Mozilo After Countrywide

Now that it has been officially announced that Bank of America is acquiring Countrywide, the spotlight is on Mr. Angelo Mozilo again. Mozilo, Countrywide’s founder and CEO, is famous for his massive sales of company stock. He’s earned hundreds of millions of dollars since he became CEO in 1999 and is expected to get another hundred million in severance after the closing of the BofA deal sometime in Q3. Some sources value his severance package in tens of millions of dollars, which, while substantially smaller than the number above, definitely ensures Mr. Mozilo a happy retirement. One source said he was planning to retire in 2009, but with this new development he might be leaving the workforce a little earlier. I don’t think that makes much difference to him. Mozilo’s generous compensation, which includes use of the corporate jet, county-club membership and other perks, has often been criticized in the media. Executives at mortgage lenders like Countrywide are believed to have caused the current mortgage crisis by allowing predatory lending, fraud, and other unfair business practices. Well the man founded the company after all…

Countrywide’s Loan Production Plunges

Countrywide’s home loan production dropped 40% year-over-year in November, the lender announced Thursday. Loan fundigs were up 5% compared to October’s results, quite a feat amid all the trouble the mortgage lending sector is experiencing currently. Countrywide almost eliminated origination of subprime home loans and significantly reduced adjustable-rate mortgages. Delinquencies rose from 4.57% in November 2006 to 6.34% last month. In October, 5.89% of Countrywide loans were delinquent.

Mortgage interest rates climbed up from record lows after the Fed’s rate cut, and this week 30-year mortgage rates averaged 6.11% - still some of the lowest rates for this year, but above 6% nevertheless. The rate dropped below 6% briefly last week. 15-year fixed-rate loans were at 5.78%, up from 5.65% a week ago. 5-year ARMs averaged 5.78%, compared to 5.75% last week. Interest on one-year adjustable home loans increased from 5.46% last week to 5.50%. Which way rates go from here will depend on a number of factors, including the market for Treasuries and the job market.

Mozilo On Housing Reform

It seems the idea of “freezing” interest rates will be implemented after all, despite its flaws and the fact that it will only help a small number of borrowers. Perhaps top economists are spooked, but why do something that is certain to fail? Even Countrywide’s Mozilo noticed how bad the idea is. He said the better solution would be to raise the conforming loan limits and to allow Fannie Mae and Freddie Mac to keep more loans on their books – an idea rejected by the Bush administration recently. There may be some conflict of interest on Mozilo’s part, but his arguments are reasonable. Freezing interest rates will help some homeowners, but it will hurt lenders and investors, and leave the rest of the borrowers to struggle with increasing mortgage payments. He also noted that the industry needs clear lending standards that will create a sense of certainty and lure investors back into the housing sector, pumping liquidity and spurring mortgage lending (Bingo! But maybe we should leave the conforming loan limits alone, cos they’re pretty high right now anyway).

The worst may not be over yet for the mortgage industry: Banc of America and Fannie Mae both predicted significant home price drops in 2008. Fixing the interest rate on a small portion of mortgages will not prevent foreclosures, especially with borrowers willing to walk away from their “upside down” mortgages.

Countrywide boycotted

A community advocacy organization called NACA (Neighborhood Assistance Corporation of America) announced a nationwide boycott of Countrywide Financial, beginning Thursday October 11. The campaign aims to “get Countrywide to change its practices or be shut down”, according to NACA’s website. This is a new one. I generally dislike anything this radical and “activist”, but at least it’s a vivid illustration of the public opinion. But this is not the only piece of exciting news surrounding the mortgage lender.

Countrywide’s total mortgage fundings fell 44% in September compared to the same month a year ago, according to its monthly operating report. Subprime originations totaled $255 million last month, down from $3.1 billion in September 2006. The lender also cut nearly 5,000 jobs in September, leaving it with 55,932 employees.

It was also announced that North Carolina’s state treasurer Richard Moore has asked the Securities and Exchange Commission (SEC) to investigate changes Countrywide CEO Angelo Mozilo has made to his stock-selling plan earlier this year. Mozilo made changes to his 10b5-1 plan and unloaded stocks shortly before bad news sent shares tumbling down, thus selling stock when it was priced highest.

Now that Countrywide’s “Protect Our House” PR Campaign has officially kicked off, there’s significant demand for those green wristbands from collectors and members of the mortgage industry, so at least one Countrywide employee is selling his on eBay. The most interesting part of this is, the employee in question says he only wanted to generate cash, not make fun of his company. Fine, what the public liked most is the fact that it says “made in China” on the inside.

