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.

Another Fed Rate Cut

The Fed cut its benchmark interest rate again, by 0.25% to 4.25%. The discount rate was lowered accordingly to 4.75%. Economists who had expected a half-point cut in the Fed Funds Rate were disappointed, as recent bad news was expected to prompt more aggressive action by the Federal Open Market Committee (FOMC). The Dow Industrials dropped nearly 300 points after the cut. Stocks of mortgage lenders and large banks suffered, including those of Countrywide Financial, Wells Fargo, Fannie Mae, Freddie Mac, Morgan Stanley, Merrill Lynch, Goldman Sachs and others. Shares of home builders Pulte Homes, Toll Brothers, Lennar and Beazer took a hit as well. The Fed’s statement suggested that they’re worried about the economic slowdown and lower consumer spending, while “some inflation risks remain” too. Meanwhile, holiday shopping has slowed down, and the holiday season’s start wasn’t that impressive after all. Analysts believe the Fed may cut again in January if holiday shopping data is weak and the financial markets remain in freeze mode.

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.

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”.

Better Mortgage Disclosure At WaMu

Some good news for mortgage borrowers: better disclosure and fair lending are back. Oh well, we heard about new lending guidelines earlier this year, and many lenders have tightened their standards, but here comes the latest about Washington Mutual. Its brokers will have to adhere to a new set of standards, largely focusing on better disclosure and working in the clients’ interest.

The brokers will be asked to supply evidence that they provide disclosures and ensure that borrowers fully understand the terms of the loan and the compensation they will pay the broker. This pretty much reflects consumer complaints about unexpected and unnecessary fees as well as being driven into complex loans they did not understand. We’ve also heard about mortgage papers including terms that hadn’t been discussed previously and were unfavorable to borrowers. If WaMu has found a way to control mortgage disclosure, borrowers will probably have one thing less to worry about.

WaMu Chairman and CEO Kerry Killinger said, “We believe our mortgage broker standard and direct call program should become the new industry benchmark for brokers and lenders across the nation”. They seem to believe that a lot may change for the better when these new standards go into effect on October 9th. At the very least, this announcement will probably do a lot for their public image.

The Fed cuts rates

We had some doubts, but finally the Fed did cut rates – by half a percentage point, to 4.75%. And what we have now is plenty of opinions on what’s next. According to economists, the Federal Open Market Committee (FOMC) is likely to cut rates again before the end of this year, at least by .25%. The next cut could happen as early as October, at the next Fed meeting. Analysts seem to believe that the rate cut will be only a temporary relief to mortgage lenders. For borrowers, interest rates may change little, or not at all, depending on their loan terms and the index their interest rate is pegged to.

For some, however, the new rate may bring a big improvement for their monthly payments. Bank of America, for example, reacted immediately on the news, cutting its prime lending rate. Rates on credit cards are expected to drop, too.

Investors fear that the rate cut will have a negative impact on the dollar and the bond market, potentially driving the economy into a recession. Gold and stocks rose significantly after the cut was announced.

In other news, Accredited Home Lenders and Lone Star have amended their merger agreement. The new price for Accredited stock is $11.75, well above its market value at the moment.

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.

American Home Mortgage: another troubled lender?

American Home Mortgage Investment Corp. had to write down the value of its loan and security portfolios due to “unprecedented” disruption in the credit markets, leading to margin calls from its investors. As a result, it is delaying payment of dividends on its common stock, and its preferred shares as well. Keeping cash on hand will allow American Home Mortgage to act quickly when it fully understands “the impact of market conditions on its balance sheet and liquidity”. At this point, it seems, understanding the effect of market disruptions is not as hard as deciding what to do right now and what to do if things get worse. The problem is that economists are having a hard time predicting what will happen next and what happens after that. It is hard to tell whether we’re experiencing a financial “correction” or standing on the verge of a global credit crunch unprecedented in history. So, the “wait and see” strategy no longer works, because credit problems are already affecting investments, retirement accounts and other financial instruments that affect a number of consumers that spans well beyond the circle of Wall Street professionals.

American Home Mortgage, which has little exposure to subprime lending, but worked mostly with prime and Alt-A borrowers, is yet another example of the “subprime contagion” – something corporate executives seemed to deem impossible until recently. If the lender is unable to meet the margin calls, it may have to file for bankruptcy, because it depends on short-term loans from banks to fund the mortgages it issues. It is expected to post a second-quarter loss and possibly “contained” losses for 2007. Stocks closed at $10, 47 on Friday, the lowest since April 2003.

