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.

New Home Sales As Bad As Existing Homes

New home sales tumbled 26.4% last year, the largest yearly drop on record. Sales were down 4.7% in December, with median home prices dropping 10.4% year-over-year, the biggest 12-month decline in 37 years. These numbers don’t account for cancellations, so actual sales were probably even lower. Furthermore, I guess most sales featured additional incentives, so the prices are inflated, too. The median price of a new home increased a mere 0.2% to $246,900 in 2007 – if incentives were taken into consideration, new home prices would drop as well. The inventory of unsold homes is at 9.7 months’ worth, which is close to a record high, so there’s no light at the end of the tunnel for home builders. An economic stimulus package? Financial innovation, anyone?

Banks Tighten Credit

The Fed’s efforts to add liquidity to the markets are being offset by banks such as Citi, which announced that it will be raising interest rates and reducing consumer lending. Mortgage lending and credit cards will also be trimmed. Lending, to anyone, in any form, is too risky right now, and while the market is trying to deal with the mortgage and mortgage-derivatives mess, there’s fear that other areas of the financial system may fail as well: credit card lending, commercial Real Estate loans, and the list goes on. To help revive the economy, the Fed will probably cut rates again at the end of January (or, as some like to believe, perhaps sooner), but maybe a serious crunch is what the economy really needs after all. Short term, tighter credit will only extend the crisis in housing, because home buyers won’t be able to secure financing. No wonder the immense inventory of unsold homes (currently above 10 months’ worth) is not moving and home builders are struggling. With or without the Fed’s help, housing will take years to get back to normal, as consumers learn to save, budget and prioritize expenses.

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.

Building Permits, Construction Drops

A report by the Commerce Department says that construction of new homes dropped 5.5% in November to the lowest level in 16 years. Applications for building permits fell 1.5% to the lowest level since 1993. Meanwhile, construction of multi-family homes increased 4.4%. The builder sentiment index remained at 19 in December for a third straight month, the lowest reading in more than two decades. And now the question is, can it really get any worse? Naturally, builders are worried: after all the Real Estate speculation, those who got burned no longer have the finances or credit rating to buy a new home. As an interesting aside, a survey by Countrywide Bank showed that getting financially fit is the top New Year’s resolution this year. Physical fitness comes second - households consider sound finances more important than healthy bodies.

Al Greenspan’s version of “helicopters”

Suggesting to “drop money from helicopters” to prevent a financial crisis was what initially earned current Fed Chairman Ben Bernanke his nickname “helicopters”. However, his predecessor Alan Greenspan has just suggested and equally radical idea. He said the government should provide “direct financial assistance” to strapped homeowners, essentially depositing free money into their bank accounts. Another solution Mr. Greenspan suggested was temporarily lowering taxes. In his opinion, although this would create a “short-term fiscal problem”, it would save the economy. Hm… this sounds pretty risky, and did anyone mention moral hazard? Or have we retired the term already? And finally, the ex-Fed chairman doesn’t even know “if it would work”, but he firmly believes it will be good for the people. So much for common sense.

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.

Analyst Downgrades Lennar

Deutsche Bank Securities Inc. analyst Nishu Sood cut his rating on Lennar Corp. from “Buy” to “Hold”, citing concern over the home builder’s joint-venture agreements. Tighter credit and a glut of homes on the market have resulted in declining demand and a high rate of cancellations, which eat into home builders’ bottom lines. Sood cut his target price for Lennar stock from $36 to $17. The stock traded at $18.72 on Thursday.

Home builders and sellers, desperate to sell homes, are offering ever bigger incentives, ranging from trips and car leases to exotic pets. Sellers are willing to make deep discounts because they fear that home prices may fall further as forecast. However, the market is so bad right now that the chances to sell a home at all are really slim. And while most owners can afford to sit and wait for better times to sell their houses, home builders are suffering losses every day a new home sits empty.

Mortgage Bankers Association: Record Foreclosures In Q3

Home foreclosures hit an all-time high in the third quarter, according to a report released by the Mortgage Bankers Association. 0.78% of all mortgages nationwide were in foreclosure, up from 0.65% the previous quarter. Delinquency rates increased from 5.12% to 5.59%, the highest level in more than 20 years. 4.72% of subprime ARMs entered the foreclosure process, compared to 3.84% in the second quarter. The association’s chief economist, Doug Duncan, said that the situation is likely to get even worse, an opinion shared by analysts at Moody’s. Moody’s predicts that housing prices will drop 30% before the crisis is over. They believe the recession will last until early 2009 (!), with home prices falling 13%, maybe more if we factor in homebuilder incentives. The hardest-hit markets will see prices drop more than 30%, in the “most severe housing recession since the post-World War II Period”, according to Mark Zandi, chief economist at Moody’s Economy.com. Home sales are expected to hit bottom in early 2008, which makes me wonder what is going to spur sales – maybe buyers will finally get bored of waiting on the sidelines?

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.

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.

