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What Does Countrywide Know That We Do Not?

Those who lived through the Great Depression had it hard. We haven’t come close to what they suffered. Needless to say they definitely had it worse, and they managed to survive. They survived to meet another challenge better known as World War II and brought us The Greatest Generation. I know this is going to spark a lot of comment from the doom & gloom the sky is falling readers. That’s OK. Just hear me out. There’s two sides to every coin.

Last week we saw American Home Mortgage leave the industry. There has been a lot of debate concerning the mortgage industry and its future. Greed from sub-prime lenders has lead to many a demise. The hardest market hit is that of selling second loans. Countrywide and Washington Mutual reported the lack of liquidity this week.

First, for those who may not fully understand the banking industry some layman explanation. Lending institutions require liquidity to make loans. That is where the secondary market is important. For simplification lender A lends on hundreds of home loans. Planting season is near and farmers need loans for seed and supplies. Lender A sells the homes loans to lender B. Now lender A has money to loan the farmers. Harvest is in and the farmers pay off their loans. Lender A buys mortgage loans from lender D to increase inflow. And so the cycle goes. Now you are ready for Matt Carter.

Liquidity is key to providing loans. Matt Carter at Inman News wrote a fantastic report titled Mortgage credit crunch roils markets. I personally think this is must reading. Mr. Carter raises some serious questions while simultaneously answering several questions. Perhaps unknowingly. A great deal of his report reflects on the decision making capabilities of the financial industry. Some of which begs the old question, “What were they thinking?”

Countrywide wisely sold off a percentage of its loans earlier this year in the secondary market, giving them liquidity for making more loans. Now they are finding it difficult to sell those loans to the secondary market. They intuitively reduced their portfolio for sub-prime loans In his report Mat Carter provided the reduction from 9.6% to 8.8% of their servicing portfolio. Wait a minute, 8.8%. So the remaining loans account for 91.2% of their servicing portfolio. Sounds like a reasonable balance to me. They didn’t have too many eggs in the delicate basket.

Now lets look at delinquency of their loans. Conventional loans is 2.64% and prime home equity loans was 3.7%. Sub-prime loans saw a 20.15% delinquency. Remember, these loans account for only 8.8% of all loans from Countrywide. Combined they have a 4.98% delinquency rate. Many businesses budget for 5-10% delinquency depending upon the type of business. So, is 4.98% really bad? Especially considering that 95.02% of the loans are not? Is this a healthy balance in portfolios?

Washington Mutual reported 16.6% of its portfolio was sub-prime. Not to mention 80% of their serviced loans are ARM loans. Not quite as healthy. Reminds me of the Wells Fargo Bank of America comparisons of the last quarter of the 20th century. Washington Mutual is reducing their work force. Countrywide is increasing their work force. HomeBanc Corp filed bankruptcy. Countrywide is buying up five of their branches.

Many lenders of sub-prime loans got their money up front with origination fees, points, and other fees. One can assume that they did not maintain a healthy balance of servicing portfolios. Had CEO’s and managers of these institutions managed a healthier balance, would we be seeing the decimation that ill prepared lenders are seeing within the lending industry today. What have they learned from it?

A huge amount of money has been poured into the industry this week. Not just within the United States. The effect has been world wide. Lets hope that CEO’s and managers use this relief money wisely.

Consolidation is occurring as you read. There will be fewer lenders to deal with. Less variance in loans and more consistency in qualifications? Maybe. Will fewer players level the playing field? Who will benefit, lenders or buyers? Countrywide is growing while others are cutting back or leaving. Why is Countrywide doing the opposite of their peers? What will their future look like? So, I pose my question, “What does Countywide know that we don’t?”

This entry was posted on Friday, August 10th, 2007 at 6:38 pm and is filed under Just Because. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

Hi Doug!

Unfortunately, these problems are anything but new. Cruise over to http://ml-implode.com/ and see the carnage for yourself. 116 lenders have gone out of business since Dec 2006.

The AHM implosion was just another blip on the radar. Most of the lenders on the implode-o-meter were sub-prime. The real danger lies in the newest bout of Credit downgrades. Alt-A and Prime lending companies are beginning to be downgraded into junk status.

Countrywide and a few points:

CFC is an absolute mess of a company. First, Mozilo has been dumping shares like a man bailing water from a sinking ship. He dumped 92,000 shares on Aug. 9th for a cool 1.3 mil. I wonder what he knows?

I have some good sources. I have been told that CFC has been doing a lot of “suspect” accounting in the last 10 days. On Aug. 2nd CFC reports that is has plenty of liquidity (see item #3). On Aug 9th they release the 10-Q and yell fire in the theater… hmmm. They just ran into the Iceberg… a good friend says they are in BIG, BIG trouble.

I smell Enron (CFC) and Kenneth Lay (Angelo Mozilo).

The SEC has been raiding HQ’s of various companies to check books. They simply don’t trust the numbers these folks are reporting. Beazer Homes released a report that they had an “actuarial error” and will amend it’s books. Look for more of the same from CFC.

Third, the FED simply released Repo’s today… its actually a business as usual move. The media has been reporting wrong all day. Repo’s are released to defend the target interest rate. The overnight interest rate (the one that the FED semi-controls) spiked above 6% last night and the FED repo’ed or “loaned” money to banks bring the target rate down to 5.25%. Nothing more and nothing less. As you saw investors were trying to make a run on the banks in a lot of countries. No biggy.

The fireworks are still to come.

August 10th, 2007 // Bobby joe
Doug,

I think there is a lot happening under the hood at CW that we don’t know about right now. It all appears to be going well on the surface, but I think there is trouble brewing.

I say this because I’m hearing that CW has not be honoring previous locks and using small changes in the loan scenario to back out of loans. This is not a good sign.

Also, American Home’s main problem was trying to sell loans in bulk instead of first in first out. You make more money in bulk, but in a market that is quickly deteriorating you can be stuck with a lot of loans if you can’t sell. Companies that sell loans as they get them are in a much better position than those that hold out for a while in hopes of making money on the volume.

Great post. Very thoughtful.

Thanks,
Shailesh

August 11th, 2007 // Shailesh Ghimire
Bobby Joe - You responded as I expected.

Shailesh - I was hoping you would respond. I respect what you have to say. Your blogs are great.

August 11th, 2007 // Doug Trudeau

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