Countrywide joins HOPE NOW

HOPE NOW is Treasury Secretary Henry Paulson’s initiative to help homeowners facing foreclosure. The coalition includes some of the largest mortgage service companies, counseling agencies, government officials, non-profit groups and trade organizations. The initiative aims to help borrowers stay in their homes, by restructuring their loans. Actions being taken include setting up special toll-free numbers for borrowers and providing information on mortgage options. Consumers are encouraged to contact their lenders as early as possible before they miss several monthly payments in a row. For more information, log on to http://www.hopenow.com.

Countrywide Financial Corporation announced Wednesday that it is joining the alliance, too. “We have 2,700 trained professionals on our homeownership preservation team”, said Countrywide CEO Angelo Mozilo. The interesting part is, news about Countrywide joining the party comes along with the story on ACORN (Association of Community Organizations for Reform Now) picketing in front of Countrywide offices demanding loan modifications and cooperation from the lender. Protestors went so far as to call Countrywide a “predatory lender” during their demonstration at a branch in San Bruno, CA.

More job cuts in housing-related businesses

Forget about steady job growth, several mortgage lenders have announced further staff cuts, and this is no small news. Weaker employment might further curb consumer spending, resulting in a weaker economy altogether.

Lehman Brothers has eliminated 850 positions, as it downsizes in response to tough market conditions. It is closing its Korean mortgage business and renaming all its residential mortgage origination and servicing businesses “Lehman Mortgage Capital”. Countrywide is taking another round of lay offs, eliminating some 900 employees. The last time Countrywide announced job cuts was less than a month ago. Cleveland-based National City said it will lay off 1,300 employees and stop issuing non-conforming loans that can’t be sold to Fannie Mae and Freddie Mac.

A study by Challenger, Gray & Christmas concluded that the 85% surge in layoffs last month was primarily caused by lenders scaling back. Not a very encouraging statistic. In this relation, MarketWatch published a very interesting article about the Fed’s opinion on the current economic conditions. And I thought the guys at the NAR were too optimistic.

Bank of America invests in Countrywide

It was announced Wednesday that BofA has invested $2bln in Countrywide preferred stock, which can be converted into common stock at $18 per share. Shares of Countrywide traded at above $25 in after-hour trading, an increase of some 20% on the news. Rumors of a possible acquisition/merger with BofA have been circulating for a whil, but until now none had come to materialize. According to the lender’s CEO Angelo Mozilo, “Bank of America’s investment in Countrywide represents a vote of confidence and strengthens our balance sheet, enabling us to position Countrywide for future growth and success”. For some reason, this sounds like a sigh of relief to me.

Kenneth D. Lewis, BofA’s Chairman and CEO, said that “the stock market has been underestimating the value of Countrywide’s operations and assets” – an interesting thought amid all the turmoil, revaluations and downgrades anything mortgage-related has seen. He also added that “The investment … recognizes the importance of the company in providing home financing across the country”, so would I be right to assume that BofA is making a very risky investment just to bail out Countrywide? I’m probably wrong of course …

Job cuts at Countrywide?

Countrywide, the largest mortgage lender by volume, has until recently been hiring additional staff – usually former employees of defunct rival lenders. It was only a few weeks ago that news of further staff additions at Countrywide emerged, amid layoffs at other companies in the industry. Now we’re hearing that the lender has laid off some 500 employees in its Full Spectrum origination unit, which specializes in Alt-A loans. “The company will monitor market changes and production levels on an ongoing basis and respond as appropriate”, said Countrywide in a statement. Should we rather read “more layoffs to come”?

Shares dropped 7.5% to $19,81 on the news. Countrywide stock was downgraded by rating agencies last week on speculation that tight liquidity may force the lender to file for bankruptcy protection.

Fed shows concern over housing

Apparently, inflation is no longer the Fed’s primary concern. On Friday, the Federal Reserve cut its discount rate by half a point. This is not a Fed Fund rate cut as yet, but still some easing of the Fed’s policy. The discount rate is charged for temporary loans to banks, so lowering the rates means more money for mortgage issuers.

Analysts believe that this move will be met with little enthusiasm, and even if it helps improve the sector somewhat, it will not be effective in the long term, but will rather postpone bigger problems in the industry. According to some, this move is designed to bail out troubled mortgage lender Countrywide, as rumors of a possible bankruptcy filing started spreading last week. Right now, it is widely believed that the Fed’s next meeting in September will bring a rate cut, despite the central bank’s reluctance to put the economy at risk of higher inflation due to cheaper credit.

Friday’s move shows that the Fed is taking seriously the turmoil in financial markets, a problem that received little comment until recently. Any actions in between meetings are very uncommon for the Fed, but policy makers must have changed their minds quickly after they took their decision to hold rates steady the last time they met.

