Countrywide Didn’t Keep Its Promise

Countrywide Financial, the nation’s biggest mortgage lender reported its 4^th quarter financial results yesterday. After a $1.2 billion loss in Q3, the company said it expected a profit in Q4, but failed to achieve that, as expected. Countrywide posted a loss of $422 million, much better than the previous quarter, but well, still a loss. However, Bank of America affirmed investors that it is still eager to acquire the mortgage lender, so shares of both businesses went up. Overall, the 4^th quarter results were pretty bad in every sense: loan fundings were almost cut in half compared to a year earlier, and loan-loss provisions increased more than 12 times from $73 million to $924 million for the same period. The delinquency rate on subprime mortgages was 33% in Q4, up from 29.6% the previous quarter. And finally, it currently holds $395 million in foreclosed real estate – now that one’s gonna be hard to get rid of.

NYC Expands Countrywide Suit

New York City Comptroller William Thompson is suing Countrywide Financial, accusing the company of misleading its investors by “falsely representing that Countrywide has strict and selective underwriting and loan origination policies”. It was announced on Friday that the suit is being expanded, with additional company officers, directors, underwriters and accounting firms. Now that names like Grant Thornton and Citigroup are involved, this is getting serious, and even uglier than before.

It’s funny how every time anyone mentions Countrywide in an online article, there’s a burst of attention and a flurry of comments ranging from “I’m a former employee, they deserve whatever comes their way” to “I work at Countrywide, we’re all ethical agents”. I’m more inclined to believe the former, until that is proved untrue. And some of the latest news on Countrywide’s Mozilo: it seems he’s so fed up with the press commenting on his stock sales and retirement benefits, that he’s decided to forfeit $37.5 million in severance pay, but still keep the rest of the money he’s about to receive upon leaving Countrywide. Does this mean that he doesn’t think he deserves the money?

Bush Administration Proposes Fiscal Stimulus

On Friday, Bernanke and the Bush administration proposed a “fiscal stimulus package” of $150 billion to help prop up the economy by encouraging consumer spending. No details were available, because the Congress has yet to approve it, but the administration is considering one-time tax rebates of approx. $800 for all consumers. An agreement will probably be reached in 30 to 45 days, just in time for tax-filing season. The plan is costly, and there’s some doubt that it won’t help the economy in the long term. Although it actually provides consumers with free cash, no one knows how they may react: in the current crisis, people are unlikely to start spending more. They may have to pay down credit card debt, buy insurance, or choose to invest the money. It may offer some relief, but it will not solve all the problems in the U.S. economy. Stock markets were closed on Monday, but Dow Jones and S&P 500 futures prices dropped more than 4% in a day. Markets all over Europe, South America, and Asia plunged on worries over bank losses, the U.S. Real Estate market and an imminent recession. Now this is getting scary.

Speculation Grows Ahead Of Fed Meeting

The next Federal Reserve meeting is scheduled for January 30, but with all the dismal economic data in recent weeks and the expected disastrous earnings results at top banks (Citi has just reported an $18 billion writedown in mortgage investments), plans may change. Although the date for the next meeting is only 2 weeks away, there’s belief that Bernanke may summon an inter-meeting to discuss a quarter-, or even half-percentage point rate cut. According to analysts, he may cut some more at the actual meeting. The market is suggesting a 0.75% rate cut, a rare event in the Fed’s practice, with some economists demanding a whole percentage point cut – an unlikely scenario, given the Fed’s concerns over inflation, oil prices, and the dollar’s weakness. Chairman Bernanke signaled that the Fed is ready to take radical action to save the economy, but after all, there’s a chance that it won’t be necessary. I guess the Fed will rather wait for a couple of weeks than summon an emergency meeting.

And now, KB Home

Big Wall Street banks will report 4^th quarter results in the coming weeks, and those are expected to be very, very bleak. But until then, home builders’ financial troubles will be in the spotlight. Shares of KB home lost 9% after the company reported a $773 million loss in Q4, 7 times the expected number. And they didn’t sweeten the pill either: Chief Executive Jeffrey Mezger said he expects the market to remain bad for a while, due to oversupply, low affordability and declining consumer confidence. Although revenue fell, the company increased its cash reserve, which, according to analysts, should help it survive the downturn. The surprising part was that KB Home placed a special emphasis on its “strategic partnership” with Countrywide. Amid fears that the lender might go under, it’s hard to see why this partnership is so important, but I guess they can always find another lender to work with if they have to. As for Countrywide, delinquency and foreclosure rates on its loans hit record highs in December, and loan origination dropped almost 50% year-over-year. It will report its financial results for Q4 later this month, too.

