Bank of America invests in Countrywide

It was announced Wednesday that BofA has invested $2bln in Countrywide preferred stock, which can be converted into common stock at $18 per share. Shares of Countrywide traded at above $25 in after-hour trading, an increase of some 20% on the news. Rumors of a possible acquisition/merger with BofA have been circulating for a whil, but until now none had come to materialize. According to the lender’s CEO Angelo Mozilo, “Bank of America’s investment in Countrywide represents a vote of confidence and strengthens our balance sheet, enabling us to position Countrywide for future growth and success”. For some reason, this sounds like a sigh of relief to me.

Kenneth D. Lewis, BofA’s Chairman and CEO, said that “the stock market has been underestimating the value of Countrywide’s operations and assets” – an interesting thought amid all the turmoil, revaluations and downgrades anything mortgage-related has seen. He also added that “The investment … recognizes the importance of the company in providing home financing across the country”, so would I be right to assume that BofA is making a very risky investment just to bail out Countrywide? I’m probably wrong of course …

Foreclosures climb higher in July

A report by online service RealtyTrac shows that foreclosures increased 9% from June, a 93% jump from July 2006. While RealtyTrac data may be overstating results somewhat, it still represents the current trend well. RealtyTrac increased its forecast for foreclosure activity this year: now it predicts a 60% jump from 2006 levels as opposed to its earlier estimate of 33%. The number of foreclosures expected is about 2 million, while Moody’s Economy.com predicts 2.5 million defaults in 2007.

5 states – California, Florida, Michigan, Ohio and Georgia – accounted for more than 50% of all foreclosures, while Nevada had the highest rate of foreclosures with one filing for every 199 households, more than 3 times the average nationwide rate of 1 filing for 693 households. 7 states, including Utah, Oklahoma, New Mexico and Rhode Island, actually reported year-over-year declines in foreclosure activity.

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.

Fed shows concern over housing

Apparently, inflation is no longer the Fed’s primary concern. On Friday, the Federal Reserve cut its discount rate by half a point. This is not a Fed Fund rate cut as yet, but still some easing of the Fed’s policy. The discount rate is charged for temporary loans to banks, so lowering the rates means more money for mortgage issuers.

Analysts believe that this move will be met with little enthusiasm, and even if it helps improve the sector somewhat, it will not be effective in the long term, but will rather postpone bigger problems in the industry. According to some, this move is designed to bail out troubled mortgage lender Countrywide, as rumors of a possible bankruptcy filing started spreading last week. Right now, it is widely believed that the Fed’s next meeting in September will bring a rate cut, despite the central bank’s reluctance to put the economy at risk of higher inflation due to cheaper credit.

Friday’s move shows that the Fed is taking seriously the turmoil in financial markets, a problem that received little comment until recently. Any actions in between meetings are very uncommon for the Fed, but policy makers must have changed their minds quickly after they took their decision to hold rates steady the last time they met.

Housing starts lowest in 10 years in July

When the housing starts report came out yesterday, no one was surprised that housing starts dropped last month. It is only natural that in a market like the one we’re seeing today builders are unwilling to begin work on new projects. What was surprising is how much they actually declined. Starts dropped 6.1% to an annual rate of 1.381 million, from 1.47 million in June. That is 20.9% below July 2006 levels and lower than the 1.4 million forecast. Permits dropped 2.8% to an annual rate of 1.373, the lowest since late 1996. Builder sentiment is at the lowest level in years, and for good reason: inventories aren’t moving, despite significant price cuts. Although many would like to buy a house, it’s getting harder to find financing and there’s fear that further price declines may drain all equity out of a home.

Mortgage interest rates increased somewhat this week, but they’re still below the highest readings for this year. 30-year mortgages carried an interest of 6.62%, up from 6.59% a week ago. 15-year fixed-rate mortgages were at 6.30, compared to last week’s 6.25. 5-year adjustable mortgages averaged 6.35%, up from 6.33%, and interest on 1-year ARMs was at 5.67%, a little higher than a week ago, when it averaged 5.65%

Home sales dropped in 2Q

The National Association of Realtors (also known as the infamous NAR) reported that existing home sales fell 10.8% in the second quarter of 2007. Homes sold at an annualized rate of 5.91 million, down from last year’s 6.63 million. The median home price dropped 1.5% to $223,800. However, amid all the news, NAR officials saw reasons for confidence: median prices are going up in 97 metro areas, as compared to 83 in the first quarter. Lawrence Yun, senior economist for the NAR, said that “Recent mortgage disruptions will hold back sales temporarily, but the fundamental momentum clearly suggests stabilizing price trends”. He also didn’t fail to mention that “Although home prices are relatively flat, more metro areas are showing price gains with general improvement since bottoming-out in the fourth quarter of 2006”. So the market bottomed out in 4Q after all? Let’s hope he’s right. I thought we’d all seen evidence to the contrary.

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?