Fannie and Freddie to tighten policies

The two GSEs announced that new lending policies will be effective as of September 13. These come as a response to a directive issued by the federal agency overseeing the mortgages giants. Fannie Mae and Freddie Mac will require that borrowers’ ability to repay loans be evaluated more carefully. Lenders will also have to improve their risk-management practices to keep pace with the increasing risk associated with the industry.

The Office of Federal Housing Enterprise Oversight (OFHEO) which regulates the two companies, called the new rules “a significant step”. Because Fannie and Freddie buy mortgages from both banks and other financial institutions that do not fall under federal regulation, the new policies will, “create market pressure for improved standards among non-banks” according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. (FDIC).

All nontraditional mortgages issued on or after September 13 will be subject to the new rules.

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.

NovaStar cutting staff

NovaStar is the next mortgage lender to reduce workforce. On Friday, March 16, it was announced that the company is planning some 350 layoffs, or 17% of its staff, in its wholesale loan origination group, including 50 employees at its Kansas City headquarters. Operation centers in California and Ohio will be affected by the cut, too.

The reductions aim to align the company to current market realities and will be implemented gradually, concluding in the second quarter of 2007. NovaStar’s loan servicing organization will not be affected by the reduction.

The lender said it will continue to focus on solid lending guidelines and lower loan origination costs. Shares rose 14.6% to $5.90.

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?

Four states ordered New Century to stop doing business

State regulators from Massachusetts, New Hampshire, New Jersey and New York have sent letters to New Century, asking the lender to stop business operations. The notices said New Century has violated state laws by failing to fund mortgages that closed and by not notifying authorities of its financial crisis. The lender said it is unable to satisfy its subsidiaries’ loan repurchase obligations and expects to receive cease-and-desist notices from other states, too. Regulators also asked New Century not to pay dividends and bonuses to its executives. Shares of New Century, which has already stopped originating new loans, dropped more than 20% to close at 67 cents on the over-the-counter Bulletin Board. What an ugly situation for New Century – and its employees, shareholders, and investors. So what, are they going to wait for all the states to ask them to stop business operations before they admit they’re finally, totally and unequivocably broke?

The mortgage lender also revealed that it has defaulted on a loan agreement with Barclays Bank PLC and is required to buy back $900 million’ worth of mortgage loans. This seems to go on forever – every two or three days New Century announces that yet another of its lenders has asked it to repay its obligations or refused to provide additional financing. They must have truly overstretched themselves.

Lenders to emphasize mortgage quality

Fremont General corp., the seventh-largest subprime mortgage lender in 2006, announced it would no longer provide the so-called “piggyback” mortgages which usually cover some 20% of a home’s cost and are added as second lien to the original mortgage. They have been widely used as a means of avoiding Private Mortgage Insurance and buying property without making a down payment. The decision was announced to mortgage brokers in an e-mail earlier this week.

If collateral is sold, lenders who provide “piggyback” mortgages receive any of the proceeds only if the property sells for more than the balance on the original mortgage. With the current market’s low demand and falling prices, they can seldom hope to regain their money. In many cases, borrowers who finance 100% of the home’s value with loans, walk away from their homes, often leaving lenders with properties that are worth less than the mortgage amount.

Lenders are tightening their standards and denying credit to borrowers with weak reports. They’re introducing stricter underwriting processes, demanding more proof of income and at least a minimal down payment. Accredited Home Owners said it will no loner provide some of the riskier types of loans and announced that incentive plans for its sales staff will from now on focus on loan quality, rather than volume.

High default levels have led to bankruptcies among lenders, who’ve had to buy back their bad loans from the financial institutions these loans are usually sold to. Accredited Home Owners has repurchased 1% of the loans it sold in 2006, up from 0.83% in 2005 and 0.64% in 2004, and hopes the repurchase activity will decline later in 2007.

Shares of various subprime lenders plunged late last week after some reports of financial loss in 2006 were issued, but many marked a slight increase on Wednesday.

What this all means is, they’re finally realizing exactly how risky those loans are, something experts have been talking about all along. When consumers with less than stellar credit are allowed to borrow 80% and more of their home’s worth without providing any proof of their income, who’s to guarantee that the loan will be repaid? Especially in a market where prices are artificially raised by speculator activity, it’s clear that those “affordable” loans can turn and bite their own originators – which they are doing now.

