Refinance Free Credit

BOA to Buy Countrywide.

Predicted by almost everyone.

Now, who bails out WAMU, the next to tank? 

Share This

The Wall Street Journal reported Thursday that Bank of America is in “advanced talks” to purchase the nation’s largest lender, Countrywide Financial Corporation. The Journal cited two unnamed sources, and both BofA and Countrywide did not have comments on the report.

Bank of America invested $2 billion in the troubled lender in August 2007, a purchase which conferred BofA first right of refusal in any sale of Countrywide — a clause that had many pegging a Countrywide/BofA merger.

Bank of America recently completed a $21 billion acquisition of LaSalle Bank in September, however, which could pose a regulatory hurdle in any Countrywide acquisition. From the Journal:

When the Federal Reserve approved Bank of America’s acquisition of LaSalle in September, the combined bank grew to hold 9.88% of the country’s deposits. Federal law prohibits a bank holding company from controlling more than 10% of U.S. deposits after acquiring another bank.

But the law includes a caveat: The 10% limit doesn’t apply to federally chartered thrifts, meaning a bank-holding company may control more than 10% of deposits in the U.S. following a thrift acquisition. Since a Countrywide subsidiary called Countrywide Bank is a federally insured thrift, that may give Bank of America room to maneuver around the deposit cap.

Is it possible that Countrywide’s move to adopt a thrift charter and move its business under the umbrella of Countrywide Bank — as it has been doing since the latter part of last year — was orchestrated to allow just such a deal?

Perhaps. Much more likely, however, the catalyst behind acquisition talks is the fact that Countrywide’s stock price has tanked in the past few days on rumors of a possible ratings downgrade and/or bankruptcy filing.

Continued turmoil in the mortgage industry, combined with swiftly increasing defaults and a frozen secondary market for many of the loans it holds, have dogged Countrywide ever since BofA took the plunge and invested — which may make any acquisition a sort of shotgun-style wedding. After all, I doubt BofA’s investors would be very pleased to see the bank sit idly by while its $2 billion stake in the nation’s largest lender evaporates, even if absorbing Countrywide will cause some modicum of pain for a bank that had so carefully avoided getting caught up in the subprime hype to begin with.

If anything, that’s the real undercurrent of irony at play here. Bank of America has the deep pockets it will take to ride out the current market storm, but it also took some pretty painful steps in the past to avoid the subprime/exotic mortgage bonanza when it was hot — costing it market share at the time.

For all of its maneuvering, BofA now finds itself at the altar with the company that, along with now-defunct New Century and Ameriquest, essentially helped define the subprime lending boom.

Which could mean that BofA will have managed to avoid the profits of the subprime lending boom, while nonetheless being forced to pick up at least some the tab.

How’s that for ironic?

Disclosure: When this post was published, the author held no positions in CFC or BAC.

From MarketWatch:

Bank of America Corp. is in advanced talks to buy Countrywide Financial Corp. The Wall Street Journal reported Thursday on its Web site, citing people familiar with the situation. The newspaper said it is not clear how quickly a deal might be struck but if it happens, it is likely to close very soon. However, it also noted that talks could fall apart altogether. Shares of Countrywide Financial surged 7.42% to $5.50 a share.

Stay tuned…

Update 1:15 PM PST: 

From MarketWatch:

Bank of America is in advanced talks to acquire Countrywide Financial, possibly stepping in to save the struggling mortgage lender, the Wall Street Journal reported on Thursday, citing unidentified people familiar with the matter.

It isn’t clear how quickly a deal might be struck, but two people familiar with the matter said it could occur very soon, the newspaper said. It’s also possible that an agreement could be delayed or fall apart altogether, it added.

The New York Stock Exchange asked Countrywide to comment publicly on Thursday, but the company declined.

Share This

Moody’s Investors Service said late Wednesday that it had placed Freddie Mac’s Bank Financial Strength Rating (BFSR) on review for a possible downgrade (subscription req’d), citing a concern that the GSE may experience higher credit losses than previously expected.

Freddie currently has a BFSR of ‘A-,’ Moody’s second highest rating for the category.

Moody’s Bank Financial Strength Rating measures the likelihood that a financial institution will require financial assistance from third parties, such as the government or shareholders.

