Housing Slump Predicted to Worsen; Countrywide to Face 'Market Consolidation'
By Emily Sanderson
Protesters stood outside the San Diego, CA, offices of Countrywide Financial Corp. before Thanksgiving in response to the lender's plummeting stock price.
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Shares of Countrywide's stock fell to below $10 in November, losing three-quarters of their value over the last year.
"About 50 people gathered in front of the building in San Diego where the mortgage lender has offices," the Mercury News reported. "Some of the participants held handwritten posters with slogans such as 'Our lives are not adjustable,' 'Would you give your mom a subprime loan?' and 'Mozilo, don't be a Grinch' — a reference to Countrywide Chairman and CEO Angelo Mozilo."
Shares of Countrywide's stock fell to below $10 in November, losing three-quarters of their value over the last year.
It is common for stock markets to fall just before Thanksgiving and then regain ground after "Black Friday" and "Cyber Monday," but the markets have been unstable this year. The fate of lenders who offer subprime loans, such as Countrywide, is yet to be determined.
On Wednesday, Nov. 21, the S&P fell 22.93 to close at 1,416.77, erasing all its gains this year. It then rose on Friday, Nov. 23, in response to Black Friday, before falling again on Monday, Nov. 26, dropping 33.49 points to 1,407.21 in response to fears that financial institutions have rising exposure to bad credit, Pensions and Investments reported.
Countrywide executives denied rumors that they were considering bankruptcy Nov. 21. In a statement released shortly before the market's close that day, the lender said it continues to have "ample liquidity and capital and will be a beneficiary of ongoing mortgage market consolidation."
Thanks in part to a $2 billion investment from Bank of America, Countrywide survived the first phase of the "mortgage meltdown," according to the Los Angeles Times.
However, another $2 billion — this time a loss announced by Freddie Mac also on Nov. 21 — raises additional challenges for Countrywide, whose business model relies heavily on Freddie Mac to purchase mortgages through the secondary market.
Shares of Freddie Mac plunged almost 30% after it said it must set aside $1.2 billion to account for bad loans and that it may cut in half its quarterly dividend of 50 cents per share. It is the stock's biggest one-day price decline and would be the company's first dividend cut since becoming a public company in 1989, according to the Associated Press.
Fannie Mae has suffered similar losses, its stock price dropping over half of its value since Oct. 10, the Associated Press reported. In efforts to create cash, both Fannie Mae and Freddie Mac have begun efforts to liquidate bonds. They have scheduled reference bill sales of $1 billion each in a Dutch auction.
Countrywide is not the only lender that relies on Fannie Mae and Freddie Mac, which were created to be key sources of funding for the housing market through their purchases of home loans made by banks and other lenders, which are then sold to institutional investors. With the industry experiencing losses at such a high tier, the real estate slump is now affecting not just sub-prime lenders but anyone seeking to buy a home.
"It's going to make it increasingly difficult for Americans to borrow money to buy homes," said Peter Schiff, president of Euro Pacific Capital in Darien, CT, in an interview with the Seattle Times. "This is not a subprime problem. This is a mortgage problem."
"Countrywide is under fire on many sides. Rising delinquencies, first seen in risky subprime loans, are now spreading to loans to borrowers with better credit scores," the Los Angeles Times reported. "It is under pressure to help borrowers whose adjustable mortgages may become unaffordable, but [Countrywide says] modifications are tricky because they must be approved by the investors who buy the loans."
Countrywide faces the difficult task of disassociating their plight with that of New Century Financial, whose similar troubles began at the beginning of March and led to a bankruptcy filing by mid-April. New Century is presently undergoing a criminal inquiry by the U.S. Securities and Exchange Commission in connection with accounting errors and with trading the company's securities. In contrast, Countrywide is making significant efforts to prevent individuals in distress from foreclosing on their mortgages.
The Mercury News reported Nov. 21 that Countrywide executives say they are trying to work out payment plans with borrowers on some 80,000 loans and have already helped more than 55,000 others avoid foreclosure this year. They have also begun working with the Neighborhood Assistance Corp. of America to assist borrowers at risk, the Mercury News reported.
Countrywide is also working with competitors GMAC, Litton Loan Servicing, and Barclays' HomeEQ unit to streamline their processes for modifying loans. The plan, worked out in conjunction with California Gov. Arnold Schwarzenegger, is the latest in a series of commitments Countrywide has made to modify loans, reported the Los Angeles Times.
Predictions for Countrywide? What financial experts hypothesized in the first quarter this year as a merger between Countrywide and Bank of America may turn into a golden parachute.
Bank of America received preferred stock that can be converted to 111 million shares of Countrywide common stock at $18 a share, the Los Angeles Times reported.
Bank of America also got the right to match any bid for Countrywide, Bloomberg.com said.
Countrywide officials, however, are still confident that they can remain independent and won't be forced to sell at a depressed price, said Paul Miller, an analyst at Friedman, Billings, Ramsey Group Inc. in Arlington, VA, as reported by Bloomberg.com.
"Eventually, Bank of America will have to buy them, but it's too soon yet, and Countrywide still will have to recognize more losses," Miller said.
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