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.

BofA Might Acquire Countrywide After All

Countrywide stock surged more than 50% on rumors Bank of America may be acquiring the lender. We’ve heard this before, but right now there’s talk that the two companies are “in advanced talks”, although there’s still some possibility that the deal will fall through. Neither company has officially commented on the rumors.

Back in August, Bank of America bought $2 billion’ worth of Countrywide shares, an investment which has by now lost a significant part of its value. Before the stock rally, Countrywide was valued below $3 billion, which makes it an attractive target for BofA. By buying Countrywide, the leading U.S. lender, BofA can expand its client base. The bank currently holds 9.88% of the country’s deposits, just below the 10% federal limit. However, this limit does not apply to federally chartered thrifts, and Countrywide happens to be one, which means that Bank of America could use the loophole and circumvent the growth limitation. Countrywide’s loan portfolio could pose a problem, however, because it contains a lot of “toxic” mortgages which are fast losing value. There is a lot of speculation surrounding the deal. Some say it was encouraged by Washington, the primary reason being that Countrywide, contrary to its own allegations, is indeed close to bankruptcy. It is believed that authorities wouldn’t let Countrywide fail, because, due to its sheer volume, the lender could put the economy at risk.

Conforming Loan Limit Unchanged In 2008

The conforming loan limit, currently $417,000, will remain unchanged in 2008, announced OFHEO director James B. Lockhart. OFHEO is the entity that regulates Fannie Mae and Freddie Mac, the government-chartered guarantors of home mortgages. Any loans above the $417,000 limit are considered “jumbo” and cannot be guaranteed by Fannie Mae and Freddie Mac, so lenders usually charge higher interest on them. This limit only applies to one-unit properties; multiple-unit properties have higher limits. Alaska, Hawaii, Guam and the U.S. Virgin Islands have higher upper limits than other states. The maximum conforming loan limit is determined by analyzing October-to-October change in the average house price, which has declined more than 3% this year. The maximum limit hasn’t changed for the last 2 years, and it probably won’t get revised upwards anytime soon. The latest NAR report says the inventory of single-family homes on the market is at the highest level in 22 years (10.8 months’ supply), which can only drive home prices down.

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.

Regulators won’t lift investment limits for GSEs

Last week, Fannie Mae requested permission to increase its investment portfolio in order to help spur the slumping mortgage market. It is currently subject to a limitation of 727.2 billion on its portfolio. The Office of Federal Housing Enterprise Oversight, or OFHEO, said on Friday it will not lift the investment caps on Fannie Mae and Freddie Mac. President Bush said that allowing Fannie Mae to purchase more loans was out of the question for the moment. However, “requests for an increase in the portfolio caps” will be kept “under active consideration”, according to a statement by the OFHEO. Freddie Mac’s spokesman expressed disagreement with the OFHEO’s decision.

To prop up the financial system, the Fed injected $38 billion into the market on Friday in the biggest move since the 9/11 terrorist attacks. Similar moves were made by other central banks last week, including those of Germany, Australia and Japan. Consequences of the turmoil in the U.S. financial system are turning up in unexpected places, as a consequence of the interrelations of various investment instruments traded all over the world.

Mortgage cost disclosures “confuse” borrowers

A Federal Trade Commission survey found that current mortgage cost disclosures are unclear and confusing to most consumers. More than 80% of the borrowers surveyed could not identify the upfront costs associated with a loan. Four out of five borrowers could not understand why the APR (annual percentage rate) was different from the stated interest rate on the loan, and more than 60% of the participants did not notice that their terms included a pre-payment penalty. More than 20% of those surveyed could not identify the total amount of settlement costs.

Researchers also found that many borrowers could not properly understand their mortgage disclosures, and were not fully aware of the costs associated with their loans. Many were not aware of restrictions, such as prepayment penalties, included in their own loan terms. FTC researchers concluded that disclosure forms were to blame and developed a simplified disclosure form which clearly specified the type of loan, any restrictions, and loan charges, as well as the APR, monthly payments and other information.

