Thursday, August 9, 2007

Countrywide Financial Reports Major Disruptions

UPDATE: I corrected the "14%" mistake. Thanks to everyone who caught that error. When news comes this fast, it's hard to keep everything straight.

From the WSJ:

Countrywide Financial Corp. faces "unprecedented disruptions" in debt and mortgage-finance markets that could hurt earnings and the company's financial condition, the Calabasas, Calif., lender said in a regulatory filing. (Read the SEC filing)


Payments were at least 30 days late on about 20% of "nonprime" mortgages serviced by Countrywide as of June 30, up from 14% a year earlier.


On prime home equity loans, the delinquency rate was 3.7%, up from 1.5% a year before. For all loans, the rate was 5%, up from 3.9%.

In a sign of the growing difficulty in selling loans, Countrywide said that it transferred $1 billion of nonprime mortgages from its "held for sale" category to "held for investment" in the first half. Countrywide marked the value of those loans down to $800 million. It also decided to retain as investments, rather than sell, $700 million of prime home equity loans, marking them down to $600 million. Countrywide has said many of those home equity loans were second-lien mortgages used by people who put little or no money down in buying a house.


Countrywide is the largest home lender in terms of loan volume. If they can't et a deal done -- no one can.

Countrywide couldn't sell $1 billion of loans at a decent price. They cut the value
of these loans by 20% when they transferred those loans to their investment portfolio.

Countrywide couldn't sell $700 billion of prime loans, and devalued those by 14%.

That means the going price on both of these investments is probably lower than the devaluation on the balance sheet. Subprime loans are going for less than 80% of face value and prime loans are going for less than 86% of face value.

Simply put -- liquidity just isn't there in the market right now. And the crunch is getting worse because Countrywide couldn't sell prime loans.