In its review, Moody’s said it will focus on Freddie Mac’s asset quality and the potential that the company may experience an elevated level of credit charges over the near to medium term. Credit stress is most likely to occur in the company’s guarantee portfolio, the rating agency said.

Moody’s will also evaluate the level of loan loss provisioning as well as mark-to-market charges that Freddie Mac is exposed to, and how this would affect the company’s capital levels and earnings profile.

Other key ratings — Freddie Mac’s Aaa senior debt, Prime-1 short-term, Aa2 subordinated debt, and Aa3 preferred stock ratings — were affirmed by Moody’s with a stable outlook. Nonetheless, even the spectre of a ratings downgrade at one of the GSEs should give market participants pause — as well as underscore how difficult industry conditions really are.

Freddie’s shares were down nearly 3 percent in early trading on the New York Stock Exchange, when this post was published.

Disclosure: When this post was published, the author held no positions in FRE.

The earnings report from Grand Rapids, Mich.-based Mercantile Bank Corp. on Wednesday should serve as a shot across the bow in terms of what may be expected from most financial institutions with significant mortgage exposure.

Mercantile, one of the first banks to report fourth quarter earnings, said that net income fell a jaw-dropping 98 percent to $0.1 million, versus $4.6 million in the year-ago period. 2007 earnings registered just $9.0 million as a result, a decline of 55 percent from $19.8 million in 2006.

Forcing the drop in earnings were what the bank called “signs of weakness” is its loan portfolio, over 70 percent of which is supported by real estate. Provision for loan and lease losses was $11.1 million for 2007, Mercantile said, up $5.3 million from the $5.8 million reported for 2006.

Nonperforming assets increased to $35.7 million by the end of the fourth quarter, up dramatically from $9.6 million one year earlier. Chairman and CEO Michael Price noted that NPAs accounted for $14.9 million of the bank’s $150 million residential construction portfolio, and $20.8 million of its $1.5 billion commercial loan portfolio.

“Our residential real estate market continues to deteriorate, with lower sales prices and a growing inventory of houses,” said Price. “Real estate problems, especially in a depressed economy such as in Michigan, are not easily or quickly resolved,” he said, although he noted that Mercantile is “moving forward” despite what he characterized as an uncertain market for 2008.

Disclosure: When this post was published, the author held no positions in MBWM.

Update: For those of you pooh-poohing Mercantile’s results because they’re in Michigan, you might want to consider the bomb dropped by West Coast Bancorp yesterday: $30 million in a loan loss provision to cover expected losses in its $263 million ‘two-step’ residential contruction loan portfolio, and a quarterly loss. West Coast operates in Oregon and Washington, worlds apart from the housing market in Michigan and Ohio.

Let’s make it official: the scratch-and-dent business is dead — for now. Between collossal losses at both C-BASS and Franklin Credit, it’s become clear turning non-performing loans into re-performing loans isn’t nearly the cakewalk it was a few years back.

A warning from Huntington Bancshares on Thursday morning shows just how far the pain has reached, with the Columbus, Ohio-based bank holding company saying that it expected to report a 2007 fourth quarter loss of $239 million, or $0.65 per common share. The lion’s share of the expected loss came from none other than Frankin Credit, who last week said it had entered into a debt restructuring agreement.

Not surprisingly, that restructuring agreement will hit Huntington’s books in a big way, with the company saying it would take a pre-tax charge of $424 million related to its exposure to Franklin Credit Management Corporation. $406 million of that amount represents loan loss provisions, meaning that Huntington isn’t expecting much in the way of recouping its prior funding here.

Commercial loans a problem, too
Getting beyond the shadow of Franklin Credit, it’s worth noting that Huntington is in line with the newest mortgage-related earnings trend: commercial real estate losses. The bank holding company said it had hiked loan loss reserves outside of Franklin Credit by $64 million, primarliy to cover what it called a “continued weakness in the commercial real estate markets in eastern Michigan and northern Ohio.”

Huntington also said it is seeing some net interest margin compression, registering 3.26 percent in net interest margin for the fourth quarter, down from 3.52 percent in the 2007 third quarter. Some of that drop was due to competition for deposits, the company said.

For more information, visit http://www.huntington.com.

