Countrywide Isn't Out of Woods Yet

Great article; $$$, but here are some quotes:

"I'd rather be breathing than dead," Countrywide's chief executive, Angelo Mozilo, quipped at a conference Monday in Washington.

The company's stock and bond prices, however, suggest that investors see a serious risk that Countrywide eventually could seek bankruptcy protection or resort to huge sales of new stock that would slash the value of existing shares.

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"The market is really concerned about the possibility of default," says Steven Persky... He thinks the company is so big and important to the economy that regulators wouldn't let it fail.

Still, he says, buying Countrywide bonds now would be "a dangerous game to play. Lots of people didn't believe Russia would default, but it did. On the other hand, in the U.S., when was the last time a large financial institution failed?" [Ed. note: famous last words.]

The company's fate hinges on how much worse the housing slump gets. Falling house prices cut the value of collateral backing the $83.56 billion of loans held by Countrywide as investments. Some economists say a recovery may be several years away. "I don't know where we are in the cycle," Mr. Mozilo said at the conference. "I wish I did."

Countrywide's savings bank holds $26.84 billion of option adjustable-rate mortgages, which allow borrowers to start with minimal payments and face far higher ones later, and $32.47 billion of second-lien "home equity" loans, potentially worthless in a default because the first-lien holder gets first dibs on the home. These two categories of high-risk loans account for three-quarters of the bank's loan holdings.

Countrywide managed to halt a run on its savings bank in August by bringing in Bank of America as a big shareholder. But the company still has to offer premium rates on certificates of deposit to attract funds needed to support further lending. The high rates it must pay for funds will squeeze Countrywide's profit margins on loans.

The company hasn't reported any purchases of shares by its senior executives in recent weeks, even though the stock recently touched an intraday low last month of $8.21. By contrast, executives of another big mortgage company with a drooping stock price, Fannie Mae, have bought shares over the past two weeks. [Ed. note: GSEs more confident about a bail-out, eh?]

Countrywide needs to repay a total of $26.38 billion in borrowings over the 12 months ending Sept. 30, according to the latest quarterly filing. Countrywide officials have said they can meet these payments -- a point that Moody's Investors Service affirmed -- but may have to sell some mortgages or related securities to do so. Investors are so wary of mortgages that it is impossible to know how much of a discount Countrywide would have to offer to find buyers for these assets. [Ed. note: not so impossible -- just look at the $.11 on the dollar E-Trade had to offer for its similar mortgage portfolio holdings...]

Investors will be looking for chances to force Countrywide to repurchase many of the loans it sold in recent years. Provisions of those sales require repurchases in some cases, such as when loans default early or otherwise don't live up to the "representations and warranties" provided by Countrywide at the time of the sale.

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