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.

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.

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.

PIMCO’s Bill Gross expects more rate cuts

Bill Gross, the chief investment officer of the world’s largest bond fund, said the Fed “cannot afford to let homes go down by 10 to 15 percent”, so it will inevitably cut rates. Gross expects the Fed Funds rate to fall to 3.5%. He estimates the total cost “of subprimes and Alt-As and basically garbage loans” at $1 trillion. Gross has been calling on the Fed to act to save housing for months, but apparently his bailout scenario doesn’t even incorporate such economic indicators as the dollar exchange rates and inflation. He warns that $250 billion in non-prime loans are about to default and those could hurt banking giants like Merrill Lynch and Citigroup. Hey, in fact that’s already happening.

According to Gross, reducing the Fed Funds rate to 3.5% will result in 30-year fixed mortgage rates dropping to 5.0-5.5%, which will magically solve all the problems in financial markets. A simple solution, isn’t it? What’s the Fed waiting for? His monthly market commentary gives a nice analysis of the economic situation at the moment, but I don’t think a drastic rate cut is a solution. When the Fed cut rates in September, mortgage interest actually increased instead of dropping. Perhaps a drastic cut will actually lower the 30-year mortgage rates, but it may also wreak havoc in other sectors of the financial market and it will most probably result in monster inflation. Gas at $5/gallon, anyone? Blame financial innovation, not interest rates.

Subprime mortgage bonds losing value

According to Moody’s Investors Service, bonds securitized in 2007 may be the worst vintage ever, exceeding the delinquency rates of 2006 securities. Moody’s, S & P and Fitch Ratings are downgrading 2006 and 2007 subprime securities, as loan delinquencies and defaults reach record highs. We had a wave of downgrades shortly after the two Bear Stearns hedge funds collapsed, but the “party” is not over yet: a lot of this paper is still being reviewed by ratings agencies and more downgrades are on the way.

In this situation, the ones who get to win are hedge funds and investors who made bets on bad loan performance and high foreclosure rates, all the while lenders and funds that invested in subprime, or any mortgage-backed securities, suffered losses or went out of business altogether.

Mortgage Applications Decline

Mortgage applications dropped 2.8% last week, according to the Mortgage Bankers’ Association. Refinance applications increased 3.3% and the purchase index declined 8.3%. Apparently consumers are waiting for better news from the lending industry, and they’re probably disappointed with the latest interest rates. U.S. subprime problems are affecting banks worldwide, and it’s not just the hedge funds and BNP Paribas. In latest news, Switzerland’s second-largest bank, Credit Suisse Group, is cutting staff in its mortgage-backed securities unit. No units are being closed yet, but staff is reduced drastically. Subprime securities, until recently the bankers’ favorite toy, are not attractive anymore. The credit crunch and the ongoing financial turmoil have revealed mechanisms and interlinks in international finance that caught many by surprise. Economists are saying there’s more trouble ahead, but I guess many have already learned the important lessons. Perhaps the world is changing.

NovaStar makes the news

NovaStar was one of the first lenders to get hit by the subprime meltdown, but it hasn’t stopped making the headlines ever since stock prices started freefalling in February. The big news this time is that its auditor, Deloitte & Touche, warns the lender may be unable to continue operating as a going concern – i.e., it may have to close down, soon, joining the ranks of more than 100 mortgage lenders that imploded this year, no big surprise. In fact, NovaStar has done really well surviving this far.

NovaStar canceled a $101 million stock offering, because it figured that, given the current market conditions and its stock price, the offering wouldn’t be in the shareholders’ best interest. Christopher Brendler, an analyst at Stifel Nicolaus said NovaStar is “having trouble with cash flows”. Another analyst - Friedman, Billings, Ramsey‘s Scott Valentin - said NovaStar will probably have to liquidate with the proceeds “being used to pay creditors”, leaving nothing to common equity holders. The lender announced that it will be cutting 275 jobs and closing 12 retail lending offices, leaving it with a staff of 600 or so. At the end of last year, NovaStar employed more than 2,000 people. The company announced that it will be modifying its business model and focusing on managing its portfolio of securitized loans. NovaStar shares dropped 16% to $7.16 on the news.

FHA Secure – a kind of bailout plan for prime borrowers?

