No, Chicken Little, the sky isn’t falling…
Reba Haas on 08 18, 2007
A friend of mine that works in a small town bank in Kansas called me in a panic the other day because the officers at the bank were freaking out during a meeting saying that Countrywide was going bankrupt. For them there is concern because Countrywide buys all of their residential loans. Apparently they must have seen some similar version of the story that the local Seattle Times had about the lender’s trading shares nosediving. I contacted a long time lender friend of mine (and 25 year lending veteran) who works at Countrywide and asked him if he’d write a quick article about it which you can access here. I’m usually very comfortable with this guy’s commentary because he has an economic’s background/degree and he’s been in the business for 25 years and used to be the number one residential resale lender for WaMu within Washington State until not too long ago when he left to work at the competition.
Basically, his biggest concern about the share price dropping had to do with the possibility that Countrywide might then become a takeover target by a bank such as Bank of America or someone, and he isn’t interested in working for one of these folks. As for accessing the line of credit, well, that in and of itself doesn’t mean they’re in a pickle, it means they don’t want to be reliant on a volatile marketplace for borrowing money. Makes financial sense to me.
About the Author: Rebecca Haas
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83 Responses to “No, Chicken Little, the sky isn’t falling…”
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Reba-
Your friend didn’t write that article. It was the widely distributed e-mail to all originators, wholesale account executives, and correspondent reps to forward to mortgage brokers, Realtors, builders, and borrowers.
Nima Rezvan published an identical “analysis” on Active Rain:
http://activerain.com/blogsview/177140/Countrywide-Home-Loans-The
Countrywide is in serious trouble. CEO Angelo Mozilo bailed out of 70,000 shares of stock a day before the Merrill Lynch downgrade was released:
http://delmar.typepad.com/brianbrady/2007/08/countrywide-i-2.html
I have performed critical analysis since April 1, 2007 of the Countrywide situation. I would never hope that 54,000 families would be out of work but their leader’s actions are morally reprehensible.
This post is just embarrassing.
What I find interesting is how adament many of the lenders that have went under so far this year were about their viability, just before the axe fell.
In many cases analysts even upgraded their ratings on companies like New Century just weeks before they closed their doors.
Unfortunately, it’s all about confidence. The line between good health and terminal illness is a grey one that has more to do with perception than anything else. Once your financial backers lose confidence in a lender, then nothing can keep you in business.
How long can Countrywide stay in business if no one is willing to buy the loans they underwrite? How long will it take for them to burn through their remaining capital/credit if the markets for mortgage securities doesn’t re-appear?
Even in the best case scenario where CFC survives by switching completely to selling conforming loans that can be sold to Fannie Mae, what does that say about the real-estate finance industry? That would put the final nail in the coffin of real-estate in the US by permanently shutting out a major portion of the market, who would never qualify for conforming products.
Let’s put this another way: whether CFC survives or not the days of readily available (and affordable) non-conforming loans are over. And what does that mean for the real-estate market in general?
This post’s incisive logic will have the effect of strangling the “bankruptcy” talk around these parts.
Another more sobering view about Countrywide:
http://globaleconomicanalysis.blogspot.com/2007/08/mad-dash-for-cash.html
There’s a lot to comment here but I’ll just touch on two points.
RE: the friends ‘article’ I couldn’t help but think of Officer Bar Brady (South Park) “OK people move along, there’s nothing to see here”
As far as the line of credit, IMO where you get your line of credit is not nearly as important as having to use one’s entire line of credit. $11.5B is not chump change.
$11.5 billion might feel like a lot but when one considers the many billions of dollars in loans CFC typically underwrites in a month it won’t stretch very far: a couple months, max. And then what? It is clearly just a stop-gap measure, hoping that the mortgage securities market revives before the credit lines are used up.
Of course, CFC could last much longer if they vastly reduce the number of loans they write and restrict themselves to ONLY conforming loans (for which there is still a market). But a restrictive policy like this certainly doesn’t give off the impression of robust health, and it sure won’t help the real-estate market which is realing from the sudden disappearance of lenders writing non-conforming loans.
The problem with Countrywide is simple – they have a huge, bloated structure that can only survive with a lot of food going through the system (mortgages.)