When consumers were shown this new form, they were able to understand loan terms much better and give correct answers to questions about their mortgages. This study is likely to trigger a change in mortgage disclosure forms, which will help consumers make better financial decisions and avoid risky loans.

Wells Fargo Correspondent Alternative Lending closed

We’re all used to small and medium-sized “sub-prime” lenders going out of business, because there’ve been so many sales, acquisitions and “crises” lately. Although Wells Fargo works on a much larger scale than most loan providers, it seems that the subprime “meltdown” has affected them too.

Wells Fargo’s non-prime lending division will no longer be accepting new registrations or locks, effective Friday, June 29 at 5 p.m. The company named “volatile times” for the mortgage industry and “slowing housing appreciation” as the reasons for their business difficulties. The lender’s clients will be contacted by Wells Fargo representatives to discuss options. Loans registered but not received by 5 p.m. on Friday will not be accepted, but loans currently in the pipeline will be processed by Wells’ Baton Rouge Team.

More trouble for New Century

After disclosing accounting errors on Wednesday, February 7th, New Century Financial Corporation lost nearly half its market value, as its shares dropped from a little more than $29 on Wednesday to $16.61 two days later. The company announced that it would have to restate its financial results for the first three quarters of 2006. The results had not accounted for loans returned by New Century’s investors and for their depreciation, due to the higher risk they present.

Like many lenders, New Century sells its loans to banks, to be packed into mortgage-backed bonds. The investors can send the loans back if a borrower is delinquent on his/her payments. In 2006, the company failed to account for the increasing number of payment defaults and the depreciation of returned loans. It announced that a 20% decrease in loan production is expected in 2007, in contrast to its earlier predictions of flat growth.

Since New Century shocked its investors with the news of its bad financial situation, a number of law firms filed shareholder securities class action lawsuits on behalf of investors who purchased the company’s shares between April/May 2006 and February 2007. These complaints allege that the company issued misleading statements regarding its business activity and overstated its earnings. One of the law firms will be appointed by court to prosecute the securities fraud action on behalf of the shareholders.

Rates Remain Unchanged For The 5th Time

The Federal Open Market Committee, also known as the Fed, decided to maintain the Fed Funds Rate on the meeting which took place Jan. 30-31st. The housing market has shown signs of stabilization and the rate remains the same at 5.25%. The next Fed meeting is scheduled for March 21st.

The decision to keep the rate unchanged comes as no surprise to many, but mixed reports arriving throughout January have raised some doubts among analysts. After several consecutive rate hikes, the rate hasn’t changed since August 2006. Rates are expected to remain stable throughout 2007 and a cut is not improbable later this year.

This news comes together with reports that refinance and purchase mortgage applications have increased during the week ending January 26. The Mortgage Bankers Association has released last week’s Market Composite Index, which compares mortgage loan application activity from week to week. The news causes economists to assume that the housing market has at last reached the bottom and is now beginning to stabilize. The situation is favorable for buyers, as long-term interest rates remain low and sellers decrease prices and offer free improvements in order to get rid of the unsold inventory that’s accumulated lately.

The Fed Funds Rate is the rate at which banks lend to each other and it directly influences credit card interest rates, home equity lines of credit and adjustable-rate mortgages, because their interest rates are often tied to the index itself or its derivatives.

Prosper.com - A website that matches lenders with borrowers

A new website called prosper.com promises to match borrowers with lenders who are willing to lend to them. Prosper.com has already brokered over $30 million dollars in loans through it websites, and they only went live in February.

If your worried about getting your money back after lending it to a person you have never met or don't know from a hole in the wall, Chris Larsen, the founder and ceo, states that they have certain measures in place to prevent false identities and let lenders choose the safest borrower. The site rates borrowers by their credit score and debt-to-income ratio and claims to properly screen each for an authentic identity and credit record.

While this seems like a great idea, I myself would be hesitant about lending my money to anyone I didn't know and would surely want to start very small to test the site and the borrowers. It's a novel idea but one that I believe will take more features and protection from prosper.com to make it mainstream. For starters, the ability to trade a loan, better lender protection, and even better id theft would be a great start.