Countrywide Bets the Farm

The Associated Press is reporting Countrywide Taps Credit Line for Cash.

Countrywide Financial Corp., the nation"s largest mortgage lender, said Thursday it had borrowed $11.5 billion from a group of 40 banks to fund loans in a move that shows just how deep the lending crisis has become.

"Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise," Countrywide President and Chief Operating Officer David Sambol said in a statement.

The move to beef up its portfolio of conforming loans could erode Countrywide"s earnings prospects, because such loans "suffer thin margins barely covering overhead costs," Goldman Sachs analyst James Fotheringham said in a research note Thursday.

"Credit costs are set to increase even further than we had anticipated as riskier loans are added to an already troubled portfolio," he wrote.

By adjusting its product mix to originate Fannie and Freddie-approved loans almost exclusively, Countrywide will be cutting out most subprime, alt-A and jumbo loan products.

On Wednesday, Merrill Lynch & Co. downgraded Countrywide to "Sell," just days after calling it a "Buy," attributing the change to the rapid deterioration of the credit market.

Friedman, Billings, Ramsey Group Inc. said Thursday a continued liquidity crunch for more than three months could send Countrywide into bankruptcy.

Credit rating agency Moody"s Investors Service downgraded Countrywide"s senior debt rating to "Baa3" from "A3," citing Countrywide"s funding problems.

A ratings downgrade essentially makes it more expensive for a company to borrow money. Countrywide could be further downgraded if it continues to face liquidity problems, Moody"s said in a statement.

The new rating is Moody"s lowest investment-grade mark. Any downgrade would take Countrywide into "junk" status, which would keep many large institutional investors from owning its debt.

Key Ideas

• Countrywide tapped 11.5 billion of its credit line in one shot. Is there more than a little fear that its credit line might be reduced if it waited?
• What Countrywide does with that cash will determine whether the company lives or dies.
• One more debt downgrade by Moody"s will cause a massive unwind of all of Countrywide"s investment grade debt. That would further pressure share prices at the very least. Will that (or did that already) affect how Moody"s rated that debt?
• Countrywide"s exiting Alt-A and Jumbo mortgages will further impact the mortgage market. It is already very difficult (expensive) for anyone to get anything but a conforming loan with a significant down payment. This move by Countrywide will compound these already very significant problems.

The LaTimes is reporting Credit crunch imperils lender.

On Wednesday, the company was said to be having trouble borrowing money on a short-term basis, securities analysts discussed the possibility of a Countrywide bankruptcy and the firm"s stock price tumbled 13%, bringing its loss for the year to 50%.

"If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break," said Merrill Lynch analyst Kenneth Bruce, who warned investors to sell their Countrywide stock, saying the company could go bankrupt if the worsening liquidity crunch gets bad enough.

A bankruptcy filing by the lender would make life uncertain at best for its 61,500 employees, about 15,000 of whom work in Calabasas and elsewhere in Southern California.

An insolvent Countrywide could also do more damage to the country"s already weakened housing market, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication based in Bethesda, Md.

"It would be a huge shock to the U.S. housing system and the mortgage system as perceived around the world -- and make an already bad situation terrible," Cecala said.

The turmoil could spook depositors at Countrywide Bank, an Alexandria, Va.-based savings and loan that has grown dramatically since Countrywide Financial bought it in 2000. Nearly 40% of the bank"s $57.7 billion in deposits were not insured by the Federal Deposit Insurance Corp. as of March 31, according to the FDIC website.

In 2003, old-fashioned 30-year loans with fixed interest rates and substantial down payments made up about two-thirds of Countrywide"s loans, said mortgage executive Bill Dallas, whose Agoura Hills-based sub-prime lender Ownit Mortgage shut down early this year.

By last year, only one-third of Countrywide"s loans were of the traditional type, with the rest spread among the more exotic loan variety, Dallas said. He said Mozilo, who had often been quick to criticize rivals for being overly aggressive, had found himself immersed in the same businesses as his competitors.

"Every section of the business that has failed, they"re in there big time," Dallas said.

At the height of the boom in 2004 and 2005, it wasn"t uncommon for a typical Countrywide loan officer to sell 20 sub-prime loans a week. "It was a feeding frenzy," said one former Countrywide employee who said he joined the company in 2004 and, after six weeks of training, made $6,000 to $8,000 a month. As fast as loans could be signed, they could be sold to investors, according to the former employee, who declined to be identified.

For starters, anyone that has any money at at Countrywide Bank better be getting while there"s still something to get. And it"s obvious that Countywide"s CEO has blown it big time from every perspective but one: How much he has personally cashed out. (More on that in a moment).

