Countrywide, America's Largest Mortgage Lender, May Have To File For Bankruptcy

Merrill Lynch & Co. analyst Kenneth Bruce has downgraded America’s largest mortgage lender from a “buy” to a “sell”, claiming that the company may have to file for bankruptcy. From Reuters:

“If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly then the model can break, leading to an effective insolvency,” Bruce wrote. “If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt.”

Nearer term, he said “the acceleration of margin calls and forced asset sales in the capital markets could lead to more problems for Countrywide to finance its mortgage operations.”

According to Reuters, Countrywide had been assuring investors that it would flourish after the current crunch is over.
MarketWatch says:

Now that one of Wall Street’s biggest investment banks has thrown in the towel — on the biggest mortgage player– it’s safe to say that the mortgage bubble is officially popped.

Countrywide cut by Merrill; bankruptcy raised [Reuters]
Merrill’s reversal on Countrywide is turning point [MarketWatch]
(Photo:Bloomberg)

Comments

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  1. gibsonic says:

    a bubble break, one analyst does not make


    considering by pretty much all other accounts it’s already broke.

  2. mrmysterious says:

    How will this affect all of us that have a mortgage through these guys?

  3. gibsonic says:

    @mrmysterious:

    free houses? debt forgiveness?

    we can only dream.

  4. Charybdis says:

    It probably won’t affect you much, somebody else will buy it out when the price gets low enough. You’ll just end up writing your checks to a different bank.

  5. shelby1076 says:

    Great question MrM.

    Their not going to close up shop, if it does happen they’d be seeking relief from creditors.

    Your still going to have to send them their check, though.

  6. OnceWasCool says:

    Their ads just haven’t been as good since the cute redhead. The guy that does them now uses insider catch phrases like “Re-Fi”. Although we all understand what that means, it comes across like a Slick Willy used car salesman. The redhead, besides being cute, use plain and simple phrases.

    Just my take on it anyway. :)

  7. holocron says:

    @Charybdis: Yeah, I was wondering about it too. Couldn’t you technically buy your loan at the lower price, however? Maybe even with a new loan?

    I doubt the system is set up that way. But it would be interesting.

  8. MoCo says:

    Kenneth Bruce wouldn’t say that Countrywide “might” have to file for bankruptcy unless he *knew* that they were going to file for bankruptcy. This is a case of a large company letting the bad news leak out slowly so as not to disrupt the entire bond and stock market too abruptly. You can just about count on Countrywide filing for bankruptcy within a week, and possibly even this week.

  9. JohnMc says:

    Folks you have not even seen the tip of the iceberg yet. The largest dollar volume of adjustables do not reset till late 1Q’08. Something like $150b. The resets for Feb,Mar,Apr will by double, best all the resets anticipated for ’07.

    You might see mortgage brokers on street corners selling apples for a dollar.

  10. timmus says:

    I heard most of the resets were coming in October 2007. Maybe I’m hearing a different source?

  11. Instigator says:

    Holy crapsticks! When is the MSM finally going to give the worst financial meltdown since the Wall Street crash of 1929 the attention it deserves?

  12. bluegus32 says:

    How many worthwhile people have been turned away by banks? How many lives ruined becuase of these @sshats.

    I find it deliciously ironic that they now can’t find someone to loan them the money to pay their bills.

    Hey, maybe we should call Countrywide at home every evening and threaten them and call them deadbeats.

  13. ChrisC1234 says:

    Maybe I don’t understand everything about economics and banking, but I don’t understand why this scenario can’t happen:

    Bank set to raise interest rate for customer’s ARM
    Customer says “I can’t afford any more per month… if my APR is raised, I will default”
    Bank knows it will be in financial trouble if it forcloses on another loan
    Bank decides NOT to raise interest rate on ARM
    Customer keeps house and continues making payments on time
    Bank and homeowner are both happy
    A few investors get a little cranky over not getting their promised rate of return on their investments

    Am I missing something here?

  14. kamel5547 says:

    @timmus: There’s so many loan types that are going to adjust I don’t think anyone knows what anyone is referring to wen specific periods are discussed. There’s the ‘Option’ arms that will reset based on the LTV (original not current), then theres the regular ARMs that will reset after X period (1,2,3,5 years in general) and every month thereafter. Then theres the piggyback loans that will reset even if the 1st is fixed… You could throw buy-downs in this category as well, although the shock is very predictable and the borrowers know up front what they are getting (mostly) not that that means it’ll be affordable. I think that covers all of the popular loan types?

    Personally I think the Options will be the real blood bath, not only do you go from a minimum payment to fully amortized, but your looking at a higher rate, and you are upside down in the loan. WaMu is holding more than a few of these I read, as well as a few other biggies.

    If Countrywide goes belly-up that’ll be a biggie considering they’ve survived past problems, and generally hold back more than many lenders.