Late last week, President Bush unveiled a new FHA program, called FHA Secure – a plan that is supposed to help troubled borrowers. The proposal, however, received much criticism immediately, because of its narrow scope and stringent requirements for borrowers. The program will secure loans for borrowers who own adjustable-rate mortgages and want to refinance into a loan with better terms. To qualify, borrowers will have to prove they’ve made their monthly payments regularly until the interest rate reset, (or if it hasn’t reset yet, that they’re current with their payments) and have at least 3% of equity in their homes. The maximum loan amount the FHA will guarantee is $202,000, or $362,000 in high-cost states, which makes the program quite useless for many consumers. The number of loans in the program is limited, too, so the entire thing will only help a fraction of the homeowners facing foreclosure on their homes. According to analysts, up to 3 million households might lose their homes in 2007-2008 due to rising mortgage interest rates.

IndyMac hiring former American Home employees

IndyMac has hired 600 loan officers who lost their jobs when American Home Mortgage filed for Chapter 11 bankruptcy protection a few weeks ago. American Home fired 6,000 employees when its lenders refused to provide further financing after the lender failed to meet margin calls.

Such a move by a mortgage lender is quite unusual in the current circumstances, as most mortgage companies are downsizing amid shrinking credit availability and financial turmoil. According to this website, more than 100 mortgage providers have gone out of business so far this year, but the problems are not contained to subprime lending alone or even to mortgage lenders in general. According to a CNNMoney article, credit card delinquencies have risen significantly from last year. Until recently, credit card payments could be financed by tapping home equity, but now that a large percentage of all homes have virtually no equity left in them, credit card delinquencies are likely to rise further.

Subprime crisis scarier than terrorism

A survey performed by the National Association of Business Economics found that experts believe loan defaults and the ensuing financial crisis are the biggest short-term threat to the U.S. economy. Until recently, terrorism was considered the #1 threat. 32% of the participants of the survey named the subprime crisis as the biggest threat to the economy. Terrorism came at #2 with 20%. Other issues on the list included inflation, government spending and the account deficit. The cost of health care was also mentioned as a major concern.

And now that everyone admits that subprime is indeed a problem and that it is already contaminating the entire economy, we don’t really see a solution coming from any of the usual suspects. What we’re seeing is more panic, because the current situation is unprecedented, so analysts don’t know what to expect. Nothing good in any case, I guess.

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.

Mortgage availability drops drastically

As credit markets panic, lenders go out of business and hedge funds collapse, whole classes of loans seem to be evaporating. Lenders are no longer willing to fund “Jumbo” mortgages, or loans for sums above the Fannie Mae limit of $417,000, because there’s no one to sell them to. Those who still offer the product charge a fee of 7% and above – and that is for prime borrowers with good credit and a down payment of more than 5%. No-down payment and 5% down payment loans have virtually disappeared from the market, and so have no-doc, interest-only and some other super-risky loans. Subprime and Alt-A borrowers were the first to feel the squeeze; now even consumers with perfect credit are hard put to find financing at a reasonable price.

A Fed survey discovered that 56.3% of banks have tightened credit standards for loans to borrowers with weak credit. 14.3% of the participants in the survey said they had tightened lending standards to prime borrowers, too. Quite bad for anyone wishing to buy a house or refinance their mortgage. It’s only natural that we’re seeing record levels of delinquencies and foreclosure activity. Consequently, anyone wishing to escape adjusting monthly payments has no real alternative to foreclosure. I wonder home many troubled borrowers actually considered the ‘worst-case scenario’ before they signed their mortgage papers a couple of years ago. Or was it the NAR & Co.’s influence? Housing prices could only go up, right?

Accredited buyout fails, lender to sue Lone Star

In June, an investment fund called Lone Star proposed to buy Accredited Home Lenders for $15.10 per share. The stock traded at $14-15 at the time, so the price sounded reasonable. Now that shares of Accredited have plunged to well below $10, Lone Star is looking to pull out of the deal. It announced on Friday that deterioration in the market and Accredited’s “financial and operational condition” has prompted a default on the buyout agreement. The mortgage lender filed a lawsuit seeking to “hold Lone Star to its obligations”. The buyout firm then issued a statement saying it can present facts showing that Accredited has failed to satisfy contract conditions and it is looking forward to providing this information in court.

