Countrywide sees trouble ahead
Two of the nation’s biggest home-loan companies are preparing their investors for the worst.
Countrywide Financial Corp. and Washington Mutual Inc. warned Thursday that turbulent mortgage market conditions were likely to hurt operations in the near term. The news, which came at the close of Wall Street’s worst trading day since February, sent shares of both companies lower in after-hours trading.
Countrywide, the No. 1 mortgage lender, said the “unprecedented disruptions” in the credit markets could adversely affect its earnings and financial condition. The Calabasas-based lender said in a regulatory filing that the market turmoil has forced it to hang on to more mortgage loans than it would like, rather than selling them to investors.
Although the company said it believed it has “adequate liquidity” to roll with the mortgage market turbulence, Countrywide cautioned that “the situation is rapidly evolving and the potential impact on the company is unknown.”
Washington Mutual, the third-largest U.S. mortgage lender, offered much the same admonition in its filing. The Seattle-based bank said the trouble in the sub-prime secondary mortgage market in the first half of the year has “spread” into markets for other, better-quality loans as well, making it hard to predict how its loan business will fare.
“The company cannot predict with any degree of certainty how long these market conditions may continue or whether liquidity . . . will improve,” Washington Mutual said.
Panic-stricken investors, watching the nation’s housing market deteriorate as overextended borrowers fall into foreclosure at near-record numbers, have recoiled from buying less-than-prime mortgages -- and the securities that back them -- on the secondary market. As a result, lenders have fewer channels to sell off the loans they have made to customers.
The rapid shriveling of the mortgage market is ensnaring lenders by the day. Roughly 70 lenders have ceased doing business in the last six months.
Anworth Mortgage Asset Corp. of Santa Monica, a real estate investment trust that buys mortgage securities, said Thursday that a subsidiary has received default notices from two lenders and was exploring all alternatives to address its “sudden liquidity issues.” It said the unit was likely to sell some of its mortgage-backed securities at prices significantly below their fair market value.
In its filing, Countrywide said that during the first half of the year it decided to retain, rather than sell, $1 billion more so-called non-prime mortgages than it had intended, while marking down the value of those loans 20%. And it decided to hold as investments $700 million of prime home-equity loans, marking them down to $600 million.
Last month, the lender posted a 33% decline in second-quarter profit and slashed its full-year earnings outlook. It said delinquencies had risen, especially among borrowers with little or no money for a down payment who took out home equity loans to afford a house.
Countrywide said payments were at least 30 days late on 20% of the non-prime loans it serviced, up from 17% three months earlier and 14% a year earlier. The late-payment rate on prime home equity loans rose to 3.7% from 1.5% the year before. For all loans, the rate was 5%, up from 3.9%.
At the time of the earnings announcement, Countrywide Chief Executive Angelo Mozilo, when asked whether he had any inkling the mortgage market would turn down with such ferocity, said: “Nobody saw it coming.”
Mozilo, who received $120.3 million in compensation last year as one of the highest-paid U.S. executives, exercised options for 92,000 shares of stock under a prearranged trading plan, according to a separate Securities and Exchange Commission filing this week.
Mozilo reported that he exercised the options for shares Wednesday for $14.69 each and then sold all of them the same day for $28.74 apiece. That’s a gain of $1,292,600.
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Reuters was used in compiling this report.
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Mortgage terms
You’ve heard about the sub-prime mortgage crisis, but don’t understand what a sub-prime loan is and why it’s problematic? Here’s a glossary to help.
Standard mortgage
A loan made to a borrower who provides details of his income and assets to the lender; has a Fair Isaac (FICO) credit score of 660 or better; and has a down payment of at least 20%.
Sub-prime mortgage
A loan made to a borrower with a poor credit history, who may be borrowing more than 80% of the home’s value. These loans typically demand higher interest rates because there’s a greater chance that the borrower will default.
Alt-A mortgage
This describes any loan to a borrower with atypical credit. It could be a loan offered to someone with a good credit score but who is unable to document his income. Or it could be an atypical loan, such as an interest-only or “option ARM” -- an adjustable-rate mortgage that gives the borrower flexibility on how much to pay each month. These loans are also more expensive than a standard mortgage.
Note: Standard, sub-prime and Alt-A mortgages may be of any dollar amount.
Conforming loan
A loan that meets certain lending standards set by mortgage giants Fannie Mae (Federal National Mortgage Assn.) and Freddie Mac (Federal Home Loan Mortgage Corp.). Loans that meet the Fannie Mae and Freddie Mac standards can be pooled and immediately sold to these government-sponsored entities. The most notable of these standards is a “conforming” loan limit, set each year based on average home prices, which is currently at $417,000.
Jumbo loan
Any mortgage with a loan balance above the conforming loan limit. These loans will not be purchased by Fannie Mae or Freddie Mac, but are often pooled and sold to private investors. In a normal market, that makes these loans somewhat more costly than conforming loans. In today’s market, where private investors are increasingly skittish, they can be considerably more expensive.
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Source: Times research