But – for other than conforming paper, the pipeline is shut down.
Now they’ve got a problem – a serious problem – because they need to be 1/4 of the size firm they are (with 1/4 of the original stock price – that is, around $10 a share!) to profitably run at that rate.
But, of course, they’re not.
And this becomes serious quite quickly, because in fact the days of playing those games are simply over. They must be over. They cannot come back – you can’t keep appreciating house prices at six times the rate of wage growth for very long.
But their entire business model was predicated on exactly that.
This is similar to what happened in ‘99 and 2000, when all those .BOMB companies went under. Same deal – totally unreasonable expectations and business models, totally unsupportable over the long haul, and impossible to fix.
So what now?
If CFC cuts back to a rational size, and does it now, it will survive – but its stock price will plummet as its enterprise value contracts to what it will be at that size of a company.
If they try to continue to play “fast and easy”, then they will die, because nobody will take that trash and EVENTUALLY the regulators will force a mark-to-market one way or another – and as soon as that happens they’re dead immediately due to violating reserve limits.
Either way the firm is in big trouble with no good way out. Mozillo’s $500 million will obviously come back to haunt him as well.
Frankly, it couldn’t happen to nicer people. They were a big part of why we have this huge housing bubble and several million Americans are going to lose their homes. It is only just that they take the justified heat.
At this point, mortgage lending in the US looks to be a dead industry. Even if things stabilize at current levels there’s no room for expansion until affordability improves.
The changes needed in order to see a meaningful increase in affordability are way off in the future. Either we need to see a big jump in incomes on the order of 35%+ or prices need to fall around the same amount. Neither of these changes have a very high probability of happening in the next 5 years.
Perhaps if incomes increase AND prices fall, the industry will see a rebound in less than 5 years. With interest rates at relatively low levels already, they are very unlikely to contribute to the turn around.
http://globaleconomicanalysis.blogspot.com/2007/08/chicken-little.html
Looks like you guys hit the big time!
Thanks, synthetik. You made my night. I feel oh so proud of RCG at this particular moment in time that I think I’m going to hurl.
Karl, I don’t think they can make cutbacks now….They’re trying to paint a picture of ! success ! and optimism ! Just look at the smiling faces and job openings posted on their career page:
http://www.countrywidecareers.com/
I wonder if they’ll be hiring any of the laid off employees from their Full Spectrum Division, into any of these retail jobs? The WSJ is now reporting layoffs within Countrywide’s Full Spectrum Lending division.
The hundreds of employees at First Magnus received a nice, cheerful memo from the corporate office just before their company fell.
http://www.azstarnet.com/sn/dailystar/197166.php
“One of the biggest buyers of First Magnus loans was Countrywide Financial Corp.”
>>Basically, his biggest concern about the share price dropping had to do with the possibility that Countrywide might then become a takeover target by a bank such as Bank of America or someone, and he isn’t interested in working for one of these folks.
I suggest that he should be wondering about a CFC bankruptcy.
Falling knives are not takeover targets … they are bankruptcy candidates like Enron, Delta Airlines etc.
“I contacted a long time lender friend of mine (and 25 year lending veteran) who works at Countrywide and asked him if he’d write a quick article about it which you can access here.”
“Your friend didn’t write that article. It was the widely distributed e-mail to all originators, wholesale account executives, and correspondent reps to forward to mortgage brokers, Realtors, builders, and borrowers.
Nima Rezvan published an identical “analysis” on Active Rain:
http://activerain.com/blogsview/177140/Countrywide-Home-Loans-The”
Looks like your “friend” lied to you. This blog is like a trainwreck. I can’t look away.
Tip to realtors: Stick to soap and other trivial topics.
Interesting… I asked my brother in law who works at CFC in LA how work was going and he said “It’s the worst situation humanly possible”.
I think his answer is a little more accurate.
Countrywide just announced that they are starting to lay off an undisclosed number of employees. They’re not wasting any time.
So what are you folks planning to do in your next careers? I can’t turn away from watching your train wreck, either.
Auggie, I’m trying to find that matchbook with the truck driving school phone number on it.
We seem to get ads everday on how to become foreclosure experts.