Countrywide Bankruptcy Rumors Float Again

Countrywide managed to produce a bunch of bad news in a day – again. Its stock plunged more than 20%, its biggest decline since October 1987, on bankruptcy rumors and speculation. In a fresh hit to Countrywide’s reputation, it was revealed that the lender has fabricated documents related to a bankruptcy case. The papers were presented to the court as evidence of Countrywide’s actions, but they had apparently never been sent to the borrower. Although it tried to explain that this was not fabrication per se, Countrywide has finally ruined its reputation. Rumors about credit rating agencies considering downgrading Countrywide and a possible bankruptcy were dismissed by the lender. At this point, if you think you’re having a déjà vu, relax: this has indeed happened before. In fact, rumors about Countrywide considering filing for bankruptcy protection sent the company’s stock falling several times in 2007, most recently a couple of months ago. The lender will report its 2007 fourth quarter and year-end earnings, and host a live webcast on January 29. Currently, Countrywide shares trade at a little below $6.

Job Cuts At LendingTree

Mortgage lender LendingTree couldn’t think of a better holiday gift for its employees: job cuts. Unlike Freddie Mac, which took its employees to a party at Ritz-Carlton, LendingTree will be eliminating 220 jobs, which leaves it with some 1,000 employees. This is the third time this year that the company conducts mass layoffs. According to a spokeswoman for the lender, the layoffs were prompted by pessimistic forecasts for the industry. LendingTree posted a third-quarter loss of $5.6 million, compared to profits of $15.2 million a year earlier. The company saw its loan sales plunge due to lower demand by the secondary market, lower revenue per loan and the closing of fewer loans. Since the beginning of the credit crunch in the summer, profits have plunged for mortgage lenders as they tightened their lending standards to prevent future delinquencies and foreclosures. A report by the Labor Department showed that the Consumer Price Index rose 0.8% in October, the biggest jump since September 2005, which will negatively affect the consumers’ ability to make timely mortgage payments, meaning more trouble for lenders. I guess Christmas won’t be very jolly for some companies.

Fannie, Freddie: More Gloom Ahead

The CEOs of Fannie Mae and Freddie Mac, the two government-chartered financiers of mortgage loans, recently voiced concerns about the housing market’s future. Freddie Mac’s Richard Syron said his company will likely suffer another quarterly loss of about $2 billion, with credit losses totaling $10-12 billion. The worst is not over yet, however: he expects home prices to drop further before the market stabilizes. The company is in “hiring freeze” in order to control costs while it struggles with losses. Fannie Mae’s CEO Daniel Mudd expects 2008 to be “very tough”, with a gradual recovery in late 2009. He expects home prices to fall 12% by next year and hopes Fannie’s recent efforts to raise capital will be enough to help the company deal with the situation. As the housing slump unfolds, it turns out even the two GSEs are not immune to trouble. Both have slashed their dividends in recent weeks and issued stock to raise capital.

Fannie Mae Will Cut Dividend, Too

Fannie Mae announced that it will cut its quarterly dividend by 30% from 50 cents to 35 cents a share, beginning the first quarter of 2008. In an attempt to raise capital, the company is planning to issue $7 billion of non-convertible preferred stock this month. The announcement comes after similar moves by sister company Freddie Mac, which issued $6 billion in preferred shares last month. Demand for Freddie stock was 5 times greater than the total amount of stock issued, according to the mortgage giant. Freddie Mac posted a loss of $1,5 billion, and Fannie took a $2 billion hit in the third quarter.

Fannie Mae said its 2008 financial results will probably be disappointing, due to turmoil in the housing markets. Shares dropped 3% on the news. Analysts believe the two GSEs may face significant losses related to subprime and Alt-A securities in the months to come. Unlike many banks, Fannie and Freddie have so far avoided large writedowns, but they are not immune to losses.

Freddie Mac Seeks To Raise Capital

Freddie Mac was all over the headlines this morning, as recent news revealed the mortgage giant’s weaknesses. It is believed that the company may have insufficient capital to cover potential home-loan losses and there’s talk that both GSEs may be insolvent at some point in the near future, should more mortgages go bad. Moody’s and Standard & Poor’s downgraded Freddie’s outlook to “negative” from “stable”, though its debt is still rated AAA. Fannie and Freddie are required to hold 30% more capital than the minimum for other companies, and Freddie Mac found itself short of money, so it is now issuing securities to raise capital. Currently the company has $600 million above the minimum reserve level, much less than its $1-2 billion comfort level. It revealed plans to sell $5 billion of preferred stock in the very near term, probably this week. If losses in the fourth quarter are comparable to those in the previous three months, the mortgage giant will need to raise even more capital. James Lockhart, the director of Fannie Mae and Freddie Mac’s regulator, OFHEO (Office of Federal Housing Enterprise Oversight), refused to suspend the extra capital requirement when asked to.

