Countrywide and WaMu Spread Liquidity Fears

August 10, 2007 No Comments »

Two of the largest U.S. mortgage lenders came forward today, saying difficult market conditions would likely hurt operations in the near term.

Both Countrywide and Washington Mutual cited the issue of liquidity, noting that the secondary mortgage market had become increasingly negative and difficult for the two lenders to sell off loans.

The impact could be quite severe, with Countrywide saying it faces “unprecedented disruptions” in the secondary market and that it could dent earnings and put the company under intense pressure in the near term.

Countrywide noted that it had “adequate” near-term funding liquidity, a choice expression investors didn’t find endearing as the stock tumbled roughly 8.5%.

Though Countrywide has been careful not to speculate, there is a good chance the liquidity issues could force the company to shut down certain aspects of their lending business.

These may include the wholesale and correspondent lines, which though extremely successful for many years, may be forced shut so the company can stay afloat and focus on the retail end.

And if Countrywide does shut down their wholesale division, massive mortgage layoffs and market fallout will likely follow.

Similar moves were already seen when Wells Fargo wholesale subprime shut down and Wachovia halted their Alt-A correspondent lending through brokers and smaller lenders.

Washington Mutual said liquidity for mortgage-backed securities had “diminished significantly” and that if it continues (why wouldn’t it) the company would be “adversely affected.”

WaMu said it had been “impacted” by the secondary market woes, but that it is “well-capitalized and its capital position is diversified.”

Those choice words sent shares of Washington Mutual down about 3.5% in midday trading.

Regardless of what these two large lenders are saying now, look for them to exit certain aspects of their lending business until conditions in the secondary market improve significantly.

This morning, the central bank moved to add a whopping $38 billion in temporary reserves to ease liquidity worries, a day after injecting $24 billion.

Updated: Huge Countrywide layoffs reported.

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