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Countrywide Gets Big Cash Infusion And May Survive Crisis

by Glenn Setzer on
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If it seems ever harder to keep track of the companies that have either stopped subprime lending or alt-a lending or all mortgage lending or have gone out of business altogether, well, that's because it is harder and harder. The numbers are dizzying; according to MSNBC - and this was on Monday, the number of companies who now fall into one or more of those categories has topped 120 this year.

Several more big lenders joined the junk pile this week but there was a piece of good news for the nation's largest mortgage lender which managed to survive a very tough couple of weeks and now appears capable of living to fight another day.

First the most recent casualty count.

Late Monday Capital One Financial announced it was closing its wholesale mortgage business, putting 1,900 employees on the street. Capital One wrote mortgages through its GreenPoint Mortgage division which it acquired a scant eight months ago when it purchased North Fork Bancorporation for $13.2 billion in cash and stock.

Capital One closed 12 of GreenPoint's operation centers and some branch offices in June, laying off 440 employees. A spokesman for GreenPoint said at the time that her company was not a subprime lender but rather a specialist in low-and-no documentation Alt A loans.

The most recent purge will cost Capital One about $860 million or $2.15 a share in after-tax charges. The company is better insulated than most mortgage lenders because its cornerstone is a huge and hugely profitable consumer (credit card) lending business. Its stock is currently trading at $66.46 per share down from its 52-week high of $83.84.

On Tuesday Accredited Home Lenders announced it would no longer make new loans and was laying off 62 percent of its employees.

The Accredited situation was more complicated than most. The company had agreed, before the subprime carnage reached its current level, to be acquired by Lone Star Funds for $400 million. Lone Star said last week it would not go through with its $15.10 per share buyout because of "a drastic deterioration in the financial and operational condition of the company."

Accredited has sued Lone Star to compel its performance on the takeover. The company had earlier admitted that its survival was in doubt and that it might have to file bankruptcy. Accredited stock was trading at $6.20 on Thursday. Its 52-week high was $37.15.

On Wednesday, as reported elsewhere on this site, Lehman Brothers announced it was shutting down its subprime lending unit, BNC Mortgage with the loss of 1,200 jobs at 23 locations nationally.

But then, late Wednesday, came some good news. Countrywide Financial Corporation was snatched from the edge by Bank of American Corporation which invested $2 billion in the nation's largest mortgage lender. Bank of America said it would buy non-voting preferred stock that yields 7.25 percent and can be converted into Countrywide common stock at $18 per share, 17.5 percent below the shares' Wednesday closing price.

Bank of America's CEO Kenneth Lewis said, "We hope this investment will be a step toward a return to a more normal liquidity in the mortgage markets. In the current turmoil the stock market has been underestimating the value in Countrywide's operations and assets."

Some analysts are speculating that total acquisition of Countrywide may be in Bank of America's plans.

Countrywide had suffered through a tough couple of weeks as its stock slid and its survival looked increasingly in doubt.

The company had to drain an $11.5 billion loan facility from 40 banks last week and said it was planning to funnel most of its mortgage origination through its bank. But then, in spite of its FDIC insured status, many customers began to withdraw funds from Countrywide's bank after the company confirmed and accelerated earlier plans to funnel most of its mortgage originations through the bank. For a while there were fears of a full-scale run on the bank.

Moody's downgraded the company's debt from A3 to Baa3, the lowest investment grade, and hinted the rating might go down even further, taking Countrywide into junk bond territory. Wachovia, however, upgraded Countrywide from under perform to market perform based on the infusion of Bank of America money.

Countrywide was trading at $23.25 late Thursday morning, up $1.43 from Wednesday's close. The stock has traded as high as $45.26 this year.


Comments

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MARK
on
Just the beginning folks... Just the beginning... Wait till this fall and early next year when house prices start to plummett along with jobs, and INCREASED rates. Only parts of the country are getting hit big now, just wait.
Sam
on
Just the beginning is correct ... But, it's just the beginning of a naturally occurring cycle. And, just the beginning of a natural "shake-out" process. Just like the ".com" Bust ... The internet in general (and e-commerce specifically) did not disappear. There was a natural "shake-out". Some people folded, some were bought out, and many not only survived, but thrived and continue to do so. Same thing with the current Mortgage industry. Yes, some companies will continue to fold, some will continue to be bought out, and others will thrive and grow. It will probably get a little more "painful" before it gets better, so just be sure that you're getting advice from informed & competent professionals.
Joe
on
Well said, Sam and Jay.
Jay
on
I agree just the beginning. In my eyes this will be a sink or swim scenerio with the market. If you are in the real estate industry and want to succeed in the market stay on top of product knowledge because everything is changing at a rapid rate. This will seperate the "car salesman" from the loan officers. Just as well be optimistic about it.
sam
on
i wonder why they try to make the american people poor? do you think is it a good policy to decrease the houses prices and increase the mortagage rates ? and who's paying the price? and to whom to complain? all the affected people should do some stikes so mabe somebody will listen.....
Alan
on
One of the keys is certainly the collateral (appraisal) side of the industry. Appraisers are supposed to be gatekeepers who say no when deals makes no sense. It is extremely rare for a loan officer, mortgage broker or direct lender, to want an honest valuation..in fact, the lenders shop for appraisers until they find a compliant one that will do their bidding, essentially shutting honest/gatekeeper appraisers completely out of the process. Lenders are responsible for consistent over-valuations!
ed
on
Undocumented loans should never be offered in the first place. Not every one should buy a home if you cannot afford it. No wonder the loan market is in such a mess.