  15. camas22 says:

    that headline is border-line libelous. If you’re just going to copy and paste news why not at least keep it on the topic of this blog, and leave stocks/finance news to other people even if htey are grabbing the lion’s share of headlines/hits today.

  16. kamel5547 says:

    @ChrisC1234:

    Yes. The banks sold the loans to investors, so they have no choice but to honor the contract.

  17. My ARM is set to readjust in October [it's with Countrywide].

    Last time my payments readjusted, it actually went down.

  18. ChrisC1234 says:

    @kamel5547: But wouldn’t NOT going belly up benefit everyone involved? (at least more so than going bankrupt)

  19. CumaeanSibyl says:

    @camas22: Two things.

    1) The headline is not libelous unless what Bruce said is libelous. There is not a significant difference between “it is possible for Countrywide to go bankrupt” and “Countrywide may have to file for bankruptcy.” If they want to sue for libel, they’re going to go after Bruce first.

    2) I don’t know about where you live, but around here, I’m pretty sure most mortgages are owned by consumers. If you want to complain about the fluff pieces that get posted here, that’s one thing, but this is a serious problem that’s going to affect just about everybody who does business with banks in one way or another.

  20. huadpe says:

    @ChrisC1234: The problem is severalfold, and there are a few reasons the bank can’t just change the terms. One, the payments are too low. That teaser rate was given because the fed had rates between 1-3% for ages there and banks knew they would go up. If the bank keeps letting you pay $400/month they will lose money as inflation erodes that money away ($400 in 2007 may = $390 in 2008, etc). Second problem is that the bank probably no longer owns the loan. They bundled and resold mortgages to everyone, which is how we got into this mess, because the bundlers were able to pass off the risk to someone else during the crazy-making housing boom. Third, even if they could renegotiate, essentially the question becomes whether the payments*risk on a new payment schedule is > sale price of house minus foreclosure/sale costs. The payments being made during the teaser periods would not be enough to tip that scale away from foreclosure.

  21. Chicago7 says:

    Maybe they could stop showing that stupid f-ing commercial over and over and over and over again!

  22. Ambience says:

    Hmm. All these stories are beginning to concern me a little since I’m buying a condo next month, and my financing is through Countrywide. I know of someone else who had their mortgage company fold the day of their closing, and they had to scramble to get a new loan ASAP. Hopefully I don’t have that happen as well.

    My loan person seems confident they’ll weather it out though; especially considering they just hired 1000 people (saw it in one of the articles from Google News).

  23. Ambience says:

    @CumaeanSibyl:

    It may not be libel, but I do have an issue with this quote:
    “If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency,” Merrill Lynch & Co. analyst Kenneth Bruce wrote in a note to clients Wednesday.

    It’s like a self fulfilling prophecy, like that run on the bank scene in It’s a Wonderful Life. You say that if the market loses confidence, Countrywide can go under. Then you downgrade them and raise the specter of bankruptcy, thereby making the market lose confidence.

  24. ryecob says:

    as usual, the bubble has burst and housing prices tumble…except in seattle. [sigh]

  25. shoegazer says:

    @Ambience: It’s called “taking a view”. Financial analysts like these are paid to say what everyone’s thinking, even if everyone doesn’t actually think it at the same time.

    The chicken/egg question you’ve described is a common one, and suffice to say that while most analysts would tell you their role is akin to that of a weather forecaster, the reality is that they DO sometimes bring companies (and countries – remember these are also credit rated) down.

  26. shoegazer says:

    Also, analysts (in the UK and at least one Top 5 IB I know) have become much more bearish/defensive on client notes since they were accused of pumping up stock valuations in the 90s.

  27. Greeper says:

    At the height of subprime mortgage madness Countrywide wouldn’t even give me a rate quote without gettign my SSN and a bunch of other info. It didnt make sense then, but I guess their market was, well, subprime.

  28. SkyeBlue says:

    Good, now maybe they will have to fire that creepily annoying guy that does their TV commercials!

  29. shelby1076 says:

    I just say this at Huffington:

    The nation’s largest mortgage lender borrowed $11.5 billion from a group of 40 banks to fund new loans, in a move that shows just how deep the lending crisis has become.

    Countrywide Financial Corp. said Thursday it made the move amid a credit crunch that has driven a number of its smaller peers to bankruptcy.

    “Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise,” Countrywide President and Chief Operating Officer David Sambol said in a statement.

    [www.huffingtonpost.com]

  30. Blueskylaw says:

    @ChrisC1234:
    Chris, the banks don’t actually keep the mortgages after they make the loan. The banks take short term loans to give you a mortgage, they collect fees from you and then take all those mortgage loans they made and package them into mortgage backed securities (like bonds). These securities are then sold to people like you and me while the banks keep the fees. So you see, they no longer own the mortgages and don’t care if you default or not because they made their money.

  31. pestie says:

    Does this mean they’ll stop sending me 3 or 4 refinance/equity loan offers a week? Christ, I hope so.