I do have an organic farm, so we should have plenty of vegetables.
What do you do with 500 lbs of zucchini?
I bet you the comment section of this post will be closed in the next half hour . This sort of coverage is laughable.
“The sky isn’t falling!”
(large metal object falling from CFC HQ strikes person on the head from above)
“What the hell was that???” “Don’t worry that was just a large metal object falling from the sky, however, I repeat, THE SKY IS NOT FALLING!”
Realtors next job-”would you like fries w/that?”
Hi Guys,
We are having a rational Countrywide dialogue over on today’s post. Please don’t judge all of Rain City Guide’s writers based only on Reba’s post. I welcome your comments on Countrywide over here.
http://www.raincityguide.com/2007/08/20/countrywide-superbad/
We’ve had a visitor who is reporting production layoffs today.
I’m sure you all find yourselves hysterically funny – but time will tell what will happen in the marketplace and with CFC as a financial institution. Personally, I’ve had several, if not all, of my loans either completed by them and/or serviced and I’m certainly not threatened by what is happening with them right now. As for the stock sale of the corporate officer, those guys have to file in advance prior to selling so the reference to him bailing out is less than jarring. Prior issues in the stock market in the days of Enron and so forth have also put a stronger spotlight on sales such as these. The reference to agents and how they’ll have to look for jobs is out of place here but I’m sure I’ll be attacked for saying it.
I agree. R Duke is out of line.
Agents like Reba who did brisk business over the last 10 years have made money hand-over-fist. They should do fine in a downturn – unless of course they didn’t diversify those fat commissions and invested and leveraged them too heavily in real estate, that is.
I feel much more sorry for the newer agents who bought the media hoopla and jumped into the market in the last few years, foregoing their old careers for the illusory 3% pot o’ gold.
Yes, the lending and real estate industries have been flooded with new people during this higher than typical growth rate in our industries. Many are waiting to see what the fallout will be and who is left standing. Those that built their business on solid relationships and good business practices should be able to continue on.
Doesn’t anyone else think that drawing on a 11.5 billion dollar line of credit when you yourself are a lending is a dire predicament?
The issue at hand is solvency, not liquidity, big difference. They are merely stalling at this point. They are acting like a person that has borrowed from a loan shark who is letting the juice run at 5 pts, demanding payment, so in turn they go to another loan shark and let the juice run at 7 pts so they can pay the first loan shark off. It’s not getting them out of trouble, merely buying them time.
By the way, CFC issued over $40 billion in loans for July 2007 alone. Even if CFC halves it’s mortgage volume that $11.5 billion credit line won’t last long.
Matthew, business is business whether you’re lending or producing widgets. Drawing down your entire line can severly limit one’s next move. However CFC wants to spin it, in this enviroment it doesn’t look good.
Reba, whatever the reporting period is (60 days??) the CEO saw this coming. There’s lots of reason for insiders to sell, new villa, Ivy league college for the kids, yahct, OR, maybe the realization your company is on the brink of bankruptcy. This too, doesn’t have the appearance that all is well.
Billiruben, rdukes biggest sin is that his comment is horribly unoriginal.
The fact is people change jobs all the time and this business can be pretty darn insecure. The last 6-8 years have been pretty easy money for a lot of folks in the industry, the next five might be the opposite. Hopefully my wife and I have built a reputation for service that actually delivers value to our clients that will maintain us through the downturn.
Bob,
As much as I think things are hopeless for CFC, I am not ready to start accusing company insiders of bailing out before everyone else knew of the problems. I honestly believe many of the lending industry managers who have been saying that they never imagined things could get so bad, so fast. There are PLENTY of cases where managers themselves drink the cool-aid, and think that their firms will continue to do well regardless of seamingly obvious stresses.
Heck, if CFC executives were so pessimistic why were they avidly EXPANDING their business and buying out competitors earlier this summer? I am convinced they actually believed we were just experiencing a mild hiccup which gave them a once-in-a-lifetime opportunity to grow.
As far as stock sales go, I don’t read too much into it. Anyone with lots of shares as part of compensation will be regularly selling.