Disclosure: When this post was published, the author held no positions in HBAN.

Capital One Financial said today that mortgage-related charges will push the largest independent credit card issuer in the U.S. below its original earnings outlook.

The company said it expects to report fourth quarter earnings of $0.60 per share and full year earnings of $3.97 per share — a drop of nearly 20 percent from earlier guidance of $5.00 per share.

Costs associated with the shutdown of GreenPoint Mortgage, announced by the company in August, were a primary reason for the drop. The shuttered mortgage operation provided a drag of $0.25 per share during the fourth quarter; for the full year, exposure to Green point is expected to provide a drag on earnings to the tune of $2.58 per share, Capital One said.

But Greenpoint isn’t the only problem facing Capital One — a general slowdown in all consumer credit categories led the company to hike its provision for loan losses by $1.9 billion in the fourth quarter. Capital One said that “the allowance build refects fourth quarter delinquencies in the company’s national consumer lending business” as well as a $700 million mark-to-market loss in GreenPoint-originated HELOCs held for investment.

Disclosure: When this post was published, the author held no positions in COF.

(sung to John Lennon’s “Imagine”)

Imagine there’s no Countrywide
It’s easy if you try
No subprime loans below us
Above us only fixed rates
Imagine all the former mortgage brokers
Living for the huge rebates

Imagine there’s no wholesale lenders
It isn’t hard to do
Nothing to fund your rebates
And no overages too
Imagine all the mortgage brokers
Paying for their leased Beamer

You may say that I’m a dreamer
But I’m not the only one
I hope someday you’ll join Wall Street
As Countrywide’s stock price falls below one

Imagine no stock sales for Angelo Mozillo
I wonder if you can
No need for greed or pride
After the CFC stocks’ wild ride
Imagine all the borrowers
Making their minimum monthly payments

You may say that I’m a dreamer
But I’m not the only one
I hope someday you’ll join Wall Street
As Countrywide’s stock price falls below one

Okay, on a serious note… I happened to pull up my stock charts to see what Wall Street feels about the mortgage lending/real estate business in 2008. I’m talking about the big publicly traded mortgage lenders, investment banks, mortgage insurance companies, title companies, home builders, etc.

It’s not a pretty sight. Most all the players involved in real estate took a serious hit to their stock prices over the past twelve months.

Let’s start with the GSE’s stock price and the decline from their 52-week high:
Fannie Mae (FNM) $32.71, down 54% from the 52 week high
Freddie Mac (FRE) $27.14, down 60% from the 52 week high

Most of the investment banks took a hit:
Bear Stearns (BSC) $74.82, down 57% from the 52 week high
Goldman Sachs (GS) $191.75, down 24% from the 52 week high
Lehman Brothers (LEH) $54.99, down 36% from the 52 week high
Merrill Lynch (MER) $50.48, down 49% from the 52 week high
Morgan Stanley (MS) $47.73, down 48% from the 52 week high
UBS Paine Webber (UBS) $44.54, down 33% from the 52 week high

Now on to the big money center banks:
Bank of America (BAC) $38.74, down 28% from the 52 week high
Citicorp (C) $27.49, down 51% from the 52 week high
JP Morgan/Chase (JPM) $40.26, down 24% from the 52 week high
Washington Mutual (WM) $12.34, down 73% from the 52 week high
Wells Fargo (WFC) $27.04, down 29% from the 52 week high

The large publicly traded mortgage banks:
American Home Mortgage/ABC (AHM) $0 – already filed bankruptcy
Countrywide Financial (CFC) $5.12, down 89% from the 52 week high
IndyMac Bank (IMB) $4.70, down 89% from the 52 week high
Ocwen Financial(OCN) $4.37, down 74% from the 52 week high
PHH Mortgage (PHH) $16.41, down 48% from the 52 week high

Thornburg Mortgage (TMA) $8.78, down 69% from the 52 week high
The regional banks and mortgage banks:
FirstFed Financial of Santa Monica (FED) $33.80, down 52% from the 52 week high
Flagstar Bancorp (FBC) $5.74, down 62% from the 52 week high
Downey Savings & Loan (DSL) $25.63, down 66% from the 52 week high

