NEW YORK -- Angelo Mozilo, the butcher's son who built Countrywide Financial Corp. into the largest mortgage lender in the United States, was in no mood for soul-searching over the subprime home crisis.

Perched on an arm chair on a ballroom stage, Mozilo, who made $387 million in pay and stock options over the past five years, disavowed blame for the collapse, pleasing his audience of fellow mortgage-banking industry leaders and foot soldiers.

"You've got to be careful here about blaming ourselves too much," the deeply tanned and sharply dressed chairman of Countrywide told the Mortgage Bankers Association this week.

The real culprits, he argued, are the Federal Reserve with its series of interest rate hikes, crooked real estate speculators, falling housing prices and regulators' attacks on interest-only and other risky subprime loans.

His take contrasts starkly with the view of those who blame loose lending policies and oversight, and a get-rich-quick culture in the mortgage industry.

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The consequences of the housing collapse, however, are not open to debate. Tens of thousands of loans have failed, pushing subprime borrowers out of their dream homes, and many economists blame subprime lending woes for a slump in the housing market that could get worse. The downturn is likely to sap overall economic growth for the rest of this year.

Many consumers felt misled by the industry, lured into borrowing at subprime, the loan category for higher credit risk borrowers who pay higher rates.

But calls for a reappraisal of the industry's practices have been met by protest. More red tape and bureaucracy would only make things worse, the lenders say, and few expect any major changes to be carried out.

"Regulation ... is better for the crooks because only the good people have to comply," Mozilo said to a reporter before taking the stage. "So I'm against it. In fact, it's regulators, in my opinion, that have caused part of the problem when they attacked the pay option and interest-only loans."

Outside the conference hall, there was still plenty of subprime mortgage misery. Over the next several years, more than a million foreclosures could occur when adjustable-rate mortgages reset at higher monthly payments.

Mozilo and Countrywide are still standing while New Century Financial Corp. and dozens of other subprime lenders have gone belly up. Indeed, the industry's big players are set for a period of expansion.

Countrywide is hiring, picking from the best of the companies that went under, and Mozilo sees a better future for the big players like Countrywide, Wells Fargo & Co. and Citigroup now that the upstarts are gone.

Alan "Ace" Greenberg, chairman of the executive committee at Bear Stearns Cos. Inc. (NYSE:BSC - news), the No. 1 U.S. issuer of mortgage-backed securities, downplayed the impact of subprime lending woes on U.S. capital markets. He said called the last few months a weeding-out process.

"I think the subprime (problem) has been blown completely out of proportion," Greenberg said.

DEPENDING ON THE MARKET

The industry wants the marketplace to make any necessary changes in its lending practices on its own. That may indeed turn out to be the only response to the crisis, with no congressional legislation yet passed. Calls for bailout plans have been dropped and any national plan to license brokers or require education programs for borrowers have been ignored.

That gives little comfort to consumer advocates dealing with the human detritus of the crisis.

"If we're depending on the market to protect the consumer ... we're in trouble," said John Taylor, chief of the National Community Reinvestment Coalition.

"What we have learned is the industry is very clever and very inventive," Taylor said. "They redesign and restructure products to maximize profit, and at the same time try to be in line with the laws and regulations."

A recent Harvard study recommended national laws to license the brokers who originate most loans, extending new lending guidance, and urged the industry to better police itself.

Banks have tightened lending standards, but the system still works very much like it did before. A vast, though smaller, force of independent mortgage brokers sell consumers loans from a variety of lenders, profiting the most from the most expensive products. Consumers often wrongly assume that brokers have a legal obligation to borrowers.

The lenders send loans they've made onto Wall Street, which repackages them as securities to be sold to investors, spreading out the risk. Homeowners don't have the luxury of sharing their risk. The cost of loans they cannot afford is seen in "for sale" signs that line streets in cities like Corona, California, a bedroom community east of Los Angeles. It has one of the nation's highest rates of people late on their mortgage payments.

Among the forest of for-sale signs are flyers touting too-good-to-be-true mortgages. One offers 100 percent financing, loans for people with no proof of income or rock-bottom credit scores. The offer heralds a 1 percent payment rate for five years, though not underscoring how a borrower would sink deeper into debt under such a plan.

"The conditions are still out there for consumers being taken advantage of, particularly in the subprime market," said Allen Fishbein, director of credit and housing policy at Consumer Federation of America.

Trillions of dollars of adjustable-rate mortgages will reset at higher monthly payments this year and next. Some 1.1 million foreclosures with losses of about $112 billion will occur over the next six to seven years, estimated Christopher Cagan, director of research and analytics at First American CoreLogic Inc., a provider of business information.

Cagan said in a study subprime borrowers will be hit hardest. He estimated 12 percent of subprime loans will default because of resets at higher rates.

The vast majority of risky loans are still being repaid on time, perhaps a sign of stability in the system. The economy is bearing up as well, and Federal Reserve Chairman Ben Bernanke this week said the subprime-linked woes "will be limited."

But there will not be a soft landing for everyone. Legions of borrowers took out 30-year loans with easy terms for the first two years. As lenders tighten standards, they surely will leave some borrowers out in the cold when they try to refinance to avoid paying higher interest rates, Fitch Ratings said.

Marvin Von Renchler, a veteran mortgage broker in Oregon, isn't ready to shed a tear for consumers.

"I run into very few people who can legitimately say, 'I didn't know (what I was getting into)."'

But Jim Campen, an economics professor at the University of Massachusetts in Boston, describes buying a house with a subprime loan to stumbling onto a used car lot. The price and other charges often are negotiated individually with each customer. And salespeople often have financial incentives to obtain the highest price possible.

"People on Wall Street live in their own world," Campen said. "They don't understand what's going on the other end. If these (subprime lenders) couldn't sell these loans to Wall Street, they couldn't do what they do."

WALL STREET BULKS UP

Wall Street's role in the mortgage industry is only growing. The crisis has attracted bargain hunters to the vast American housing market.

"I was happy to be one of the last guys to buy as opposed to the first guys to buy because I think assets were a lot cheaper at the tail end," said Michael Marriott, co-head of Credit Suisse's mortgage business after buying Lime Financial.

The newer players could pick and choose the best properties that paid the best returns with less risk of bad loans.

"Look at how much capacity was removed with the big stand-alone subprime guys being basically evaporated. So the market will be right-sized, and when its right-sized I think (profit) margins will come back," he said.

Other Wall Street players have bulked up, too.

Citigroup's CitiMortgage ranked as the No. 1 subprime lender in the first quarter, originating an estimated $8.1 billion in loans. That's a 29 percent jump over the year-ago quarter, according to Inside Mortgage Finance. Countrywide was a close second with $7.9 billion in subprime originations.

Bear Stearns and Merrill Lynch & Co. each have acquired subprime operators to feed investment banking machines that repackage mortgages into securities for pensions, hedge funds and overseas investors.

Wall Street executives say investment banks would lose clients quickly if they knowingly packaged bad loans into mortgage-backed bonds. It's in their best interest to weed out the subprime lenders who have lax underwriting standards or use unscrupulous sales tactics to place their riskiest mortgage products with borrowers who can't afford them.

But many say they just do what the market wants. Peter Paul, considered a pioneer in bringing loans to well-off borrowers with untraditional financial histories, likens mortgages to clothing.

"We're somewhat amoral about this kind of stuff," he said. "If we were fashion designers and they wanted purple polka dots, we might have our own opinion, but we'd probably give them purple polka dots."

© 2007 Reuters Limited.

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