The CEO of Countrywide has been working toward retirement, that is true, but my understanding is that he was persuaded to add on another 3 years of which one of those has now passed. The timing of what is going on in the industry just happens to be occurring at this point of the timeline but I’m sure even this CEO couldn’t have masterminded the problems that affected the subprime market.
I’m with you, Sniglet.
Sniglet,
Have you seen how much stock Mozilo has sold this year?
Matthew,
I have seen some of the figures for CFC executive stock sales but I don’t really know what to make of them, in and of themselves. How much different are this year’s sales from previous years? Also, how much different is CFC executive compensation this year from previously? For all I know, CFC exutives got a massive stock option increase this year which would necessarily mean they would be selling more stock than usual.
118.2 million options sold this year! All the while CFC has been buying stock back!
The CEO is dumping shares left and right while the company is buying them back… Interesting..
I think CFC is doomed by it’s state of business alone but I think they have made it almost a for sure by adding to the stench of possible deception and unethical behaviour that now arises from parts of the mortgage industry. The manouvers lately has clearly indicated severe distress while statements have been made of big reserves and that there is no truth in any bankcrupcy rumours and that they are instead looking at expansion. If this turns out to be deceptive actions in order to try to trick investors to fund their business they are dead in the water. If there is one thing there is no mercy with at Wall street it’s deception of investors. One’s the trust is gone it’s game over. The CEO’s stock activity does certainly not help whatever the reason.
Not only do I find myself funny,but I really find this whole sub prime mortgage mess/ponzi scheme hysterical.These guys knew the emperor had no clothes,thats how you fill a lifeboat to the waterline w/half a billion or so,last ones off the boat(ma/pa investors,401 k’s,hedge funds,etc)bite teh bullet.Look out below,its recession time.
People said the same things about Enron. It can happen and it will happen.
So, which is more disturbing: the Countrywide topic we’re hashing about here or the news about Capital One closing it’s GreenPoint Mortgage division? I’ve never been a fan of GreenPoint having watched them gouge consumers for years and frequently doing so at the closing table when a consumer was most vulnerable.
Reuters
WRAPUP 3-Capital One slashes jobs, mortgage industry swoons
(Adds details in paragraphs 2-3, Capital One CEO comment)
By Dan Wilchins
NEW YORK, Aug 20 (Reuters) – The U.S. mortgage industry took another battering on Monday, as Capital One Financial Corp said it will shut a lending unit it bought less than a year ago, while two mortgage companies took steps to bolster liquidity as losses piled up.
Capital One, best known as a credit card issuer, said it will cut 1,900 jobs and take $860 million in charges as it closes its GreenPoint Mortgage unit, which it acquired last December when it paid $13.2 billion for North Fork Bancorp Inc.
McLean, Virginia-based Capital One plans to close GreenPoint’s headquarters in Novato, California as well as 31 offices in 19 states, and will stop offering mortgages through brokers.
It also cut its 2007 profit forecast to $5.00 per share from $7.15.
“GreenPoint has run into unforeseen challenges that are beyond its control,” Capital One Chief Executive Richard Fairbank said in a memo to employees, adding the closure “is the function of an unprecedented set of market circumstances.”
GreenPoint has specialized in “Alt-A” mortgages, which often go to people who do not qualify for “prime” mortgages or cannot fully document income or assets.
Capital One shares closed down 3 percent at $66.72 on the New York Stock Exchange. They fell an additional 2.4 percent to $65.08 in extended trading after Capital One’s announcement.
errrrr,the sky is falling.Stay tuned
http://ml-implode.com/
“So, which is more disturbing: the Countrywide topic we’re hashing about here or the news about Capital One closing it’s GreenPoint Mortgage division?”
I’d say CFC for sure due to from what at least looks like active deceptive behaviour. Capitol one doesn’t blow any smoke-screens, they commincate the problems and close shop for this part of their business. You can’t be much more upfront than that even if this statement is very disturbing:
“GreenPoint has run into unforeseen challenges”.
Huh, unforseen to who? How have they managed to miss the whole subprime debate?
So you’re telling me that Capital One made a good decision in buying GreenPoint just last December without being able to “foresee” any issues within this short timeframe? I’d say the owners of GreenPoint that got paid some big money for their firm are a bit more repugnant.
At least GreenPointe is admitting defeat… CFC should just do the same and be done with it.