How about the mortgage insurance companies?
MGIC Investments (MTG) $15.95, down 77% from the 52 week high
PMI Group (PMI) $8.48, down 62% from the 52 week high

Even the title insurance companies were not immune:
Fidelity National Financial (FNF) $13.08, down 54% from the 52 week high
First American Corp. (FAF) $28.10, down 49% from the 52 week high

And let’s not forget the major home builders:
Beazer Homes (BZH) $4.99, down 89% from the 52 week high
Centex (CTX) $19.23, down 65% from the 52 week high
DR Horton (DHI) $10.53, down 66% from the 52 week high

Hovnanian Enterprises (HOV) $4.80, down 87% from the 52 week high
KB Homes (KBH) $16.97, down 70% from the 52 week high
Lennar Corp. (LEN) $13.86, down 75% from the 52 week high
Pulte Homes (PHM) $8.78, down 75% from the 52 week high
The Ryland Group (RYL) $21.89, down 64% from the 52 week high
Standard Pacific (SPF) $2.63, down 91% from the 52 week high
Toll Brothers (TOL) $16.51, down 54% from the 52 week high

What am I trying to say? Nothing. I’m just reporting the facts. Wall Street does not like a whole lot of anything to do with real estate or real estate finance right now.

In 2008 it’s not gonna be just the mom and pop lenders and Realtors that will be suffering. It’s quite possible that some of the major publicly traded names listed above will not be with us in 2009.

Go back to just 18 months ago. How many of us would have ever thought that Countrywide was teetering on the edge? The way Countrywide Financial is burning through cash, it makes one wonder – what would life be like without Countrywide?

Most mortgage brokers I know live and die by Countrywide. I’d recommend you start thinking about new wholesale sources. If they’re available.

Bank of America has already discontinued wholesale lending.
Rumor is Wells Fargo is not far behind. Where does that put WaMu, Citi and Chase?

The problem is that 1099 mortgage brokers originated loans go bad about 4-6 times more than W-2 retail employee originated loans.

Mortgage brokers have no “skin in the game”. It’s all about the origination commissions. What happens after the loan is funded is not their concern. This has to change.

Countrywide is not the problem. The problem is that anyone can become a mortgage broker with zero education, zero training, zero experience, zero oversight and most importantly – no future records of any past misdeeds. All you need is to pass the California Real Estate Salesperson exam. Period.

At least with Wall Street there is the SEC, NASDAQ, NYSE, and corporate oversight in the mode of a “U-5”. It’s your personal record of everywhere you’ve worked on Wall Street and if you ever committed any boo-boos. We don’t have anything like this in the mortgage industry – yet.

Besides increased educational requirements, I see the mortgage industry heading the way of Wall Street with surety bonds, errors & omissions (E&O) insurance, higher balance sheet capital requirements, and the biggie – “buybacks”.

I predict that in the very near future if a mortgage broker originates any fraudulent loans (including appraisals) they will have to purchase them back at PAR.

Wanna take a gander at what the insurance costs will be for a mortgage broker if they are on the hook for a fraudulent loan originated by any of their employees (this includes processors, underwriters, originators and management)?

My other predictions for 2008 are lower LTVs. 100% financing will only be available to full doc borrowers with low ratios, high FICOs and 2 months PITI cash reserves.

HELOCs are heading towards lower CLTVs. The days of 100% HELOCs will be long gone. 90% CLTV is the new 100% CLTV.

Down payments will be making a comeback. A 10% down payment might become industry standard for the next two years.

No income doc loans will only be available at a max 75% LTV and with minimum 680 FICOs. Lenders will want to verify your down payment.

Second home and investor loans will have much lower LTV and tighter underwriting.

And this is just the tip of the iceberg of changes to come.

Watch your daily emails for more of these type changes in the first and second quarters of 2008.

Share This

Via FT Alphaville, sourced to Citigroup:

This is much more than just a “buyers’ strike”, or a matter of hoping/waiting for buyers’ risk appetites to return. In reality many of the key buyers have blown up and others will no longer participate now they know what the risks are.

