Countrywide cuts heighten loan crisis
Home loan colossus Countrywide Financial Corp. announced Friday that it would slash as many as 12,000 jobs, or nearly 20% of its workforce, saying the downturn in the housing market and the credit crunch related to sub-prime loans have created the worst conditions ever seen by the modern mortgage industry.
The announcement by Calabasas-based Countrywide came hours after a smaller rival in the mortgage business, Pasadena-based savings and loan IndyMac Bancorp Inc., warned that it probably would record its first loss since 1998 in the third quarter. IndyMac said it would cut 1,000 jobs, 10% of its total.
Countrywide, the No. 1 home lender, funded $284.2 billion in mortgages this year through July 31, up from $255.8 billion in the same period in 2006, but said it expected lending to decline 25% next year.
With defaults on its riskier loans soaring in recent months, Countrywide reiterated a pledge to shift its business toward “plain vanilla” mortgages that can be sold to government-sponsored loan buyers Fannie Mae and Freddie Mac -- loans that historically have had narrow profit margins for lenders.
With those pressures on its revenue, major cost cutting was unavoidable, Countrywide Chairman and Chief Executive Angelo Mozilo said in a letter to employees Friday.
“Unfortunately, the only way to accomplish this is to make significant reductions in our workforce,” Mozilo said. “In fact, this current cycle is certainly the most severe in the contemporary history of our industry.”
In recent weeks, Countrywide had announced 1,400 layoffs. Mozilo said Friday that those cuts were included in the 10,000 to 12,000 expected cuts among Countrywide’s more than 61,000 employees.
The company’s banking, insurance and loan servicing operations will see few reductions, with the bulk of the job cuts affecting loan officers, processors and other employees of divisions that generate loans, Mozilo said. Though Countrywide provided few additional details, Southern California will clearly suffer because the company employs about 15,000 people in Calabasas and elsewhere in the region.
“They’re a significant employer” in the West San Fernando Valley and Ventura County, said Nancy Sidhu, vice president and senior economist with the Los Angeles County Economic Development Corp. “The anxiety factor has to be rising for residents of the area.”
So far, however, her business advocacy organization does not see evidence of serious economic problems spreading beyond the housing sector, she said, an assessment shared by real estate and finance expert Stuart Gabriel of the UCLA Anderson School of Management.
The news was another stunning turnabout for Countrywide, which has been hammered by rising delinquencies and recently endured a cutoff of funds by its Wall Street lenders -- part of the credit crunch affecting the mortgage industry.
That problem forced Countrywide to draw down an $11.5-billion emergency credit line with a group of banks last month and to accept a $2-billion investment from Bank of America Corp., which obtained an option to buy 16% of Countrywide.
Investors appeared to take the news of the planned layoffs in stride Friday. Countrywide’s stock fell 27 cents, or 1.5%, to $18.21 on a day in which market indexes declined more sharply. But the news was still a shock to at least one interested observer.
“I thought they were considered the rock-solid industry leader,” said Arizona Atty. Gen. Terry Goddard, a former state director for the U.S. Department of Housing and Urban Development.
Countrywide is a major employer in Chandler, Ariz., where it had expanded because the cost of doing business is relatively cheap. Goddard said he was part of a group of state attorneys general who were lobbying Countrywide and other major mortgage firms to be aggressive about modifying loan terms to help troubled borrowers remain in their homes.
“If they’re laying off 12,000 people, things look pretty bad for them; it may be harder for them to take those kinds of actions as much as we’d like,” he said.
The layoffs underscore the troubles of the home loan industry, which has seen scores of companies driven out of business this year. A surge in delinquencies late last year on sub-prime mortgages to risky borrowers spooked investors, who at first refused to purchase securities backed by sub-prime loans and now are resisting buying any mortgage bonds except those issued by Fannie and Freddie.
Meanwhile, defaults have moved beyond the sub-prime sector: In recent reports, the Mortgage Bankers Assn. noted a rise in foreclosures on supposedly high-quality prime loans that were used by speculators who put little money down on houses in California, Nevada, Arizona and Florida, and now are walking away because lower home prices mean they can’t “flip” the homes at a profit.
Mozilo said he was continuing a move to fund more home loans through subsidiary Countrywide Bank, which had $99.6 billion in assets on June 30 -- a modest amount by major bank standards. Bank of America, for instance, has more than $1.3 trillion in assets.
The strategy is to use the bank’s deposits to fund loans and to have it hold more mortgages as investments, which would reduce Countrywide’s dependence on Wall Street and buyers of mortgage bonds.
Mozilo said Countrywide’s Full Spectrum Lending, a division that sold sub-prime loans directly to consumers, would continue a shift toward mainly helping sub-prime borrowers refinance into prime loans. He said the company’s wholesale division, which works with independent mortgage brokers to fund loans, would no longer have a separate sub-prime sales force.
The company also is expected to incur a large expense in its third-quarter earnings for write-downs on loans it hasn’t sold and the future value of its servicing, or bill-collection, business, said Frederick Cannon, a Keefe, Bruyette & Woods analyst who rates the stock “underperform.”
Times staff writers Michael A. Hiltzik and Andrea Chang contributed to this report.
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U.S. banks and financial service companies with banking operations are in the process of cutting tens of thousands of jobs. Among the cuts:
Countrywide Financial Corp.: 10,000 to 12,000
IndyMac Bancorp Inc: 1,000
Lehman Bros. Holdings Inc.: 2,450
National City Corp.: 1,300
Accredited Home Lenders: 1,600
Bear Stearns Co.: 240
Capital One Financial Corp.: 3,900
Citigroup Inc.: 17,000
First Magnus Financial Corp.: 6,000
H&R; Block Inc.: 615
SunTrust Banks Inc.: 2,400
Wachovia Corp: 4,000
Wells Fargo & Co.: 170
NovaStar Financial Inc.: 275
First American Corp.: 1,900
LandAmerica Financial Group Inc.: 1,100