August 17th, 2007 by AHB
From the Wall Street Journal. “Countrywide Financial Corp. has been the focus of financial-market jitters since a stock analyst warned Wednesday that the company’s troubles could be deeper than previously thought. Here are answers to some questions about the company’s predicament and the potential outcomes.”
What is the problem at Countrywide?
“The country’s largest mortgage lender by volume has lost access to some sources of the money it needs to make home loans. The main problem so far is in the market for commercial paper, where companies borrow money for periods from one day to about three months. As of June 30, Countrywide relied on commercial paper for about $13 billion in financing, which it used to make loans that it would then turn around and sell to government-sponsored mortgage companies such as Fannie Mae and Freddie Mac or to private investors. In the past year, Countrywide had made an average of about $41 billion in loans every month, most of which it sells directly to Fannie Mae and Freddie Mac.”
How is Countrywide different from other troubled mortgage banks in the headlines?
“Many lenders that have closed or filed for bankruptcy protection in the past several months have been mortgage banks, which borrow short-term in credit markets, lend to home buyers, then sell the loans to Wall Street banks or keep them as investments. They aren’t banks in the usual sense and don’t take deposits.”
“Countrywide, by contrast, is a savings and loan holding company that includes a thrift unit, Countrywide Bank FSB, and mortgage bank unit, Countrywide Home Loans. That gives it more ways to borrow money than would be available to a mortgage bank alone. The thrift takes deposits, can borrow from the Federal Reserve and Federal Home Loan Bank and has short-term financing agreements with private banks.”
If mortgage defaults represent a small portion of Countrywide’s loans, why is Wall Street so worried?
“In a worst-case scenario, which most analysts see as unlikely, banks, depositors, investors and federal agencies would refuse to keep lending Countrywide the money it needs to pay for all the mortgage loans and securities it holds. In such a scenario, the company would be forced to sell those loans at fire-sale prices, weighing on markets and incurring losses both for itself and its lenders. Countrywide borrows from a broad and diverse group of creditors, so the related losses would likely be widespread.”
Who regulates Countrywide, and what can they do if the situation gets worse?
“Countrywide is regulated by the Office of Thrift Supervision. The FDIC is charged with protecting the interests of Countrywide’s depositors. A spokesman for the OTS said the agency is “monitoring the situation carefully working closely with the institution.” Federal regulators can get involved on a number of levels. First, the Federal Reserve and the Federal Home Loan Bank can make added emergency loans to help Countrywide survive a temporary credit crunch. If that doesn’t suffice, federal regulators can pressure the company to sell certain assets, such as its mortgage servicing unit, to shore up the finances of the bank. Beyond that, the FDIC has the power to appoint a conservator, who can do whatever is
necessary to ensure depositors’ funds, up to and including the sale of the entire company.”
Countrywide Airs Plan To Weather Credit Squeeze
From the Wall Street Journal. “Outlining a strategy to help it weather a worsening credit crunch, mortgage lender Countrywide Financial Corp. shored up its finances by tapping an $11.5 billion line of credit and having its banking arm provide a greater share of funding for its loans.”
“But the moves did little to reassure investors on Wall Street, where the company’s stock price continued to fall, or customers on Main Street, some of whom lined up at a branch near the corporate headquarters in Calabasas, Calif., to ask questions about the safety of their certificates of deposit or to withdraw funds.”
“After falling nearly 30% earlier in the day in New York Stock Exchange trading, Countrywide shares recovered some ground to close at $18.95, down 11% from Wednesday. The stock is now down 55% since the start of this year.”
“Yesterday, in the biggest wave of subprime mortgage-bond downgrades to date, Moody’s Investors Service slashed ratings on 691 securities from 2006 that were originally worth $19.4 billion. Some 78 of the bonds previously bore Moody’s top Aaa rating.”
“The securities were backed by second-lien mortgages that included many “piggyback” loans, home buyers used to avoid making substantial down payments. The rating company attributed its move to “the dramatically poor overall performance” of such loans and their high default rates.”
“The problem is with “jumbo” mortgages above the $417,000 limit and some other loans, including those to people with poor credit records or who don’t document their income — so-called nonconforming loans, or ones that can’t be sold to Fannie or Freddie.”
“With Countrywide’s access to the short-term commercial paper markets now cut off, many investors are unsure if the company can work through its funding problems in coming months.”
“”The uncertainty is concentrated in the near term. The company is either going to get over this event in the next few months or it isn’t,” said Jon Duensing, a portfolio manager at Smith Breeden Associates.”
“Kevin Murphy, a bond-fund manager at Putnam Investments in Boston, said, “Countrywide is the gold standard of the mortgage market and has a pristine reputation, but if they can’t get the funding they need, it would be very bad for their business and become a real credit issue.””