would-be'

CFC2007B039051 SEC_ENF _FqIC_Ol


flippers misrepresented oc speculative transactions, spike during the past year.

pancy and income in order to obtain maximum leverage on that their defaults are a meaningful component of the delinquency

While defaults are far high r than originally predicted, the decision to acquire mortgage pool insurance on nearly two-t . ds of the PDA portfolio has substantially reduced the Bank's exposure to loss. The recen rally in rates will result in meaningful declines in the MTA index and slow the rate of negati e amortization, and lhas in fact pushed the majority of recasts out to 20 10 and beyond. While tb timing of recognition of credit losses has had a volatile impact on the income statement, the margins priced into the product suggest that the .lifetime return on the 2004-2007 PDA book ill still come in above 15% pre-tax. Guidelines have been cut back to increase minimum FICDs d eliminate high-Cl.Tv low-doc lending. New originations (almost entirely hybrid PDAs), thoJgh modest in volume, are projected to generate a 25% return on capital.


1. 'How many POA (Pay

ption) loans do we have on the balance sheet?

Since the inception, the b has invested in $51 billion of PO A loans including the $2.06 billion transfer from HFS to HFI a ofSept-07. The Bank HFI portfolio a 22.5% YOY decline fro California loans comprise a total UPB of $28.2 billion in POAs as of Sept-2007; this represents $36.4 billion as of Sept-2006. 6% or $15.8 billion of the $28.2 billion portfolio.

10% ($2.6 billion) of the $ 8.2 billion POA portfolio has a Bank owned 2nd lien behind it. 12% ($3.5 billion) ofthe $28.2 illion POA portfolio has a CHL 2nd lien behind it. So, in total 22% or $6.1 billion of the $28.2 illion POA portfolio has a Countrywide 2nd lien behind it. (Line amount totals

The total drawn amount on the 2nd liens is $605 million as ofSept-2007 $852 Million). 3. What is the delinquen

y rate?

As of Sept. 30th 2007, 90+ day delinquencies total 2.91 %, or $821 million. This represents a 261 basis point increase in the 0+ day delinquency rate from Sept. 30th 2006, and 123 basis points increase from June- 07. A the portfolio balance declines, the effects of seasoning and the housing market have ampli Jed the impact of deteriorating portfolio performance on the delinquency rate. California 90+ day delinqu ncies total 3.10% or $492 million as of Sept. 30th 2007. This is approximately 1.5 times th non-California 90+ day delinquency rate of approximately 2.67%.

Confidential treatment requested by Cou

'de Financial Corporation

I -

All Bank vintages are p rming better than similar vintage CHL-serviced PayOption ARMs. Bank Ever 60 DLQ rates Ii ve run at approximately half ofCHL's level.


0.19010($52 million) of the $28.2 billion POA portfolio is in foreclosure as of Sept. 30th 2007. (182 loans). BankPOA lifetime charge offs total $52 million (Includes Charge-offs on Loans that were put -back from B to CHI.). Bank POA lifetime net charge offs excluding the ones on putback loans total $40 Million. 5. What is the rate of pr payment on these loans?

The September 2007 pre~ment rate for Bank PayOptions was a 24% CPR, down from a 34% CPR in 2Q07. Bank 3-ye prepayment penalty POA have prepaid at 25% CPR fr... Sept 2006 om to April 2007. They haveeclined to 12% CPR in Sept. 2007. The reduction in prepayment speed is attributable to a d cline in HP A, increased cost of non-agency refinancing, and a market contraction ofunderwritin guidelines. 6. Wbat are the prospect Current forecasts call for continue to increase for th of 2009. This forecast for which call for borne prices for future delinqnencies and foreclosures?

e rate of new 90-day delinquencies on the Bank POA portfolio to next four quarters, and to stay above the Q3 rate until the second half orsening delinquencies is consistent with Moody's HP A projections, to continue to decline during that time period.

