Countrywide Financial Corp. survived the first phase of the mortgage meltdown this summer thanks in part to a $2-billion investment from Bank of America.
But the Calabasas-based lender suffered a major new setback Tuesday when mortgage giant Freddie Mac posted a big loss and said it needed new capital -- which could curb Countrywide’s ability to make loans.
When the mortgage crisis began last summer, Countrywide said it would cut back making higher-risk loans to concentrate on the safer loans it could sell to Freddie Mac and Fannie Mae, the government-chartered buyers of home loans.
That approach is now looking dicey in the wake of Freddie Mac’s surprising $2-billion loss and its announcement that it must raise more capital before its regulator will allow it to step up purchases of loans from lenders such as Countrywide, said Fox-Pitt Kelton analyst Howard Shapiro, who downgraded Countrywide shares.
“Countrywide’s survival strategy has depended on access to the secondary markets” -- the companies that, like Fannie Mae and Freddie Mac, buy loans and bundle them into securities for sale, Shapiro wrote. The approach won’t work so well when Freddie Mac and Fannie Mae “are capital-constrained and may need to shrink.”
Countrywide’s shares traded as low as $8.21 during the day amid renewed speculation that the company was heading toward bankruptcy.
Company spokesman Rick Simon called the bankruptcy talk “absolutely false,” and Countrywide said its cash and available credit were sufficient to pay its debts through the end of next year.
The stock ended at $10.28, down 29 cents, or 2.7%. Even so, shares are down 25% in the last five trading sessions and 76% since the start of the year.
Countrywide is under fire on many sides. Rising delinquencies, first seen in risky sub-prime loans, are now spreading to loans to borrowers with better credit scores. It is under pressure to help borrowers whose adjustable mortgages may become unaffordable, but says modifications are tricky because they must be approved by the investors who buy the loans.
And profit margins historically have been thinner on the so-called conforming loans that Fannie Mae and Freddie Mac buy.
The government-sponsored companies create huge pools of loans to back mortgage bonds that they sell to investors with a guarantee of payment. To compensate for this insurance against loss, they charge lenders a fee when they buy and agree to guarantee the lenders’ mortgages.
As losses mount at Fannie and Freddie, they will have to compensate by raising those fees to lenders -- an extra charge that Countrywide may have trouble bearing, said Frederick Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco.
“The question is whether Countrywide can pass the extra costs on to borrowers,” Cannon said. “Right now there’s a lot of competition” on the prime loans under $417,000 that conform to the standards of Freddie Mac and Fannie Mae.
Countrywide can keep some loans as investments for its Countrywide Bank subsidiary. But the bank is so small that Countrywide must sell most of its loans, Cannon said. It is originating $20 billion to $22 billion a month in new mortgages but has only about $120 billion in loans as investments.
By contrast, major banks like Bank of America -- historically a second-tier company in terms of home-lending volume -- have far more room to put new loans on their balance sheets, Cannon noted. And BofA is highly competitive, saying it wants to become the top mortgage lender in the country.
To advance that strategy, BofA made a $2-billion investment in Countrywide to gain access to its efficient loan-generation and customer-service operations. But Countrywide’s sagging fortunes now have cost Bank of America almost half that investment -- on paper, anyway.
Charlotte, N.C.-based BofA received preferred stock that can be converted to 111 million shares of Countrywide common stock at $18 a share.
The decline in Countrywide’s shares has now left BofA down $858 million at Tuesday’s closing price. BofA declined to comment Tuesday; its shares fell a nickel to $42.77.
Countrywide isn’t the only lender in rough waters. On Tuesday, tax preparer H&R; Block Inc. -- which has a lending subsidiary -- replaced Chairman and Chief Executive Mark Ernst with Richard Breeden, the former head of the Securities and Exchange Commission.
Breeden had led an investor group critical of Block’s 1997 purchase of Option One Mortgage and its recent failure to complete a sale of the Irvine-based sub-prime mortgage lender, where losses have mounted into the hundreds of millions of dollars.
At the heart of the mortgage meltdown are rising defaults by borrowers who cannot make payments on their loans.
Saying they wanted to avoid foreclosures, Countrywide and competitors GMAC, Litton Loan Servicing and Barclays’ HomeEQ unit said they were working to streamline their processes for modifying loans. The plan, worked out in conjunction with California Gov. Arnold Schwarzenegger, is the latest of a series of commitments Countrywide has made to modify loans.