Countrywide secures more financing
Countrywide Financial Corp. eased fears of a crippling cash shortage by lining up $12 billion in new financing, which boosted its shares nearly 14% on Thursday but didn’t stem harsh criticism of the No. 1 mortgage lender’s practices.
Countrywide -- which said last week that it would lay off as many as 12,000 employees, or 20% of its workforce -- has already drawn down an emergency $11.5-billion line of credit from a group of banks and last month received a $2-billion investment from Bank of America Corp.
The Calabasas-based lender disclosed the new credit lines in one sentence in its monthly report on operations and provided no details on which banks would provide the loans or on what terms.
Investors responded with a vote of confidence about its chances for surviving an industry downturn that has put scores of smaller lenders out of business. Countrywide shares rose $2.31, to $18.93.
That was potentially good news for BofA, which has an option to buy 16% of Countrywide stock for $18 a share under the terms of its $2-billion investment, which was made via the purchase of convertible preferred stock. After the BofA deal helped the stock rebound to as high as $22.02 on Aug. 23, shares had mostly been sliding since then on worries that the company’s woes were intensifying.
But lawmakers and state and federal officials weren’t as pleased as investors, urging Countrywide to explain the practices that caused a surge in foreclosures and clarify how it planned to address its problems and those of its borrowers.
“Now that Countrywide is having success obtaining credit, the onus is even greater on them to clean up their act,” said Sen. Charles E. Schumer (D-N.Y.) of the Senate Banking Committee, calling on the company to “be part of the solution by refinancing the bad mortgages they made.”
North Carolina Treasurer Richard Moore, who oversees a pension fund that owns $11 million in Countrywide stock, said he was concerned that the company had shoveled out risky adjustable mortgages to borrowers who couldn’t afford them while enriching Chief Executive Angelo Mozilo with hundreds of millions of dollars in bonuses and stock-option profit.
In a letter to Countrywide lead director Harley W. Snyder, Moore cited reports that the company had rewarded employees for steering customers into sub-prime loans with rates that shot up after two years and required borrowers to pay hefty penalties if the mortgages were paid off early.
Countrywide “sacrificed long-term sustainability for short-term profits,” Moore wrote.
“When you take advantage of your customers, they’re not going to be your customers again,” Moore said in an interview. Countrywide “paid out options and bonuses based on voodoo profits. What are [they] going to do about it going forward?”
Countrywide said Moore’s concerns were based on inaccurate information. The company prohibits steering customers who qualify for prime loans into sub-prime mortgages and doesn’t pay higher commissions on sub-prime loans with prepayment penalties, it said in a statement.
The statement said Countrywide was proud of its “extraordinary efforts” to help borrowers struggling with loan payments, noting that it had “found solutions to keep more than 35,000 borrowers out of foreclosure during this year alone.”
The $12 billion in new financing provided a solution to Countrywide’s financial crisis, analysts said. The capital, secured by liens against mortgages the company owns, “should substantially address funding concerns,” Credit Suisse Group analysts said in a research note.
Others made note of the few details. “Given the lack of disclosure, one must wonder about the lenders, the costs, and the level of collateral necessary for the loans,” analyst Frederick Cannon at Keefe, Bruyette & Woods said.
The monthly report that contained the credit-lines disclosure said mortgage originations in August were down 17% from a year earlier. Mozilo has said the volume will drop by 25% next year.
In the past, Countrywide relied on short-term borrowings in what were known as the commercial paper markets to fund loans that were then “securitized” by pooling the mortgages to back bonds that were sold to investors.
In recent months, however, investors have refused to buy any but the safest mortgage bonds. They also have declined to provide funds for Countrywide to make loans because it can no longer securitize the adjustable-rate and jumbo loans that ignited the explosion in mortgages and housing earlier this decade.
Last week, in addition to announcing the layoffs, Countrywide said it would mainly write traditional loans that could be sold to Fannie Mae and Freddie Mac.
Those government-sponsored companies purchase few sub-prime mortgages or other nontraditional loans. What’s more, they won’t purchase mortgages greater than $417,000, although Schumer and others have proposed raising that limit.
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