Defaults Rise at Mortgage Lender

Foreclosures Surge, Countrywide Says

Countrywide Financial, the nation's largest home loan lender, reported yesterday that foreclosures and late payments on mortgages in December soared to their highest levels in five years.

The large number of the bad loans alarmed mortgage analysts who follow the company. Several said the Countrywide report showed that housing market conditions were unraveling at an unexpectedly rapid pace.

Lehman Brothers analyst Bruce W. Harting wrote in a report yesterday that "the extent of the deterioration is a surprise." Steven Persky, chief executive of Dalton Investments, a Los Angeles investment adviser, said: "People are recognizing that foreclosures are skyrocketing beyond expectations."

The turmoil in the housing market is prompting more talk of a recession by some of Wall Street's biggest names. Goldman Sachs, the world's largest brokerage, wrote in a note to investors yesterday that it is expecting a recession this year and advised them to buy defensive investments, such as consumer staples and utilities. Investors were cautioned against buying the stocks of financial firms that are exposed to the mortgage crisis and have declined drastically.

Shares of large mortgage lenders dropped yesterday, with Washington Mutual falling 3.5 percent and IndyMac declining 16.5 percent. Countrywide hit a 13-year low at midday before recovering to close down 6 percent. On Tuesday, Countrywide shares plummeted 28.4 percent and prompted a broader sell-off in the stock markets as analysts worried about the lender's long-term survival.

Countrywide, with a $1.5 trillion portfolio of loans, is so large that its failure may cause a crisis on Wall Street, which over the past few years has tied its fate to the mortgage industry by buying so many of the mortgage-backed securities these lenders produce, said Stuart Plesser, an equity analyst at Standard & Poor's.

The housing market would suffer as well, he added. "There are major implications if Countrywide fails," Plesser said. "A customer's ability get a mortgage would be significantly impaired."

In yesterday's monthly operating report, Countrywide said that among the 9 million mortgages for which it processes payments, the foreclosure rate doubled in December, to 1.44 percent from 0.7 percent a year earlier. Defaults rose to 7.2 percent from 4.6 percent in the same period.

Foreclosures and rising defaults, which occur when homeowners are more than 30 days late on monthly payments, deal a double blow to Countrywide: The firm suffers losses on the loans themselves, and its mortgage securities, which are backed by its loans, drop in value and become difficult to sell.

Without a robust mortgage-backed security business, the firm would face a severe cash shortage. Company officials have admitted that they face a challenging environment but have repeatedly said they are not considering a bankruptcy filing.

Some analysts doubt such statements. Egan Jones, a ratings company, wrote in a report Tuesday that Countrywide is "severely challenged and might falter if it does not receive an infusion of at least $4 billion within the next couple of weeks."

To this point, Countrywide has heavily relied on the Federal Home Loan Bank in Atlanta, which has loaned $51.1 billion to the troubled mortgage company. But Countrywide appears to lack the collateral to borrow more from that bank.

Some analysts say Countrywide may be too big to fail. "The government would have to pick up a big tab if Countrywide failed," said Plesser, the equity analyst at Standard & Poor's. "So it would seem to me it's in the government interests to step in before the mess, before it failed rather than later."

A major problem for Countrywide, based in Calabasas, Calif., is that housing prices continue to decline around the country, with some areas experiencing double-digit drops in value. House-price declines are the driving force behind defaults and foreclosures because homeowners are more likely to stop their monthly payments on properties that are worth less than what they paid for them.

The worst may be ahead for home prices. Treasury Secretary Henry M. Paulson Jr. said yesterday that the housing market has not bottomed out. "There's no evidence that is improving or bottoming, and as a matter of fact, I think the evidence would indicate that it is going to have further to run," Paulson said on CNBC.

Countrywide's president and chief operating officer, David Sambol, said the firm is headed in the right direction despite such challenges.

The lender had a slight increase in the number of mortgages it sold in December compared with the previous month, and deposits jumped to $113 billion in December from $83 billion in the previous year at the bank Countrywide owns, which is insured by the Federal Deposit Insurance Corp.

"Our fourth quarter ended with a number of positive operational trends," Sambol said in a statement. "Management is pleased with the progress we have made in positioning the company to navigate the current challenging environment."