Countrywide made sure to let all of its business partner know today that everything was A-OK with the beleaguered lender with an email earlier today. Here it is in its entirety:

Dear Business Partner:

Yesterday, rumors circulated about Countrywide’s financial condition that caused concern among our Business Partners and employees. While our policy is that we typically do not comment on rumors, yesterday’s unique circumstances led to Countrywide issuing the below statement that I wanted to share with you right away:

“There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the Company.”

In addition, the Company will host a live management discussion of the results for the 2007 fourth quarter and full year on Tuesday, January 29, at 12:00 p.m. (EST).

On behalf of the entire Countrywide^®, America’s Wholesale Lender^® team, I want to extend our appreciation for your ongoing support during these challenging market conditions. As always, thank you for your business.

Todd A. Dal Porto
Senior Managing Director and President
Countrywide, America’s Wholesale Lender

But let’s make a wild assumption that the company is not OK. What does a Countrywide implosion mean to the mortgage community? Let’s take a look at some numbers and make some basic guesses. Please note that I am not a corporate bankruptcy attorney and do not know how or if any of these things would transpire in a Countrywide bankruptcy; I am simply looking at some of the ripple effects of such a shutdown.

Ripple through the mortgage industry?

In their 2006 annual report (PDF, pg. 28) Countrywide reported $178 billion in closed-loan purchases through their Correspondent Lending channel. Their description of that channel from their annual report is:

Our Correspondent Lending Channel (“CLD”) purchases mortgage loans from other lenders, which include mortgage bankers, commercial banks, savings and loan associations, home builders and credit unions. As of December 31, 2006, this Channel had correspondent relationships with approximately 2,100 lenders, who are subject to initial and ongoing credit evaluation and monitoring. CLD operates in all 50 states.

For 2006, Countrywide was ranked by Inside Mortgage Finance as the largest correspondent lender, in terms of volume, among residential correspondent mortgage lenders nationwide.

If we assume for a moment that a Countrywide bankruptcy would put a temporary freeze on loan fundings through their channels such as Wholesale and Correspondent Lending that would mean at least 2,100 mortgage banking institutions would lose access to their funding capacity for an indeterminate period of time. I would assume that the freeze would be until a reorganization was approved in one form or another. Who knows how long that would be?

We’re not talking mortgage brokers - we’re talking banks

I’m not talking about wholesale mortgage broker loans being put on hold - I’m talking about very large institutions that rely on lines of credit from Countrywide suddenly being without all (or a large chunk) of their ability to fund loans. To understand how mortgage banking works see my overview on warehouse lending.

These banks come in all shapes and sizes and have lines of credit from a few million to much larger amounts. If over 2,100 “banking” institutions have their financing disrupted this could be a major lock-up in the mortgage system. Millions of home loans would be impacted until the effects of the bankruptcy were clear.

Even if there is no freeze fundings could be impacted

Even if a bankruptcy doesn’t technically freeze the access to credit that those 2,100 institutions have it could still severely gum up the works. Banks that have Countrywide lines of credit may be extremely reluctant to fund loans with that credit. The reason is that the funding bank doesn’t want to get stuck with the loan should Countrywide stop buying loans or have any material change in their loan purchasing guidelines or timeliness. Cautious banks may choose to delay funding or look to switch the loans to other facilities (if they have them).

These delays could have substantial impact on purchase transactions in particular.

We haven’t even begun to talk about brokers

Obviously this huge gum-up would trickle down to the broker originations as wholesale lending through either Countrywide directly or through another bank relying on Countrywide funds as part of its wholesale funding strategy would evaporate or suddenly fall in to limbo. The wholesale channel is huge.

The meteor that killed the dinasours

If Countrywide goes thousands of lending institutions and broker will immediately face reduced funding capabilities. In this instance the brokers will actually be in better shape than the banks; as brokers who have multiple funding options can move their loans to banks whose funding is not in question. The biggest losers will be the regional and medium-sized banks who rely on Countrywide as their primary source of financing for loan originations. They will either be in limbo or without funding capacity until they can establish additional credit lines through other large lenders (if they can).

Countrywide is a huge pillar in the lending pyramid. If they go down expect chaos in the funding world until funding, credit and other concerns are addressed. Until there is certainty about funding capacity thousands of banks and brokers will be in limbo - and worse, the customers who are anticipating funding may have to wait to see if their loans will be closed and funded.

Share This