Greenpoint was one of the chief “innovators” in BS “Alt-A for all my Friends! No need to bother your pretty-little-self with paper work”. Capital One new this, or should have with a little due dilligence.
Plus they are tiny in comparison to CFC.
A CFC failure has the potential to roil the markets more than nearly any other lender. Greenpoint is just another notch on the wall. See ya. Wouldn’t want to be ya.
But I like how you seem to be coming around, Reba. This stuff might not be so benign to your bottom line.
No, I’m saying that they made a lousy decision and it’s disturbing that they couldn’t see what leemen and experts could but that is not nearly as disturbing as being deceptive to investors which is at least what it looks like CFC might have been/are.
If CFC goes belly up despite repeated attempts to ensure investors otherwise it will destroy what is left of confidence in the mortage industry. Capital One making a bad buy, realizing it, cutting losses and moving on is probably not nearly as damaging.
Reba-
My issue is the “quick article and commentary” from your friend at CFC. It was neither his article nor commentary; his excellent qualifications notwithstanding.
Mr. Mozilo took advantage of an exemption that circumvented prior disclosure; he could sell with two days notice.
I think critical analysis of the industry leader is most important in the current lending environment. The ripple effect will be staggering of a CFC BK; it could be the event that throws us into a recession. THAT is why I think critical analysis is important.
I agree that IF Countrywide went bankrupt it would be devastating but I still don’t agree that it is imminent. Here’s a question for you Brian.. if the CEO was going to sell don’t you think he’d have done so when the stock was at its much higher levels than where it is today? With the stock trading down so much in the past 3 months I’m sure there is much less for him to be excited about in selling now although the doomsday folks will say he’s selling because it’s a sinking ship and he wants to get off with the rats.
oh, and Brian, I’m not shocked that Countrywide also asked its employees to send a more canned response – I’ve worked for some big corporations and that’s pretty standard too when tough situations come up, particularly if you’re in a publicly traded company. However, my personal conversations with him delved into more detail than his online statement could provide and I’m still standing by my statement that if he’s not freaking out about it, neither am I.
After several years of working together and seeing how he manages his business, clients, and knowledge of the industry I know he’ll tell me when he sees something nasty. I’m not saying he likes what’s happening now but we also talk outside of the blog world about what this all means and how it might impact our clients and the industry in general.
Reba,
Angie Moz was selling as fast as he could. Over the past 18 months, or more, he exercised his options upon receipt. Also, never forget that Tanzillo would go on CNBS and talk up his stock while he was selling millions of dollars worth of stock. When Cramer talked the stock into the low $40s, Mozillo was getting a very high premium for a junk stock he had to KNOW was about to be seriously impaired.
If I knew it, he had to know it.
Countrywide had two directors walk out. One left with no notice. That doesn’t happen because you want to “spend more time with your family.”
Reba,
Like E said, Mozilo is only allowed to liquidate so much stock and at certain times by SEC rule 105b-1. He can’t make it TOTALLY obvious without the SEC dropping the hammer on him, just SOMEWHAT obvious… We’ll see how it all plays out.
E and Matthew answered the first part of the question, Reba.
I can accept that your friend isn’t too concerned. With 25 years in lending, he shouldn’t be; he’s employable anywhere.
I would love to read HIS analysis. I’ll bet his conclusion is similar to mine (BofA will pounce)
Brian Brady said “I have performed critical analysis since April 1, 2007 of the Countrywide situation. I would never hope that 54,000 families would be out of work but their leader’s actions are morally reprehensible.”
I am curious what financial techniques or auditing steps did you perform as part of your “critical analysis” to arrive at your conclusion of the companies failure as a going concern?
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
Jus wonderin ,how long did everyone on the UL ” other space coast”
think you can sell each other $7 cups of trucker juice,and watch home prices go up every day?Here on Gulf coast of Fl.,you cant look down any street without seeing a mushroom patch of for sale/buy this house,get a free car/boat/dog signs.They cant give this overvalued stuff on the water away.You are looking at the highwater mark right now,fasten yer seatbelts.
parts of FL and other hyper capital growth MSAs have issues not seen in WA.
