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.

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.

Freddie Mac to return to regular reporting

Freddie Mac will resume making regular quarterly reports this Thursday, June 14. The mortgage giant has only stated annual results since 2002, when it was involved in an accounting scandal. In 2003, the company said it had overestimated earnings for 2000 through 2002 by approx. $5 billion.

Analysts expect Freddie Mac to report first-quarter earnings of a little more than $1 a share, down from $2.80 a year ago. The financial results will be released before the opening bell on Thursday, and a conference call will be held at 10:00 a.m. The call will be webcast live on the company’s website, http://www.freddiemac.com.

In April, Freddie Mac announced it will purchase $20 billion in subprime loans and is currently developing new mortgage products designed for subprime borrowers. Legislation for stricter oversight of the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, is currently being developed.

Accredited acquired by private equity fund

Accredited Home Lenders Holding Co. will be sold to Lone Star Fund V PL for $400 million. The fund will buy all of Accredited’s shares for $15.10 a piece, 10% higher than the stock’s price on Friday, June 1^st. On Monday, Accredited’s stock traded for $15.12.

The offer will probably close in the third quarter of this year, which will mark the end of companies specializing solely in subprime lending as a field of business. Accredited is one of the last lenders operating exclusively in the subprime sector. NovaStar
Financial is looking for a buyer, too, and Delta Financial will probably remain in business because it did not originate adjustable-rate subprime loans.

Accredited has been “exploring strategic options” for a while now, as troubles in the subprime sector undermined its financial standing. It reduced its workforce of 4,200 by 1,300 in the first quarter, as delinquencies on its loans spiked. It had to sell most of its inventory at a substantial discount in order to raise cash, and received a $230 million term loan from Farallon Capital Management LLC. It also managed to renew an existing $600 million credit line, thus somewhat improving its situation. It was threatened by delisting from the Nasdaq Stock Exchange because it failed to file its annual report for 2006 on time, due to the resignation of its auditor, Grant Thornton LLP.

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.

Shares of subprime lenders tumble

On Wednesday, February 21^st, a number of subprime lenders saw their shares tumble in response to news of financial instability at NovaStar, the 19^th largest subprime lender. NovaStar stocks dropped 39% since the news came out, to reach $10.68, as shares of New Century Financial declined 7% to $17.45 and those of Countrywide Financial went down 2.4% to $40.66.

Stocks of nearly all subprime mortgage lenders have been falling sharply during the past few months, as a response to deteriorating market conditions, but they are not the only sign of trouble in subprime lending. Approximately 1 out of 10 sub-prime mortgages has defaulted by the end of 2006, and banks are forcing mortgage companies to repurchase the bad loans. Since a large percentage of mortgages originated in 2006 are either “stated income” (which means that borrowers don’t have to provide proof of their income) or “interest-only” (where borrowers can pay the interest alone for a certain initial period), the risk of delinquencies is incredibly high and investors are pulling their funds out of the subprime mortgage market.

Now that lenders are tightening their underwriting standards, origination numbers are slowing down, but so are loan purchases by banks. HSBC announced it would have to spend more than expected on loan repurchase, New Century reported 4^th quarter loss and said it would have to restate its income for the previous 3 quarters due to accounting mistakes, Accredited and NovaStar posted loss in the 4^th quarter as well. Countrywide is stronger financially but high numbers of delinquencies will affect its stability too.

This is yet another installment in the wave of bad news that flooded the subprime market since the end of 2006. As lenders adhere to higher standards, loan origination volumes drop but loan quality increases. Loan providers predicted a tough 2007, but for some it proved tougher than expected. Several dozen smaller lenders have closed down or been sold recently in the challenging market environment. LoanCity closed seven branches, leaving 5 still operating, due to a “softer market”. Wells Fargo is cutting 250 jobs at its Fort Mill, S.C., offices, because lower origination volumes are expected due to tightening of policies.

The current situation is a challenge for subprime lenders, but it will eventually lead to improvements in the industry sector altogether. As the housing market shrinks, so does the demand for mortgage loans and some companies find themselves with little or no work to do. By the end of the year, we’ll probably see stricter mortgage standards and fewer lenders still operating in the new market realities.

A Better Outlook for "New Century"

Chris Brendler, an analyst with Stifel Nicolaus upgraded New Century from “Sell” to “Hold”, saying the company still has enough cash to handle its current tough situation. He called liquidity concerns, which led to last week’s 43% drop in stock prices, “premature”. Before last week’s disaster, Stiefel Nicolaus’ opinion of New Century was quite negative, which means they foresaw trouble ahead.

According to Brendler, New Century has $360 million in cash and $17 billion in borrowing arrangements, 50% of which aren’t utilized and it seems that the company will be able to manage. It is still unclear how badly the adjustments to mortgage value will affect New Century, but analysts believe it will be able to wriggle out of its financial fix.

New Century shares rose 2.9% to $17.70 in pre-market activity, as other subprime lenders’ stocks climbed an average of 0.5%. These include Countrywide Financial, IndyMac Bancorp and Novastar Financial.

Nevertheless, the outlook for subprime mortgage lenders remains challenging, as delinquency rates on high-risk loans rise.