Ever since the now infamous Merrill analyst Countrywide downgrade and the accompanying bankruptcy comment, the news media and bloggers throughout the nation have been going nuts.
At this point, it’s almost impossible not to read or hear a report about the nation’s largest mortgage lender, though I’ve noticed that no one seems to be dissecting the situation, just spreading bankruptcy fears and pondering the idea of not having to pay their mortgage.
Even if Countrywide were to go bankrupt (which they won’t), the company would continue to operate under bankruptcy protection and mortgage payments would be due as usual.
So a quick stroll around the web and I’ve found articles titled, “Will Countrywide Survive”, “Could Countrywide Go Under?” and “Is Countrywide Facing Bankruptcy?”.
Let’s take a look at the recent developments at Countrywide, since there are so many:
Countrywide CEO Sold 40M Shares in 2007.
Countrywide borrowed $11.5 billion from a group of 40 banks to fund loans.
Countrywide downgraded by a Merrill analyst from “buy” to “sell” on potential bankruptcy fears.
Countrywide shares sunk to $18.95 (below their 52-week low) after falling as low as $15 a share in trading Thursday.
Countrywide faced with multiple class-action lawsuits.
The S&P cut credit ratings on Countrywide Financial by one notch to A/A-2.
Fitch Ratings has downgraded Countrywide’s long-term Issuer Default Rating (IDR) to ‘BBB+’ from ‘A’.
Moody’s analysts said in a conference call that Countrywide had liquidity to last through the end of 2008.
Countrywide ran full-page ads in newspapers on Monday to reassure customers that deposits in Countrywide Bank are federally insured up to the $100,000 limit.
Jim Cramer said not to sell Countrywide stock, but not to buy it either. Thanks Jim.
So what does all this Countrywide news means anyways?
Well one thing I’d like to point out is that Countrywide originates and services mortgage loans.
What this means is that they find loans, fund them, and also hold on to them to collect interest.
The major difference between Countrywide and the many wholesale banks and lenders that have already met their demise is that Countrywide has multiple streams of revenue, and can hold onto loans as opposed to selling them on the secondary market.
That’s a huge benefit, and it allows Countrywide to navigate through these tough times more effectively than a wholesale lender who only makes money when loans are sold on the secondary market.
And that’s why the wholesale guys are going down, because nobody on the secondary market wants to buy loans unless they’re government-backed, forcing many of these companies to shut down.
Countrywide is also considered a thrift, so it can borrow from the Federal Reserve and Federal Home Loan Bank, giving it a huge advantage over wholesale lenders.
That’s why Countrywide will likely survive while others shut their doors, though as I mentioned before, look for the company to shut its correspondent lending division and the wholesale unit.
In closing, yes, Countrywide is in trouble, and yes they needed to borrow money to fund loans, and that’s why the CEO sold so many shares, but to say they may go bankrupt is stretching it.
See my previous post on the Countrywide bankruptcy fears.
Updated 9/5/07: Huge Countrywide layoffs reported.