They kept “educating” consumers on how to borrow more without making down payments or paying PMI by using the so-called “piggyback” loans and “interest-only” mortgages and now they’ve decided the risk is too high and they can’t handle the delinquencies. I’d ask why anyone didn’t warn those people before it was too late. And what were banks thinking when they were lending their money to consumers who clearly were unable to repay these loans and preferred not to worry about it until they were forced to. It seems the money lenders earned on interest and fees on those loans wasn’t enough to cover the losses incurred by depreciation. Well, it seems that the “big players” will survive current challenges, but numerous smaller companies have already left the market.

Let’s hope that healthier lending policies will help stabilize the market, even though it’s hard to find out how exactly that’s going to happen, since housing will become even less affordable for subprime buyers, and if those 10-17% leave the market, we’ll have even lower demand, further decreasing prices and unsold new homes.

Subprime lenders worried by high default rates

Last week some serious problems in the subprime mortgage business became evident, as a number of lenders announced higher-than-expected losses. HSBC officials said the company’s US division reported rising defaults, and New Century declared its financial results for 2006 contained accounting errors and overestimated the company’s earnings. Shares of subprime lenders saw serious declines throughout the week, exacerbating the situation for mortgage companies.

The subprime sector has been especially productive recently, with lenders looking to close as many loans as possible and allowing for lower mortgage quality. As delinquency rates begin to rise, they’re likely to start tightening their standards and raising interest rates on high-risk loans. This means that many borrowers will be unable to access credit, which may lower housing sales.

An estimated 17% of home purchases are now made using subprime loans. If these consumers are left out of the housing market, the effect will certainly be felt throughout the industry, but it’s hard to quantify the impact. The overall delinquency rate was 4.7% in 2006, up from the historic low of 4.4% in 2005. Probably not all subprime borrowers will leave the market, and economists say the reduction shouldn’t be a big problem for the industry.

Experts are optimistic in their forecasts and believe that the economy will remain stable throughout 2007, and the housing market will start to improve later in the year. Freddie Mac forecasters say the economy won’t be dragged down by the slumping Real Estate industry.

Real Estate Agents Are Leaving The Real Estate Business

In November 2006 David Lereah, chief economist of the National Association of Realtors, predicted that the number of Realtors will drop by 6-8% in a year. This finally seems to be happening, as sales slow down and agents are no longer able to earn six-digit incomes as they used to do in 2004 and 2005. Sales started declining in 2005 but the number of agents kept growing until it reached the record of nearly 1.4 million in 2006. Today, too many agents are working for an industry where sales are contracting.

According to some estimations, there are 20 to 25% more agents than needed in the industry. Companies are considering reducing staff and agents themselves are turning to alternative careers. And while former agents are often happy with the job change, where they typically are able to secure a better income, so are agents who stay in the business as competition is waning.

This trend is likely to continue for quite some time now, as the industry shows further signs of decline. After a government report of lower-than-expected job growth in January was issued, interest rates on 30-year and 15-year fixed-rate mortgages dropped the week ending Thursday, February 8th. The one-year adjustable-rate mortgages dipped to 5.49% from 5.54% the week before. Interest rates decline for the first time since early December 2006.

Frank Nothaft, chief economist and vice-president at Freddie Mac, said the company expects the interest rates on 30-year mortgages to average 6.3 to 6.5% in 2007. This means essentially flat or slightly increasing rate throughout the year, which will probably lead to a decline in refinance activity.

Several smaller subprime lenders have closed down recently, including Mortgage Lenders Network USA Inc. and Wachovia Corp.’s EquiBanc Mortgage unit. New Century Financial said new loan volume is declining and reported fourth-quarter loss for 2006. Shares of HSBC, New Century Financial Corp., Countrywide Financial and Novastar dropped on Thursday, after predictions of lower mortgage activity were announced.

Countrywide Foresees a Tough 2007

Countrywide Financial, one of the US leading mortgage lenders, announced its financial results for 2006. While the overall annual results indicate a successful year, the 4th quarter performance was worse than predicted. The company Chairman Angelo Mozilo said he expects a tough 2007 “as mortgage origination volumes decline and industry capacity is rationalized”. The management is also preparing for higher delinquency levels and credit deterioration.

Nevertheless, Countrywide officials hope the company will continue to profit as smaller players leave the market or merge with larger businesses in the tough environment. The company predicts a better 2008, which should mark the beginning of an upward trend for the housing and mortgage market.

In spite of the reports, Countrywide shares went up as rumors of possible merge or acquisition by Bank of America spread late last week.

Countrywide is one of the largest residential mortgage originators in the U.S., holding a 15% market share.