Countrywide Bankruptcy Likely? Not While the Feds Are Bailing Them Out

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

I’m a Countrywide watcher. It’s size and reach in mortgage loan origination is worthy of any mortgage originator’s respect and admiration. I had a lot of confidence in Countrywide as it marched to becoming America’s largest originator of home loans. I liked ’em so much that I had a piece of the joint, in my IRA, until April 1, 2007.

It was no April Fool’s Day joke when I announced that they were in trouble because of the Pay Option ARM product. For the Series 7 types, I went from long to cash within 24 hours of writing that post, then short ( not in my IRA) 24 hours later. I was nervously wondering when Wall Street would catch on to the problems and decimate the stock; I felt it would be worth less than ten bucks a share. Alas, I chickened out and closed the short position to raise cash during the liquidity crunch of 2007; I figured that profit would pay my daughter’s tuition when the market slowed.

Wall Street still thinks Countrywide is a twenty dollar stock, even as it trades below nine bucks a share. Are they being fooled, like the Enron debacle, or do they know something that we don’t? While Wall Street fiddles the Mozilo tune, pundits think CFC could file any day now. I don’t think a Countrywide bankruptcy is likely. I thought it made sense for the Feds to bail out Countrywide; two days later they opened the discount window.

How are the Feds bailing out Countrywide today?

1- Certainly, as Countrywide has moved it’s fundings to its federally-chartered bank, any Fed market activity benefits them.

2- I said that they way out of the mess was for Countrywide to originate new loans in less risky programs. CFC has rolled out a major reverse mortgage program and is compensating brokers to refer those loans to them. While some people believe its actions violate the spirit of HUD laws, there are no HUD guidelines specifically forbidding this practice. Reverse mortgages are three times as profitable as conforming loans and carry little or no risk to the originator because of the HUD guarantee.

3- Finally, aggressive use of the FHA and VA loans are being practiced by Countrywide underwriters. The word in the mortgage brokerage community is that CFC is the place to go if you have a dubious guvvie file. We hear that CFC underwriters are primarily focused on the ability to repay the loan as opposed to a demonstrated ability to repay the loans. That’s lender talk for “if the guy has jacked up credit but can afford the payments, send it to CFC”. The word on the street is that CFC is approving those loans. Guvvie loans are twice as profitable as conforming loans and carry no risk to the originator.

We can dissect this any way we want; this is essentially a federal subsidy to bailout Countrywide Financial. It is not a direct bailout but an “accommodation” of sorts. The Fed loans them money cheap, guarantees their risky loan underwriting, and steers them to more profitable business by looking the other way…for now.

I can say that I blame them. Mozilo is the “little mortgage broker who could”. He built his firm into a powerhouse by pushing the edge of the envelope these past thirty years; I don’t expect him to lay down and play dead now. I think they originate their way out of this mess with implied government assistance. I think we’ll eventually see a merger with B of A, sometime next year, and that merger will happen in the $14-$18 range. That makes CFC a bargain at nine bucks a share, right?

Not for me- I’m just too damned chicken!

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