American Home Mortgage: nearly bankrupt?

In a news release issued yesterday, July 31, American Home Mortgage (AHM) announced that it is “experiencing a hindering of access to its traditional lending facilities” and will be unable to fund its lending obligations. The lender has paid “very significant” margin calls in recent weeks and “has substantial unpaid margin calls pending”. AHM has retained Lazard, the same company that served now-bankrupt New Century, to assist in evaluating “strategic options”, including liquidation of its assets.

Shares dropped more than 90% immediately after trading was resumed, to close at $1.04. According to analysts, a bankruptcy or major restructuring is very likely because AHM can not function without its financing. Shareholders will probably be left with nothing. The whole story looks a lot like the subprime lender meltdown, only that now it’s Alt-A.

Lawsuits seeking class action status are already being filed against AHM. Charges include failing to disclose substantial information that affected its earnings and resulted in overstating its financial results.

Shares of other lenders were affected, too, with Countrywide down 3.8% to $28.17, Fremont General declining 11% to $5.77 and NovaStar losing 25% at $9.64.

Countrywide reports quarterly results

The slowdown in the housing sector is hitting Countrywide hard: income fell 33% in the second quarter, and the market is expected to remain “challenging” for the rest of the year. Shares dropped 8.7% on the news, reaching $31.11, the lowest level since November 2005.

Countrywide’s full-year earnings forecast was cut to a range of $2.70-$3.30 per share from April’s $3.50-$4.30 and January’s $3.80-$4.80. Revenue dropped to $2.5 billion from last year’s $3 billion.

Countrywide has recently tightened its credit guidelines and eliminated some especially risky mortgage products, but losses associated with mortgages issued in recent years are expected to climb in the coming months. The company has set aside $292 million for credit losses, more than four times last year’s provision of $61.9 million. According to Countrywide’s CEO Angelo Mozilo, losses were related to “prime” loans given to borrowers with good credit, not subprime mortgages as one would expect. What happened to “contained” subprime losses?

Mozilo said that problems are likely to persist for the rest of 2007 and well into 2008, possibly 2009. No wonder we’re seeing such robust insider selling at Countrywide.

Wells Fargo says goodbye to 2/28 ARMs

Wells Fargo, the fifth-largest bank in the U.S., has stopped offering 2/28 adjustable-rate mortgages effective Monday. The so-called 2/28 ARMs are in fact a hybrid product featuring a fixed interest rate for the first 2 years of the loan which then begins to adjust. This move is prompted by massive downgrades of subprime bonds by rating agencies in the past 2 weeks. Countrywide Financial Corp., Washington Mutual Inc., First Franklin and Option One Mortgage have already stopped offering the product.

Meanwhile Standard & Poor’s announced that it’s placing $1.76 billion in asset-backed securities on CreditWatch with negative implications. S & P said it is continuing its review of CDO ratings, so more downgrades are possible in the near future.

Countrywide to hire staff

Countrywide intends to hire an additional 2,000 employees this year, the company announced on Monday. These additions will allow the lender to open 100 new branch offices, according to company CEO Angelo Mozilo.

What’s going on here? Countrywide is not doing that well financially, plus we officially have a slump in the mortgage market, plus most lenders are cutting staff and closing branch offices. Why is Countrywide suddenly hiring more people and opening new offices? Mr. Mozilo announced at the UBS Financial Services Conference on Monday that Countrywide intends to increase its market share and additional staff is needed to achieve this goal. And while it is true that Countrywide has managed to stay afloat so far, I don’t yet see how this is going to work.

Shares of Countrywide Financial Rise

Shares of mortgage lender Countrywide Financial rose after Merrill Lynch called the company an “attractive buying opportunity”. Stocks were up 3.7% at $35.65, while shares of other mortgage lenders showed gains, too. Shares of Accredited were up 59% at $9.60, those of NovaStar made a 22% jump to $5.11, and Fremont reached $7.38. Goldman Sachs, Lehman and Bear Sterns said they are considering purchasing mortgage portfolios, teams of lenders or even entire subprime lending companies. Are they giving subprime another chance? In fact, this could be a smart move on investors’ part, because they could be acquiring fully-operating facilities along with experienced staff – on the cheap – as lenders face their financial hardships.

On a side note remark, Angelo Mozilo, chairman and CEO of Countrywide Financial, has been selling his company’s shares in bulk lately. On Mar. 12 alone he got rid of 70,000 CFC shares, raising 2.45 million, following the 70,000 shares he sold for $2.62 million on Mar. 8 and the 46,000 shares he dumped for 1.67 million on Mar. 6. Is it just me or does something smell fishy?