Consumer Spending Slowed In October

Growth in consumer spending slowed to the lowest level in 4 months in October, the Commerce Department reported Friday. Spending increased a mere 0.2%, the smallest increase since June. This is slightly below the expected increase of 0.3%. Individual incomes grew by 0.2% as well, which is the slowest pace in 6 months and slower than expected. Gross domestic product increased by 3.9% in Q3, but economists believe the current quarter will not be as robust, with growth possibly slowing to 1% annual rate.

Construction dropped 0.8%, in the 20^th consecutive month of declines for the industry and the biggest decline since July. The slowdown in the housing industry may lead to more layoffs, and even weaker consumer spending. Rising inflation is scaring off consumers and, despite a relatively strong beginning, retailers are bracing for a tough holiday season this year.

Mortgage Rates Lowest In 2 Years

Interest on 30-year fixed-rate mortgages fell to 6.10% this week, the lowest level in 2007, and the lowest since the week of October 13, 2005, said Freddie Mac. 15-year fixed-rate mortgages averaged 5.73%, down from 5.83% last week, which is the lowest since January 2006. I guess now is the perfect time to refinance a mortgage if you can find a lender, but that could be hard, unless you have a perfect credit record. 5-year adjustable-rate mortgages slid to 5.86% from 5.88% last week, not that spectacular but still lower. One-year adjustable mortgages were at 5.43%, up from 5.42% a week ago. Speaking about the housing sector, Freddie Mac’s chief economist Frank Nothaft noted that the “overall picture” looks “glum with no immediate relief in sight”. So it is indeed.

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.

Countrywide and KB Home: the worst not over yet

During a panel discussion hosted by the Milken Institute, Countrywide’s CEO Angelo Mozilo and KB Home’s President Jeffrey Mezger talked about the housing market, the Fed’s policy and surplus inventories. The worst is not over yet, according to Mozilo, and Mezger believes “things are going to stay tough for quite some time” for KB Home. Both agreed that lifting loan limits for “conforming” mortgages would help the industry, because the current limit is below median prices in many areas. Non-conforming loans that cannot be purchased by Fannie Mae and Freddie Mac come at a higher price, which further diminishes affordability and exacerbates problems in the housing sector.

So if they see more trouble ahead, how come Countrywide promised to post profit in Q4?

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.

Banks suffer amid housing woes

Japan’s largest securities company Nomura Holdings Inc. will post a pretax loss of $620 million, its first quarterly loss in four years, caused by troubled residential mortgage-backed securities. It was also announced that Nomura will cut 400 jobs in the U.S. and shut down its residential mortgage-backed securities business. According to CEO Nobuyuki Koga, “the pace of the collapse” was quicker than expected. Japanese banks Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. also reported losses on investments in securities backed by subprime mortgages.

In the U.S., Merrill Lynch and UBS expect to report substantial losses with their third-quarter results, related to home-loan investments. Citigroup revealed a 57% drop in third-quarter profit, including higher-than-expected losses of $1.56 billion on mortgage-backed securities. No wonder that no one wants to originate subprime anymore.

S & P believes housing crisis not over yet

Standard and Poor’s says losses from the housing turmoil will probably peak in 2009, with total defaults reaching $150 billion, although the global economic growth is expected to remain strong for the next two years. The U.S. economy will probably grow at a lower pace due to higher unemployment. S & P’s chief economist David Wyss also mentioned that he expects another rate cut before the end of this year and that the stock market is strong, so financial markets are probably “heading for expansion”.

This estimate, however, may be somewhat optimistic, given the uncertainty reining in financial markets right now and the strongly “bearish” forecasts of some economists. Losses at mortgage lenders are still all over the news, so the mortgage industry is not likely to rebound in the coming months. Jumbo Loan lender Thornburg Mortgage announced yesterday that third-quarter losses on loan sales would be greater than expected, which resulted in an 11% drop in its stock price. Thornburg had expected a loss of $863 million, compared to the actual number it will probably report - $1.1 billion. The estimated loss of the lender’s mortgage securities portfolio was also revised upwards, to $268 million from $262 million. The company believes that it will be able to continue to fund new loans “provided market conditions do not deteriorate further”.

Countrywide launches “PR Blitz”

Countrywide officials must have noticed all the negative publicity that emerged lately, so now they’re starting a PR campaign in hopes to improve the company’s public image. Maybe I’m being cynical, but asking your employees to wear green wristbands (why green?) saying “Protect Our House” (!) is a little desperate.

It is hard to obtain reliable information on Countrywide’s lending practices and compensation structure, but the drop in share prices, Angelo Mozilo’s shameless unloading of company stock and a number of other events that grabbed public attention in recent months are pretty obvious and straightforward indicators of problems within the company and its financial standing. Maybe some of the bad publicity is false, maybe it’s exaggerated, but there’s hardly any doubt that this PR campaign is a response to disruptions within Countrywide that can’t be fixed by saying “Don’t worry, everything’s OK”, “we won’t take it!” (the bad publicity, that is), or by wearing a wristband. Waiting for more news on this.