Mozilo, KB Home chief offer bleak forecast

Mortgage, home building executives say housing market faces tougher times and call on Congress to boost lending.

BEVERLY HILLS, Calif. (Associated Press) -- The chief executives of Countrywide Financial Corp. and KB Home predicted more trouble ahead for the nation's slumping housing market on Monday, calling on lawmakers to expand financing for home buyers.

The remarks from Angelo Mozilo of Countrywide (Charts, Fortune 500), the nation's largest mortgage lender, and Jeffrey Mezger of KB Home, one of the biggest homebuilders, came during a panel discussion hosted by the Milken Institute on the economic impact of the subprime mortgage meltdown.

Asked if the worst was over, Mozilo said, "No. I don't think so."

Last week, Countrywide reported a $1.2 billion loss in the third quarter, but its shares soared after the company said it expects to be profitable this quarter and next year.

Mezger, also KB Home's president and director of the board, offered a similarly downbeat outlook.

"We anticipate things are going to stay tough for quite some time," he said.

Earlier this year the number of defaults and foreclosures among home loans, particularly subprime mortgages taken out by borrowers with past credit problems, spiked. That sent a jolt through financial markets as investors pulled back from buying mortgage-backed bonds and other securities.

The resulting credit crunch left Countrywide and other lenders scrambling for cash to keep funding loans.

"Falling values is what continues to be the problem here," said Mozilo, also Countrywide's chairman. "And as long as values keep on falling, the subprime situation will get worse and begin to spill into prime [loans]."

Calabasas, Calif.-based Countrywide originated about 7 percent of all subprime home loans in the United States last year. The housing slowdown has forced Los Angeles-based KB Home and other major homebuilders to slash prices to help combat a glut of unsold new and resale homes on the market.

"It's going to take quite some time for the inventory to clear," said Mezger, referring to the stock of unsold homes.

Both Mozilo and Mezger said they want the government to lift loan limits on government-sponsored operations such as Fannie Mae, Freddie Mac and the Federal Housing Administration.

Fannie Mae and Freddie Mac buy blocks of mortgages from lenders and then pool them into securities for sale on Wall Street. The FHA insures loans made by mortgage lenders.

Currently, the limit on loans Fannie Mae and Freddie Mac will buy is $417,000. That's far below the median sale price in expensive states such as California. Many lenders have cut back on originating loans above the limit because the loans aren't eligible for sale to the government banks.

As such, raising the limits would help lenders fund more loans to would-be buyers and thereby stimulate more home sales, supporters say.

Mozilo said the Federal Reserve's rate cut last month will help, but the government must do more. He complained the onus to help borrowers has "all been placed on the lending community."

Countrywide said last week it would step up loan modifications and other efforts for some 82,000 adjustable mortgage loans slated to reset to a higher interest rate and higher monthly payments.

Ross DeVol, director of regional economics for the Milken Institute, said the combination of declining home sales, rising oil prices and the credit crunch has brought the nation to the brink of recession.

"We're right there," DeVol said. "If anything else goes wrong, we're probably in a recession."

Shares of Countrywide slipped 47 cents, or 2.7 percent, to $16.83 on Monday. KB Home shares rose 25 cents, or nearly 1 percent, to $27.83.