-high number of speculative investment in single family homes and condos.
-high number of lemming investors with little understanding of why or why not. little undestanding of taxation and finance (not lending).
-high use of funky loans. (compared to the rest of the country, WA Option ARM borrowers had higher credit scores, more income, more assets and chose the fully amortized payment more often.)
-high use of zero down loans.
-few economic indicators pointing to continued or sustained demand.
WA is not immune. WA is less likely to experience a problem and less likely to experience a severe problem.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
Ive always liked the word lemming,its nice! I also like B.Bradys critical analysis of CFC.Countrywide took some torpedos in the night amidships.Not the time to book a cruise.The new arrangement of the deck chairs looks nice though.
[...] As the mortgage industry begins to crumble and home prices are declining across the nation, the local media and blogging real estate insiders seem to be getting a bit anxious. Maybe it’s just me, but take a look at some of the recent headlines: Home values here still rising(Elizabeth Rhodes, Seattle Times) Seattle-area homes are holding value, Zillow says(Aubrey Cohen, Seattle P-I) (Reba Haas, Rain City Guide) [...]
R Duke,
I went to both of the links in Brian Brady’s first post on this topic where he mentions “critical analysis”. I found comments to news articles, but I failed to find any analysis. maybe I am blind?
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
I’m sure that Brian can defend himself, but instead of checking the links to things that specifically don’t say anything about critical analysis (the first link is to a CFC news release the 2nd is just an article about what a scum the Moz-man is), you should bang around his website, where there appears to be a number of articles on CFC.
You don’t have to be a CPA to perform a critical analysis, btw. In fact in this situation it’s probably a detriment.
Do you have an opinion on where CFC’s headed, Michael? “Critical analysis” showing it’s health perhaps? I assume if you are so confident in their health, you are buying CFC on the dips just to show support and make a bit of extra cash off the chicken littles?
I can’t speak for Michael but I certainly did.
mlindekugel,
From your cheerleading tone,I wouldnt be suprised if you were confident in the health of CFC.Im all ears.
I agree you don’t have to be a CPA to perform critical analysis to determine a company’s financial health….or a CFA, CMA, CIA (not the spy agency) for that matter. Every accounting, finance, and econ student will study the same financial ratios and techniques used to evaluate the health of a company. Warren Buffet uses the same. I didn’t question the validity or appropriateness of Mr. Brady’s critical analysis. I am not sure what there is for him to defend. I asked what steps he performed to arrive at his conclusion. It may be buried deeper than I searched. That is OK.
If it is true Warren Buffet, the world’s richest most successful investor, is considering a stake in CW, then something good must be coming from the allegedly doomed company.
I don’t have an opinion on the financial health of CFC as I have not read their most recent financial statements, SEC filings or the company’s quarterly earnings reports to the analysts on Wall St. I know very very little about banking regulations.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
If CFC ceases to function because the market refuses to fund them is that the fault of CFC’s mismanagement or the market’s irrationality?
I don’t know.
I see CFC sticking through this. They are too big for the FED not to take action (whether or not that is a good thing…) and as much as I enjoy the downfall of this horrible housing bubble, no one wants a banking collapse. I just hope they pay the price and come out of this leaner and and smarter.
Buffet is not buying any part of CFC. That is pure Wall St. driven speculation that has absolutely ZERO foundation. Their logic is this:
“Buffet has a lot of money. Buffet likes to buy distressed companies and try and turn them around and then sell them at a huge profit. Therefore, Buffet must be interesting in CFC”.
Fact: Buffet does not disclose to anyone outside of the Berkshire clan what he plans to do financially. He is notorious for not telling anyone what companies he is interested in.
Don’t believe the hype. Buffet is not going to rescue CFC, he knows they are toast.
I can’t say I am not worried about CW. I can think back over the years in which a company’s party line at a time of financial crises has served both sides of the fence. some failed. some prospered.
