Even best borrowers are falling behind, lender says

Times Staff Writer

Call it the mortgage-meltdown creep.

Countrywide Financial Corp. helped trigger a Wall Street sell-off Tuesday when it said that a growing number of customers once considered to be good credit risks were having trouble making their mortgage payments.

Until recently, such problems had been almost exclusively limited to the so-called sub-prime market, for borrowers with flawed credit records and high-cost mortgages.

But Countrywide, the nation’s biggest home loan company, reported Tuesday that it was seeing more of its good-credit “prime” borrowers do the same.


“The spillover into prime, I don’t think, is something that should shock anybody,” Angelo Mozilo, Countrywide’s chief executive, said in a three-hour conference call with investors and analysts to report second-quarter earnings.

The Calabasas-based company said payments were at least 30 days late at the end of the second quarter on 3.4% of prime first mortgages, up from 2.1% a year earlier.

The delinquency rate was worse among borrowers of prime home-equity loans -- second mortgages -- who missed payments at a rate of 4.6%. That was up from 1.8% a year earlier.

Sub-prime delinquencies also worsened sharply in the quarter, Countrywide said. Payments were late on 23.7% of sub-prime mortgages, up from 15.3% in the same period in 2006.

Mozilo said many of the prime borrowers facing delinquency had used home-equity loans on top of regular first mortgages when purchasing their homes to put together enough money for a down payment and avoid the added expense of private mortgage insurance.

The spillover into prime was enough to send Countrywide shares tumbling 10%, or $3.56, to $30.50 amid a broad market sell-off spurred in large part by the company’s second-quarter financial results. Countrywide reported that the corrosion of its loan portfolio cut into sales and profit.


“Probably the most disheartening thing about Countrywide’s results was the extent to which its weak performance in the second quarter reflected deterioration in prime home-equity loans, rather than exclusively sub-prime credit,” said Kathy Shanley, a senior investment grade analyst at Gimme Credit, a New York-based corporate bond research firm. She rated the company’s bonds as “deteriorating.”

Countrywide’s second-quarter net income fell to $485.1 million, or 81 cents a share, from $722.2 million, or $1.15, a year earlier. The results widely missed analysts’ estimates, according to Thomson Financial.

Revenue fell 15% to $2.55 billion.

The company also slashed its full-year 2007 outlook for the second time, citing an “increasingly challenging” housing market.

So far this year, Countrywide shares have fallen more than 28%. Mozilo held out little hope that the company’s fortunes and mortgage business would improve soon.

“It just takes a long time to turn a battleship around,” Mozilo said. “This is a huge battleship, and we’re headed in the wrong direction.”

He said the inventory of unsold homes had to decrease and the slide in home prices had to stop before the nation’s housing market saw any signs of recovery -- a process he predicted would take another 18 months.


Calling it “a gut feeling,” Mozilo said it would take until 2009 before the market started to head “into another direction.”

“We expect difficult housing and mortgage market conditions to persist,” Mozilo said.