Money-Rx Blog

Bankruptcy rumours for Countrywide Financial Corp., the nation's biggest mortgage lender, fanned fears of an extended collapse in the financials and housing sectors. This comes on the back of predictions for an increased chance of a recession in 2008 from Goldman Sachs. On Wednesday, Countrywide reported increased delinquencies and foreclosures, with analysts sounding warnings that in the event of a lack of capital infusion to the tune of $4 billion, Countrywide would have no option except to delcare bankruptcy. The Los Angeles Times quotes Weiss Research, which rates the condition of lenders, that the Calabasas company "is on a collision course with bankruptcy," adding that it "exhausted many of its extraordinary financing options last year and is ill-prepared for the rising mortgage defaults and home foreclosures that are widely expected this year....Countrywide is offering a 5.45% annualized yield on three-month, $10,000 certificates of deposit, the highest in the U.S. and far above the national average yield of 3%, according to Informa Research Services. On Wednesday, some customers at Countrywide Bank's Glendale branch said they were concerned and closely following the news, trying to determine whether the favorable terms offered were worth the risk."

This is the same subprime story being played out everywhere, only this one is on steroids. On the one hand, borrowers are defaulting, resulting in delinquencies and foreclosures while on the other hand, investors pull their money out of mortgage backed securities. This double whammy creates a huge credit squeeze, and bankruptcy can be avoided only by a huge infusion of capital to offset both the drop in mortgage payments and investment shortfalls.

If you look at the percentage of delinquencies (6.96 percent of loans, up from 5.02) and pending foreclosures (1.04 percent, up from o.65) under normal circumstances, it would not really warrant a bankruptcy. However, right now, it's a game of perceptions, and lack of confidence creates a real crisis, as even a small uptick in the figures triggers a bigger credit crunch.

And this fear spreads from one company in trouble to the rest of the mortgage industry, and when volumes reach a critical level, to the general economy. Understand that the worst part of the credit squeeze is over, even as foreclosure rates keep going up. This means that these companies have already lost a significant capability to attract investors, and it's hardly likely to get any worse. This is why even as recesion fears were being stoked, insiders were, and some still are, remarkably upbeat about their near-term prospects. As of now, it's just a question of fighting for time, to see if Countrywide Corp., and other lenders, can hold on until market sentiment against mortgage lenders returns back to normal levels.

Update: Wall Street Journal - Citigroup, Merrill seek more foreign capital: Merrill is expected to get $3 billion to $4 billion, much of it from a Middle Eastern government investment fund. Citi could get as much as $10 billion, likely all from foreign governments. Already, foreign governments have invested about $27 billion in Merrill, Citi, UBS AG and Morgan Stanley....Both Citi and Merrill are scrambling to nail down the details before they report earnings next week that are expected to include additional losses stemming from their exposure to mortgage-related investments. Together, these additional losses could reach as much as $25 billion....More bad news for banks could be around the corner. With the economy weakening, Citigroup and its peers are bracing for a new round of problems stemming from souring loans to consumers and businesses. Banks' profit margins are getting pinched as they increase rates to lure depositors.

This just underlines the problems that Countrywide faces. If Citi is scrambling for a new capital infusion from Singapore's GIC, that can mean only one thing - More subprime writeoffs are on their way...

Update 2: Events happening faster on the ground than I can keep up with. Jan. 10 (Bloomberg) - Bank of America Corp. is in talks to acquire Countrywide Financial Corp. A sale may salvage Bank of America's $2 billion investment last August in Calabasas, California-based Countrywide. The Charlotte, North Carolina-based bank owns preferred shares paying a 7.25 percent dividend convertible at $18 into Countrywide common stock. The shares have since fallen to $7.75 in New York trading, valuing the company at $4.48 billion...Countrywide's rising stock led competing mortgage companies higher. IndyMac Bancorp Inc., the second-biggest independent home lender, rose 23 percent and Washington Mutual Inc., the biggest U.S. savings and loan, added 15 percent. Bank of America increased 56 cents, or 1.5 percent, to $39.30.