Countrywide CEO says housing market downturn could lead to a recession, urges cut in Fed discount rate.

August 23 2007: 4:10 PM EDT

NEW YORK (Reuters) -- Countrywide Financial Corp. Chief Executive Angelo Mozilo warned on Thursday that the U.S. housing downturn could lead the country into recession and the Federal Reserve should cut its discount rate to boost liquidity.

In an interview on CNBC television, Mozilo said the housing market is showing no signs of improvement.

There is a "very serious situation going on" in the U.S. housing market, Mozilo said. "This environment is certainly not getting better."

Asked if there would be a recession, Mozilo said: "I think so ... I know I've been proven wrong so far, but I can't believe that when you're having a level of delinquencies, foreclosures - equity has disappeared, equity is gone, the tide has gone out - that this doesn't have a material effect, A, on the psyches of the American people, and eventually on their wallet."

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"If you really want to create liquidity, then you should bring the discount window down to the Fed funds rate, so they [banks] can use it without paying more than they would to other banks," Mozilo said in an interview, adding: "A statement by the [Bush] Administration and [Fed Chairman Ben Bernanke] that they are concerned about housing, are paying attention, and won't let it get out of control, has a psychological impact."

Last week, the Federal Reserve cut the discount rate, which it charges banks for short term loans, to 5.75 percent in a move to improve market stability and liquidity. The Fed funds rate, which banks charge for loans to each other, is 5.25.

Others agree more is needed.

"The Fed has cut the discount rate and added liquidity to the markets but those things aren't enough to turn the fundamental market around," said Phil Orlando, chief equity market strategist at Federated Investors in New York. He said the funds rate should be cut to 4.25 percent by year end.

"I've seen this movie before, and the ending of the movie always ends up in some form of recession," Mozilo said. "I can see the economy slowing down substantially enough to give the regulators, the Fed some pause in what's going to happen next."

Mozilo, 68, said markets are in "one of the greatest panics I've ever seen in 55 years in financial services."

Mozilo said he can see the U.S. economy slowing down enough to concern banking regulators about what will happen next. He also called for a temporary lifting of portfolio caps on mortgage companies Fannie Mae (down $1.27 to $68.11, Charts) and Freddie Mac (down $0.66 to $64.23, Charts, Fortune 500), saying "at the very time they're desperately needed to create liquidity for first-time homebuyers, their balance sheet has been capped."

In the interview, Mozilo also accused Merrill Lynch & Co. analyst Kenneth Bruce of "irresponsible behavior" in suggesting in an Aug. 15 research report that downgraded Countrywide to "sell" from "buy" and said that Countrywide might face a possible bankruptcy if market conditions worsen.

Countrywide slides on dim outlook

At least two analysts this month had said that Countrywide's fate could include bankruptcy.

Merrill Lynch (Charts) spokeswoman Carrie Gray declined to comment and said Bruce was not granting interviews.

"There is no more chance for bankruptcy today for Countrywide than there was six months ago, a year ago, two years ago, and when the stock was $45 a share," Mozilo said. "We're a very solid company."

Going it alone

Countrywide faced a credit shortage this month as mortgage defaults rose and capital markets tightened. On Aug. 16, it announced an unexpected drawdown of an entire $11.5 billion credit line because it had trouble selling short-term debt.

Bank of America Corp. (up $0.25 to $51.90, Charts, Fortune 500) on Wednesday invested $2 billion in Countrywide, buying preferred securities convertible into common stock and helping to shore up the latter's finances.

However the investment also raised speculation that the second-largest U.S. bank might eventually buy Countrywide, which Mozilo helped launch in 1969.

"We've gone it alone for 40 years and can go it alone for another 40 years," he said.

Analysts have said Countrywide might lose mortgage market share to well-diversified commercial banks with deeper balance sheets, including Bank of America, Citigroup Inc. (down $0.07 to $48.36, Charts, Fortune 500), JPMorgan Chase & Co. (down $0.39 to $45.61, Charts, Fortune 500) and Wachovia Corp. (down $0.04 to $49.66, Charts, Fortune 500)

Countrywide held a 17.4 percent market share from January to June, according to the Inside Mortgage Finance newsletter.

Countrywide (up $0.22 to $22.04, Charts, Fortune 500) shares fell about 1 percent while Mozilo spoke. In afternoon trading, they were up more than 1.2 percent on the New York Stock Exchange.

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