Countrywide Financial is the nation's largest mortgage. How large?, They made one out of every five loans in the first half of this year, and are responsible for collecting 14% of the nation's monthly mortgage payments.
Today Countrywide took an action that signals that their financial situation is very rapidly deteriorating:
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 is a desperate move that signals a deepening crisis, one that could cripple the mortgage industry and, by extension, damage the larger U.S. economy..."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-ratings 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 of Countrywide filing 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, or 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 the money it gets 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."
And lest you think its just Countrywide:
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 will 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 plans to streamline its mortgage unit, cutting 240 jobs.
And lest you somehow think the effects of this might somehow remain isolated, there's this:
Construction of new homes fell in July to the lowest level in 10 1/2 years, and analysts said there is no end in sight to the deepening housing slump.
The Commerce Department reported Thursday that construction of new homes and apartments dropped by 6.1 percent in July from the June pace to an annual rate of 1.38 million units.That was down 20.9 percent from the pace of activity a year ago and represented the slowest construction pace since January 1997.
"As bad as July's numbers were, they are bound to get worse in the next one to three months because of the turmoil in financial markets today," said Patrick Newport, chief U.S. economist for Global Insight. "A mortgage is getting harder to get, especially for those who cannot qualify for prime loans."
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