By Dina ElBoghdady
Washington Post Staff Writer
Friday, August 17, 2007
Countrywide Financial announced yesterday that it is using an entire $11.5 billion line of credit to ease its way through a severe global credit crunch, an ominous sign of how difficult it has become for the nation's largest mortgage lender to borrow money to fund its loans.
The credit line, 70 percent of which Countrywide has four or more years to repay, comes from a syndicate of the world's 40 largest banks. Many analysts said tapping into this money was a desperate move that signaled a deepening crisis, one that could cripple the mortgage industry and, by extension, damage the U.S. economy.
Countrywide's morning announcement rattled the already volatile financial markets and hurt the lender's stock, which has lost about half its value since mid-July. Countrywide shares closed at $18.95 yesterday on the New York Stock Exchange, down 11 percent.
"What's spooked the market is the fact that these kinds of credit lines are something nobody expects will be drawn upon," said Christopher Wolfe, a managing director at the credit-rating agency Fitch Ratings. "They're kind of like an insurance policy that you never really use."
The announcement came one day after a Merrill Lynch report raised the possibility that Countrywide could file for bankruptcy. Speculation about the company's chances of survival continued yesterday, with a report from Friedman, Billings, Ramsey Group commenting that the California lender's demise would be "ugly, but it can happen" if the liquidity crunch drags on for another three months.
Many say such an event would be catastrophic given Countrywide's size. In the first half of this year, Countrywide funded 17.4 percent of loans in this country, nearly one in five, said Guy Cecala, publisher of the trade publication Inside Mortgage Finance. It serviced, or collected payments from borrowers on, 14 percent of all outstanding mortgages.
"My view is they are too big to fail," Cecala said. "They are the public face of the U.S. mortgage market. The potential collapse of someone like Countrywide would be devastating to the economy."
Countrywide's success has come from its ability to grant mortgages, quickly sell them to investors, and then use that money to fund more mortgages. But it has become so large that it relies heavily on short-term loans from banks, institutional investors and other entities to run its operations as well as fund its mortgage purchases.
Those short-term loans have dried up in recent weeks, which is why the company is in financial distress and in need of the credit line it is now using. The credit line is a more expensive method of borrowing than the short-term loans.
Yesterday, Fitch, Moody's and Standard & Poor's lowered Countrywide's credit rating, which will make it even more difficult for the lender to borrow.
"The traditional funding avenue is shut off," said Brian Horey, a partner at Aurelian Partners, a private investment firm in New York. "Countrywide can't fund themselves as they normally do."
The funding problems continue to affect other companies with a stake in mortgages. First Magnus Financial, one of the largest privately held U.S. mortgage companies, stopped making loans yesterday. National City, an Ohio bank, said it would merge its home-equity business with its mortgage business because it has cut back on equity lending. An undisclosed number of people will lose their jobs. Bear Stearns said it planned to streamline its mortgage unit, cutting 240 jobs.
All these cuts mean borrowers have fewer options for home loans.
To regain its footing, Countrywide plans to further shrink its mix of mortgage offerings. It is eliminating or curtailing loans that have fallen out of favor with investors -- namely the ones that cannot be sold to Fannie Mae or Freddie Mac, the largest investors in U.S. mortgages.
Those government-chartered enterprises generally don't buy loans made to subprime borrowers, loans that exceed $417,000 or loans that require no down payment or no verification of income.
In a statement yesterday, David Sambol, Countrywide's president and chief operating officer, said he expected 90 percent of the loans that his company originates would conform to Fannie Mae and Freddie Mac standards.
Many analysts say that's a dramatic shift from the days of the housing boom, when non-conforming loans were wildly popular. But Countrywide has been tilting in the new direction over the past year. Now, it sells about 70 percent of its loans to Fannie Mae and Freddie Mac, one analyst said.
The company also said that to shore up its position, it plans to transfer its mortgage production from Countrywide Home Loans, its non-bank mortgage subsidiary, to another subsidiary called Country Bank FSB.
Countrywide Home Loans originates mortgages through brokers and other outlets and collects money from borrowers, said Vincent Arscott, an analyst and director at Fitch. Country Bank, created in 2001, gathers deposits and makes loans, just like any other traditional bank.
To the extent possible, Countrywide could use the deposits at the bank to fund its loans. The deposits are a more stable and reliable source of money, Arscott said.
In yesterday's statement, Sambol said he thought these moves would help the company survive turbulent times. "With these changes, we believe we are well-positioned to leverage opportunities presented by a consolidating industry," he said.