I don’t know the exact make up of CW lending or the foreclosure rate. If CW is following the national trend then it may not be so bad.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
Anyone going long on CFC right now out to have their head examined. I’m usually not one to disparage other people’s stock picks, but for the love of God let’s examine their healthy right now:
1. Regulators are camping out in their conference room round the clock
2. They just borrowed 11.5 billion dollars in an attempt to stay solvent
3. The CEO is dumping all his stock
4. The FED is lowering the discount window rate, signifying that a major lender is in trouble (Hmmm… who could that be?)
5. A PIMCO guy was recently interviewed by Bloomberg and refused to answer questions about CFC.
6. The largest wave of ARM resets has yet to commence. Foreclosures are already up 93 percent this year and the largest wave or resets has not yet occured! How does anyone think this is going to get any better? If anything it is going to get much worse.
“If CFC ceases to function because the market refuses to fund them is that the fault of CFC’s mismanagement or the market’s irrationality?”
Other lenders are making it through thus far, so part of the blame lies in CFC’s business model. Mozillo himself said during a recent conference call that their loan performance models depended on both home values continuing to rise and the ability of borrowers to withdraw principal to make mortgage payments. Neither are very sound assumptions in the current environment, nor were they good assumptions to go on after regional markets started to peak in 2005.
The good business models will survive, the bad will fail. CFC looks like they’re in the latter category for the company as a whole.
I pretty much agree with Matthew on all counts, including the fact that stock picks are rather personal and need not be second-guessed by others. However,Reba, regarding your buying CFC on the dips, when your business and presumably your livelihood depend on the sustainability of the housing and mortgage markets, it seems frankly insane for you to bet your money on a risky housing and mortgage based stock during these uncertain times. Using this strategy, if this mortgage mess does trigger a housing market implosion, you could POTENTIALLY lose both your business and your investment dollars simultaneously. I guess I truly wonder why anyone would subject themselves to that kind of risk. That said, I admire your cojones and hope it works out and will step off my soap box now.
Are you going to edit this post to reflect that the aforementioned friend’s “commentary” is really Countrywide’s party line that they are having their employees parrot?
You can get some great deals on CFC call options right now… Too bad no one is touching them will a 10 ft pole.
Got PUTs? I do, I do!!!
Bottom line is this for CFC
Best case scenario: The end up firing thousands of employees, end their subprime/alt-a/non traditional products and become a shell of their former selves, struggle to maintain positive cash flow for the next few years, basically become just another loan company. It may appear that they are already trying to do this. (it COULD happen, who knows, they may get bailed out) Too little too late? we’ll see.
Worst case scenario- They go bankrupt
What has separated CFC from other loan companies? What has made them the #1 lender in the U.S.?
A. Exotic loans.
Therefore if we can conclude that CFC road exotic loans to the top of the industry, why is it not logical to conclude that exotic loans will lead them to financial ruin like it already has 130 lenders to date? If your only answer is “Well they are REALLY REALLY big” you might want to rethink your answer.
If anyone is buying CFC for a good investment (not a speculative, dead cat bounce), they need serious help. These people should not be around sharp objects, heavy machinery, or be out in public without close supervision.
Flush the money down the toilet. It will last longer, and you will have a cool story to tell.
OK enough about the CFO & CFC future prospects. Can anyone comment on what may happen to mtg “escrow” payment being made to CFC if they do file bankruptcy?? My son, who has a conforming (80%) loan and good credit, is paying his property tax payments to CFC. If CFC doesn’t pay it will California wait?? I don’t know the BK laws and I don’t know what advise to give my son re the escrow payments. Anybody in the know???
Wow! Shoot the messenger!
Here’s when I started- 4/1:
http://www.bloodhoundrealty.com/BloodhoundBlog/?p=1250
I continued with analysis of potential defaults on book value on 8/6:
http://delmar.typepad.com/brianbrady/2007/08/will-countrywid.html
Then I called for federal action because CFC is too big to be ignored on 8/16:
http://delmar.typepad.com/brianbrady/2007/08/countrywide-in-.html
Finally, yesterday, why the CFC pricing failed them:
http://delmar.typepad.com/brianbrady/2007/08/countrywide-jus.html
All one has to do is talk to his stockbroker, read the 10-Qs, and talk to CFC employees.
Hi Bud,
There’s a federal law called RESPA which directs lenders on what they can and cannot do when it comes to paying taxes and insurance out of reserve accounts.
http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm
Good luck to your son, if CW goes down.