Will The Fed Cut Rates Again?

They may want the Wall Street to believe a rate cut is not imminent, but investors are already counting on a 0.25% cut. The central bank released its economic outlook, in which it projected slower growth in 2008, and, quite surprisingly, declining unemployment. The economic growth forecast was revised downwards from 2.5-2.75% to 1.8-2.5%. Meanwhile, turmoil in financial markets is in full swing, with the two largest mortgage financiers Freddie Mac and Fannie Mae reporting higher-than expected quarterly losses.

Shares of Freddie Mac dropped more than 28% after the mortgage giant announced quarterly loss of $2 billion and said it has trouble meeting its capital minimum, which may prompt it to cut its dividend. The company also warned that deeper losses may be coming in the future. Consequently, Countrywide got downgraded by Fox-Pitt, Kelton analyst Howard Shapiro on fears that Freddie’s trouble may mean less financing for the mortgage lender. Countrywide promptly released a statement saying it has “ample liquidity”, but analysts have trouble believing this. So, the Fed may have to cut rates on December 11^th, especially if something big happens as a result of the current chaos. Inflation and the price of oil, however, are still pretty troublesome and if the latter hits $100, the chances for a rate cut are minimal. Time will show.

S&P Cuts Bear Stearns Rating

S&P cut Bear Stearns’ credit rating after the company announced plans to write down $1.2 billion in subprime assets, which will likely result in its first quarterly loss since 1985 when the company went public. After the rating was revised from A+ to A, the stock price actually rose because the writedown was smaller than other securities firms’. Citigroup got its ratings lowered after writedowns of $9 billion and Merrill Lynch & Co was downgraded on writedowns of $8 billion.

Meanwhile, Wells Fargo’s CEO John Stumpf, speaking at an investment conference, predicted that the worst is yet to come for the housing market. He said that this is the worst Real Estate market he’s seen in his 30-year career, and 2008 will probably be even worse. Wow he actually said that.

Home Depot Feels The Heat

Home Depot, the home improvement store chain, had to cut its full-year outlook for 2007 after financial results came in somewhat weaker than expected in Q3. The company posted a 27% drop in quarterly profit, citing “tough environment” as the main reason. Net earnings dropped to $0.60 per diluted share, compared to $0.73 a year ago. Sales dropped 3.5% compared to the third quarter of 2006, “reflecting negative comparable store sales of 6.2%, offset in part by sales from new stores”, according to the retailer’s press release. Earnings per share are expected to decline by 11% in fiscal 2007, adjusted downwards from September’s forecast for a 9% decline.

“We started the year with a more pessimistic view of the housing and home improvement markets than many. It turns out we were not pessimistic enough”, said Chairman and CEO Frank Blake. Well, Home Depot is not the only company that wasn’t “pessimistic enough”.

Fannie And Freddie Under Fire

It was announced earlier this week that New York State Attorney General Andrew Cuomo is investigating Fannie Mae and Freddie Mac in relation to accusations that the two mortgage giants had purchased loans based on inflated appraisals from Washington Mutual. According to Cuomo, WaMu pressured eAppraiseIT, an appraisal company, to inflate home values on thousands of loans which were later sold to Fannie and Freddie. Freddie Mac replied immediately saying it will cooperate with investigators. WaMu and eAppraseIT said they did not breach regulations. WaMu’s stock price dropped 17% on the news, to the lowest level in 20 years.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), the GSEs’ regulator, however, expressed disappointment with the subpoenas. In a letter to Cuomo, he said that Fannie and Freddie “have no economic incentive to knowingly purchase or guarantee mortgages with inflated appraisals”, and “you and your staff may not fully understand the differences between the mortgage-backed securities issued by the GSEs and those issued by other entities”. I can feel the rage.

Fannie and Freddie have operating rules in place, which say that if the loans they purchase are linked to inflated appraisals, the lender has to buy them back. Too bad for WaMu, it’s already suffering losses from failed subprime loans, so if it has to repurchase all the mortgages it sold to Fannie Mae and Freddie Mac, its financial situation could deteriorate further. For the time being, both companies are continuing to purchase WaMu mortgages.