It was widely speculated that Accredited will not be able to continue operations if Loan Star doesn’t proceed with the deal, but the lender seems to believe it will remain operational regardless. According to analysts, the most likely outcome of the situation will be a renegotiation of the terms. It seems, however, that Lone Star would rather prefer to walk out of the deal altogether. This sounds like an interesting case, we’ll be looking forward to more news from Accredited.

Mortgage rates drop, BNP Paribas freezes securities funds

BNP Paribas, the biggest French investment bank, said it cannot value the assets in three of its asset-backed securities funds and is therefore temporarily suspending redemptions. The funds have lost $0.9 billion in the past three weeks, almost a third of their value in July. BNP Paribas said in a statement that, “regardless of their quality and credit rating”, it is impossible to value the assets because they don’t get any bids from investors. Approximately a third of the funds’ investments are backed by subprime paper but the panic in the U.S. credit market itself has caused much of the problem. Other funds are also losing value or being frozen by financial institutions in the current market, because the underlying assets cannot be sold at what would be considered fair prices.

Amid such problems in the financial markets, interest rates dropped this week, with the 30-year fixed home loan declining to 6.59% from 6.68% last week. The 15-year adjustable-rate mortgage averaged 6.25%, down from 6.32% a week ago. 5-year adjustable mortgages carried an interest rate of 6.33%, compared to last week’s 6.29%. 1-year ARMs were at 5.65%, up from 5.59%.

S&P to downgrade Alt-A

Standard and Poor’s said it has put 207 classes of securities backed by Alt-A mortgages on CreditWatch negative. The original total balance of the securities was $913.9 million. After the collapse of subprime lending, Alt-A loans are the next problem group which is causing significant losses to lenders and investors in mortgage-backed securities.

The situation on the mortgage market right now was aptly described as ‘panic’ in one publication, as virtually all types of non-conforming loans – from subprime to jumbo, are either no longer available or prohibitively expensive. Borrowers looking to refinance meet limited to no supply from lenders. Mortgage companies are making daily, and sometimes hourly decisions about the availability and pricing of products, making financing hard to come by.

In other news, the Fed Fund rate remains the same at 5.25%, as expected.

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.

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.

Bernanke concerned over housing

In his testimony to congress, Federal Reserve Chairman Ben Bernanke said that the subprime mortgage sector has “deteriorated significantly”, causing “increased concerns” among investors in some other types of financial instruments. It seems that top figures in the industry are finally admitting that the problems in subprime lending are a serious issue, with Freddie Mac’s CEO Richard Syron saying he doesn’t believe that housing has “hit bottom”, and that “things are going to get worse”. What we’ve seen so far may only be the beginning of a huge collapse, not the “rebound” in housing that some had hoped for.

The Fed has trimmed its forecast for growth in 2007 and 2008, but inflation forecasts remain unchanged. Unemployment is expected to rise slightly.

Amid a flood of economy-related news this week, mortgage interest rates remained mostly unchanged from last week’s readings, probably because the general outlook changed little. The 30-year fixed-rate mortgage remained close to the highs for this year at 6.73%, and the 5-year adjustable-rate mortgage averaged 6.35%, the same as a week ago. 15-year fixed-rate mortgages edged down to 6.38% from last week’s 6.39%, and one-year adjustable loans were up slightly at 5.72% from 5.71% a week ago.

“No value left” in Bear Stearns funds

Bear Stearns estimates that its two troubled hedge funds that invested in securities backed by subprime mortgages are nearly worthless today, after “unprecedented declines” in the value of underlying collateral. The smaller, “enhanced leverage” fund has “effectively no value left” in it while the older High-Grade Structured Credit Strategies Fund has lost 91% of its value. Shares of Bear Stearns dropped $2.47, or 1.8% to $137.44.

As markets watch everything that has “subprime” on it collapse, fears are spreading among consumers who don’t know exactly what their retirement savings are invested in. Now that securities backed by Alt-A loans are getting downgraded, many are beginning to realize how problems in the lending sector could affect nearly everyone. Moody’s, the rating agency which recently started downgrading the securities, says it is not being hired by issuers of commercial mortgage-backed securities. Underwriters are “rating shopping” and the agencies that get hired are the ones most likely to give higher ratings.

I can’t help but wonder if there will be a significant difference between ratings done by Moody’s and other companies. After all, ratings agencies need a good reputation so giving false ratings doesn’t make much sense. It seems that more downgrades are inevitable, so this “rating shopping” trend shouldn’t really last for long. But who knows…