No matter if there’s a company BK, buyout, or meltdown, the entity is bound by federal law throughout the process.
Have your son follow up with the state auditor to confirm his property taxes have been paid.
Hi Brian and Matthew,
My concern is that with all the media attention now, Prime, A paper home buyers and refinancing homeowners may decide to select another lender, which would continue to put a strain on their biggest expense: labor.
I’ve got to believe that the competition for A paper conventional loans is pretty harsh right now.
The usual market MO is to compete with rates and fees. Could Countrywide pull it off by offering the best rates and fees in the market?
What do you think?
Brian-
Your critical analysis of CFC was right on brother.As the secondary market implodes,the base of the house of cards is loosin some joker cards.Its a freefall now,stand back.
Thanks Brian. I missed the Chrysler/CW article. If Brian Brady’s analysis is correct CW could lose half its interest income from dried up business and have a material charge to bad debt for defaulted loans and a materal permanent down of B/S assets. Interestingly, most of the airlines were/are in a much worse financial position. In a down market airlines run in the red for years during a turnaround or bankruptcy reorganization before running in the black again. from Brian Brady’s analysis CW is far better off than the airlines.
Cheers,
Michael P. Lindekugel
Financial Analyst
RE/MAX Commercial
Team Reba – RE/MAX Metro Realty, Inc
Due to lack of time to moderate for the balance of today (other work to do!) I am going to ask that RCG close comments on this post. If anyone is up for more discussion you can go either to Jillayne’s post just after this one, or start up a new thread elsewhere.
Cheers,
Reba
Michael,
Comparing CW to the terribly mismanaged airline industry isn’t much of a defense.
The airlines are different. People buy the best tickets for them as long as they are available. I don’t think they care of the state of business of the airline. This creates cashflow for the airline even in bad times. When CFCs main business case seem to have disappeared it’s a very different story.
Late in May I was on a business trip to San Diego and met Brian Brady for dinner. That night Brian shared his concern about CFC and gave me a much more detailed breakdown and analysis of his thoughts. His analysis and conclusions have proven to be rather prophetic. The only area in which he was off is the time period in which he thought it woud happen…it happened much faster.
With approximately 50% of CW volume gone, the key to remember is it was the most profitable volume they had. While they lost 50% of their volume, it accounted for over 60% of their profitability. To make matters worse, agency paper “A” paper profit margins are extremely thin. The most profitable product they have now are govies and govies is a niche they do not have sunstantial market share.
Dan Brown wrote a very telling post today http://www.themortgagereports.com/2007/08/randy-woolridge.html
In it he clearly documents how Countrywide Bank is paying substantially higher yields on their CD’s to potential investors.
Dan states the following:
“And then the story takes an interesting twist when we consider that its CDs are priced so far out of the market.
Remember: Certificates of Deposit offer an interesting debt opportunity to Countrywide because each “deposit” is FDIC-insured for up to $100,000.
In other words, even if Countrywide defaults on its CDs, the holders of the CDs stand to lose nothing except the opportunity cost of giving their dollars to the Calabasas-based lender. The FDIC (i.e. U.S. taxpayers) will replace their “lost” principal balance.
This is a clear case of Moral Hazard if I’ve ever heard one. By paying a half-percent more than every other bank on Fidelity’s Web site, Countrywide appears to be taking on risk for which they won’t be responsible if the company fails.
And this is what Professor Woolridge told us. Sometimes the bank with the highest yield is the bank with the biggest troubles.
In Countrywide’s case, he may have been right again.”
Another problem with CFC is something Mozilo stated in 2005:
“their loan performance models depended on both home values continuing to rise and the ability of borrowers to withdraw principal to make mortgage payments.”
Sounds like economic realities are starting expose that business model.
I’m NOT one of those individuals that is cheering for CFC to fail, however I do know my name is not Pollyanna.
Whether CFC goes into bankruptcy, is acquired or is substantially smaller…times are tuff for them and not to recognize that is not prudent.
At Reba’s request, I’m going to go ahead and close comments on this post… However, Jillyanne is also hosting a very interesting conversation on Countrywide, and Deborah just started a new thread on the situation within the mortgage industry. I think it is safe to say that we’ve far from exhausted this conversation!