Former Freddie Mac CEO Settles Dispute With OFHEO

The Government reached a settlement with Leland Brendsel, former CEO of Freddie Mac, who was involved in the mortgage giant’s accounting scandal back in 2003. Brendsel will have to pay a total of $16.5 million in fines and other costs, including giving back some of his salary and bonuses. The money will be used to assist homeowners facing foreclosure. Brendsel was ousted in 2003, when he was accused of creating a corporate culture that allowed earnings misstatements of $5 billion between 2000 and 2002. Four other former Freddie Mac executives settled charges by paying civil fines and restitution. In the future, Freddie Mac cannot hire Brendsel again without the permission of the Office of Federal Housing Enterprise Oversight (OFHEO). According to Kevin Downey, the former CEO’s attorney, Brendsel and OFHEO “disagree strongly about what happened in the past at Freddie Mac”.

Another Subprime Casualty

Last week everyone was talking about the departure of Merrill Lynch’s CEO, and this weekend it was Citigroup’s Charles Prince. He stepped down as Chairman and CEO after Citi announced losses in the billions of dollars, due to asset price writedowns and credit-related losses. Win Bischoff was appointed interim CEO, until the company finds someone to replace Prince. Robert Rubin, Former Treasury Secretary, was named Chairman of the board. Prince’s tenure was one marked with management experiments, shareholder dissatisfaction and risky strategy – a mixture that didn’t work out well in the end. Citi’s stock trades now at a price 17% lower than where it stood when Prince took over in 2003. Risky bets on subprime mortgage securities may result in $8 to $11 billion in writedowns for the bank, in addition to a $6.5 billion hit it took in Q3.

Countrywide’s quarterly results and promises

The mortgage lender we all love to watch and criticize reported its financial results on Friday. Losses were big, but not as bad as expected, so the stock price went up immediately. A loss of $1.2 billion, which equals $2,85 per share, for the 3^rd quarter, down from $647.6 million on the positive a year ago, and shares still went up 30%. Origination volume shrank, probably due to better lending standards, which should result in higher-quality loans, and loan-loss reserves were increased significantly, to $934 million, from $38 million a year earlier. So what we can see is a better long-term outlook, if the company survives the current turmoil. This is the first time Countrywide reports a quarterly loss in 25 years, and the market isn’t showing signs of improvement, so there’s a chance the next one will be just as bad.

What helped stock prices was Countrywide’s forecast for future performance. David Sambol, the mortgage lender’s President, said the 3^rd quarter was an “earnings trough” and things can only get better from now on. The management believes Countrywide will turn a profit of 25 to 75 cents per share in the fourth quarter and, according to Angelo Mozilo, continues “to be bullish about the longterm prospects of both Countrywide and our industry”. 3 months to go.

BofA to lay off 3,000 employees

Bank of America is exiting the wholesale mortgage business, and scaling back its investment banking unit, eliminating 3,000 jobs. It will stop offering home mortgages through brokers, and focus on lending directly to consumers through its banking centers and loan officers. Analysts believe more layoffs may be on the way.

BofA’s third quarter financial results were quite disappointing, with net income dropping 32% compared to the same period a year earlier. Several top executives left shortly after financial results were announced, including the head of global structured products, and the co-head of equities. Other banks saw earnings plummet, too. Wachovia Corp. reported a 10% drop in profits in Q3 and said it will eliminate 200 jobs by year end. Citigroup’s profit fell 57%.

Countrywide asked to oust Mozilo

A pension fund advisory group called CtW Investment Group, has sent a letter to the board of mortgage lender Countrywide Financial, asking for Countrywide CEO Angelo Mozilo’s resignation. The American Federation of State, County and Municipal Employees said Mozilo should be replaced with two independent directors, and changes should be made to Countrywide’s executive compensation committee. While the criticism seems reasonable, they seem to be waking up to the facts a little too late. Mozilo’s stock sales caught media attention more than half a year ago and have been discussed in the blogosphere ever since but hey, better late than never.

In other news, the $350 million penalty Fannie Mae paid after accounting errors were exposed is now being distributed to investors who were harmed as a result of the fraud. Glad to know that.

D.R. Horton reports losses in fiscal fourth quarter

The second-largest homebuilder said orders dropped 39% year-over-year to the lowest level in nearly 6 years in its fiscal fourth quarter. Order cancellations were at 48%, up from 38% in the previous quarter. Chairman Donald Horton attributed the poor results to low mortgage loan availability, which hurts sales. Shares dropped 5.3%.

Market conditions are expected to remain challenging for months to come, according to industry officials. Federal Reserve Chairman Ben Bernanke said that housing will have a negative impact on the economy for the remaining part of the year and at least for some time in 2008. Builder sentiment is at its lowest level since the index was established in 1985. The index fell to 18 from a reading of 20 in September, which means that only 18% of respondents in the survey view market conditions as beneficial.