California Lesson: Adaptability Breeds Confidence

The outlook for California and the nation can best be appreciated by recalling the bad times of the early 1990s. Angelo Mozilo, co-founder of Countrywide Credit Industries, the mortgage lender, tells of being summoned to see President Bush in 1992. “It was just before the election, and Bush asked me and the head of the home builders association why nobody was buying homes, even though he had brought interest rates down to the lowest level in years,” Mozilo recalls.

“To me the answer was so clear that I blurted it out: ‘Mr. President, you could bring interest rates to zero and still nobody would buy homes because they’re afraid of losing their jobs.’ ”

A little over five years ago, unemployment in California was close to 10% as aerospace companies downsized brutally and corporate restructuring spread fears of job losses through all industries.

Today all has changed. Unemployment in California is down to 5.8%--only 2.9% in San Jose and Silicon Valley. Consumer confidence is high. And Mozilo, 58, sits at the center of the strongest housing industry he has ever seen.

“I believe it is very possible that in the next 12 months you’ll see the largest volume of total mortgage transactions in history,” he says.

Throughout California, with only a few exceptions, home sales are at near-record levels. Prices are rising and interest rates are trending downward. “It’s like nirvana; I’m frightened something will come along to upset it,” says Mozilo, who nonetheless sees no evidence that crises in Asia’s economies are having any effect on California’s housing markets.

Economist Eileen Neely of Fannie Mae (formerly the Federal National Mortgage Assn.) agrees that home buying will continue at a near-record pace, leading to historically high levels of homeownership in California and the rest of the nation in the next several years. “The passion for homeownership among recently arrived immigrant groups” will help drive residential real estate markets for the next decade, Neely says.

A turn to rising interest rates could change that picture, of course. But the interest rate trend is down, and likely to stay that way for 1998. “The deflationary environment in the world will take long-term interest rates down to 5.75% and perhaps lower,” says investment strategist Charles Clough of Merrill Lynch.

The Asian crisis, by discouraging the Federal Reserve Board from raising rates to cool the U.S. economy, even plays a role in keeping interest rates low.

To be sure, California, which exports high-tech equipment, farm products, movies and videos, software and medical instruments to the rest of the Pacific Rim, will be hurt by the Asian crisis. Economist Tom Lieser of the UCLA Anderson School sees a slowing of California’s job growth next year.

And corporate restructuring is still very much a part of the U.S. landscape, with AT&T;, Eastman Kodak and even a successful company like Boeing trimming thousands of jobs in an effort to hold down costs.

Yet consumer confidence, in the doldrums only five years ago, is high today. What accounts for that change in attitude?

*

Flexibility, in a word. Companies and the people who work for them have become adaptable. Faced with a slowdown in Asia, California business people are looking to fresh opportunities in Europe and Latin America.

Or they are looking homeward to an economy in which business services, a catchall phrase covering software, temporary employment, finance and marketing, has become one of the fastest-rising job categories.

“The California economy is resilient. Something else always turns up,” says Mozilo, a philosophy and marketing graduate of New York’s Fordham University who came west and founded Calabasas-based Countrywide in 1969 in partnership with David Loeb, a prominent Wall Street investment banker.

The company revolutionized mortgage lending by taking advantage of securitized mortgage markets developed by the government-assisted Fannie Mae and Freddie Mac (formerly the Federal Home Loan Mortgage Corp.), and by inventing the first computerized credit-processing system.

In its fiscal 1998, which ends Feb. 28, Countrywide will have made $48 billion in new mortgage loans, serviced $176 billion in existing mortgages and taken in revenue from commissions and fees of more than $1.2 billion.

But adaptability for a company or a state’s economy is no accident. It takes work and considerable learning from hard knocks. As recently as three years ago, Countrywide was battered by a still slow local economy--it gets 30% of its business from California--and a sudden upturn in interest rates, which killed a profitable mortgage-refinancing market.

So Mozilo adapted, trimming the company’s work force; forming a subsidiary to lend to less-than-prime-credit borrowers; and acquiring companies in home appraisal, title insurance and other real estate services.

In diversity is strength. “Countrywide is not the same prisoner of interest rates it was in 1994. It’s lean and fit,” says analyst David Dusenbury of Credit Suisse First Boston.

The company faces new challenges from major commercial banks, which see mortgages as an easy way to gain relationships with clients. “Of the 15 top mortgage lenders today, 12 are commercial banks,” Mozilo says. Norwest Corp. of Minneapolis has become the nation’s No. 1 mortgage lender, displacing longtime leader Countrywide.

*

There is even talk that a major bank, such as NationsBank, will buy out Countrywide. But Mozilo shrugs and says that “there would be a clash of cultures” between his entrepreneurial company and a big bank. His own view is that his company, now opening branches “in every hamlet in America,” will account for “10% of U.S. mortgages within three years, compared to 6% today.”

“At 29 years of age, Countrywide is at the beginning of its greatness,” Mozilo says.

California, with its traditional mainstay real estate industry in an expanding mode, is similarly confident. (Locally, only San Bernardino and Riverside counties and the Palmdale area are still working off foreclosed properties from the recession.) The state can expect problems as Asian economies go through their time of hard knocks. And California will encounter challenges and opportunities as its population grows by an estimated 17.5 million people in the coming two decades.

But, having learned from hard knocks, California faces 1998 with confidence that it will adapt to whatever comes. And, compared with only five years ago, that makes all the difference.