Estimates of potential fu e delinquencies and foreclosures do not consider the firm's resources focused on. loss mitigation n the form of loan modifications and refinances. Loss mitigation efforts may partially mute xpected delinquency and foreclosure estimates. Although we have not fact there is a possibility that would-be flip transactions. CLTV low-doc loans, wit may be speculators who represented income as wel default ensued. 7. How are we mitigatin red this possibility into the Bank's POA loss reserve projections, e current spike in delinquencies could be related to a "flame out" in Approximately 30% of the 2005 / 2006 POA book consists of90% a 90+ delinquency rate of about 5%. Many of these delinquent loans srepresented occupancy to obtain maximum leverage and likely mis.. When it became apparent that no quick flip would be possible,

the risks posed by bonsing market and POA performance?

63% of the portfolio has Jst loss or mezzanine credit support in the form of mortgage insurance. 38% or $10.7 billion has fi st loss coverage to a 3% cap. l3% or $3.8 billion has mezzanine cover<\ge from 1.75% to 4. 5%. 12% or $3.3 billion bas mezzanine coverage from 1.00% to 4.00%. 8. Relative contribution f delinquency growth due to UP A and other factors.

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CFC2007B039053 SEC_ENF _Fbc_010363

Declining house prices ha Vintages. The projected 31.88% for the 2006 vinta 2004 vintage and less fav vintage is still 9.5 times th and deteriorating credit en

e had a significant impact on the performance of the most recent POA etime ever-PO delinquency rate for 2004 vintage is 2.85% versus e (llx multiple). After adjusting for the greater seasoning of the able borrower attributes in the 2006 vintage, the ever~90 rate for 2006 of the 2004 vintage. This variance is attributable to declining HP A ironment.

9. Are we still putting th se loans on our balance sheet, and if so, why? Yes, the bank continues to retain PQA loans fOTinvestment on balance sheet. The risk-return profile oftbese loans has en materially improved due to underwriting changes made in Q3 2007. Production of PO A has substantially declined due to borrower preference for hybrid negative amortization 10 programs. The bank: projection for Q4 originations of Payment Advantage loans for lio totals $427 Million compared with $71 MiUion in POA. The Payment Advantage portf lio is $1.4 Billion as ofSept-07.


10. Relative credit perf0r' ance of PO A versus Hybrid ARMs? For 2004 POA Vintage, B I EveJ~90 delinquency rate is 0.85%. For 2004 Hybrid Vintage, Bank Ever-90 delinquency rate is 0.74% For 2006 POA Vintage, For 2006 Hybrid Vintage,

BL Bank

Ever-90 delinquency rate is 3.94%. Ever~90 delinquency rate is 5.25%.

For the 2006 vintage, Hyb id ARMs layered risk is greater than POA's resulting in greater Ever90 rates ..(One Borrower "A is 70% for Hybrids compared to 66% for POA; the combination of CLTV>95 and LOW Doc is 12% for Hybrids compared to 1% fOJ POAs). POA delinquency rates run lower early in th9life of the loan due to the minimum payment option (80% of PO A customers currently choos the minimum payment option). 11. BankPOA

Cumulati e Loss Assumptions

and Resulting Returns

Cumulative losses assume in pricing POAs from 2004 through 2007 vintages average 0.64%. The 0.64% cumulative los I estimate produced an expected return on capital of 21%. Retrospective cumulative 1 ss estimates for the same POA vintages average 2.66%. These estimates produce a 15.8% return on capital expectation. The 2004-2007 book is anticipated to generate approximately $1 98 billion in pre-tax earnings net of losses from its inception through the remaining life of the prrtfoliO. Current guidelines produc a cumulative loss estimate of 0.90%, which is used to price new production. Current guidel es cumulative loss estimates generate a 25% return on capital . expectation.
Jess Ledennan SMD & Chief Risk Officer


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Sec Mktg " Credit


Mg .t

818-225-3038 Office 92-594.3038 Internal 940-367-1427 Cell

500 Park Granada ail Stop: CH20e alabasas, CA 9 I302

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