The interesting thing is a mere 1.04% of its loans are in foreclosure as the chart on the lefty shows.

That"s what overleverage in the face of a credit crunch can do to you. In desperation Countrywide has now resorted to betting the farm that it can get things straightened out. And if it can"t, creditors can kiss that $11.5 billion credit line goodbye.

And judging from current pricing on subprime junk, Countrywide is going to have a mighty tough time of rebalancing its portfolio solely by reducing risk on new loans.

The chart on the right shows why: Countrywide was as much caught up in bubble financing as many of the now 120+ mortgage lenders that have gone bust according to Mortgage Lending Implode O Meter. Countrywide may simply run out of time when foreclosures start soaring in the face of ARM resets later this year and next.

Kevin Depew was talking about Countrywide today in his daily dose of "Five Things". Today"s was one of the best ever. Lets take a peek at points #1 and #3 but you are missing out if you don"t read the entire piece.

1. Countrywide Empties Out on Widowmaker

The news trickling out on Countrywide Financial (CFC) is a big deal. Remember, this is the biggest mortgage lender in the country.

• So, how bad is it?
• Think of it like this. It"s late December. Snowing. Aqueduct racetrack. The last race is in four minutes, you"re down $287 and seven beers. But you"re not finished yet. There"s still one race left, the last race, the one they call The Widowmaker. Few losers ever survive The Widowmaker. But there it is, calling to you, asking for one last wager, one final grasp. Ah, but there"s a slight snag, a hitch in your giddyup so to speak. The only paper in your pocket is a losing exacta ticket from the last race that came in backwards. We"re talking the only paper in your pocket. You sold your unlimited subway card after the 5th race, plunged full-bore on a filthy hot dog, a beer and a 9-1 shot that finished next-to-last. You are Countrywide.
• Who are you gonna turn to now?
• If you"re Countrywide you"re gonna tap your entire $11.5 billion bank credit line.
• As Christopher Wolfe, managing director at Fitch Ratings told Bloomberg, "When a company draws on its bank lines, it just basically gives off the impression that it has run out of options."
• "Typically these bank lines are there but not really meant to be used."
• Meanwhile, Angelo Mozilo, chief executive officer of Countrywide, recently exercised options for 46,000 shares in the company and then sold those shares for $1,306,400, according to Thomson Financial.
• Mozilo owns 1,378,390 shares of company stock (497,297 held directly and 881,097 indirectly).
• Over the last two years, in addition to the current filing, Mozilo has been awarded stock four times totaling 787,694 shares, and has exercised options 270 times totaling 14,553,538 shares and has sold shares 268 times (14,550,928 shares for $536,348,378).

3. Everybody Out of the Poole!

Meanwhile, back in the fake world, St. Louis Federal Reserve president Bill Poole said the subprime mortgage rout doesn"t threaten U.S. economic growth, and only a "calamity" would justify an interest-rate cut now, according to Bloomberg.

• And, as if on queue, Moody"s just moments ago warned that the "global credit rout" may cause a major calamity.
• Hedge funds face potential losses on collateralized debt obligations, securities packaging other assets, Chris Mahoney, vice chairman of Moody"s said on a conference call today, according to Bloomberg.
• "A possible consequence of the repricing of risk assets would be the failure and disorderly liquidation of a hedge fund or other institution of sufficient size as to disrupt markets, as Long-Term Capital Management threatened to do in 1998," Mahoney said.

Flashback August 2: Countrywide made this statement - It is important to note that the Company has experienced no disruption in financing its ongoing daily operations, including placement of commercial paper.

Flashback August 9: Countrywide Financial Corp. faces "unprecedented disruptions" in debt and mortgage-finance markets that could hurt earnings and the company"s financial condition, the Calabasas, Calif., lender said in a regulatory filing.

In between, those dates it just so happens that CEO Angelo R. Mozilo managed to unload 92,000 shares at a price of $28.74 for a total payout of $1,292,600 above his option price of $14.69. I talked about that cashout in "Unprecedented Disruptions" at Countrywide.

But that is mere child"s play compared to the grand total of $536,348,378 as Kevin Depew reported. Is this a great country or what? Where else can you make a half billion dollars running a company into the ground?

Now think about that paragraph again. It goes a long way towards explaining why things are not as good as the bulls claim.

Wealth is simply far too concentrated at the top end, while debt is concentrated everywhere else. One cannot average up the two and say "on balance things are OK". On balance things are not OK especially for those millions facing foreclosure. And things are going to get worse (lots worse) when the unemployment rate starts soaring.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/