Why Countrywide is Done

First of all, the rumor about Buffett buying Countrywide turned out to be wrong, as usual.

Second, the Bank of America investment produced a huge pop that instantly faded once people realized what a desperate move it represented for Countrywide.

An article in today's New York Times: Inside the Countrywide Lending Spree.

Countrywide has a huge presence in California: 46 percent of the loans it holds on its books were made there, and 28 percent of the loans it services are there.

But Countrywide documents show that it, too, was a lax lender. For example, it wasn’t until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home’s appraised value and required no documentation of a borrower’s income.

As recently as July 27, Countrywide’s product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade. As long as the loan represented no more than 70 percent of the underlying property’s value, Countrywide would lend to a borrower even if the person had a credit score as low as 500. (The top score is 850.)

You can bet that any loans like this are underwater and the borrower is going to default. If you read the "If Only I Waited" posts from Bubble Markets Inventory Tracking, you can see that a 30% equity cushion based on the 2005 price of a California house is now no cushion at all.

That is why default rates and recovery rates are inversely correlated. Countrywide has so much Real Estate Owned that they will have to accept terrible prices to get rid of it.

The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.

...Countrywide was willing to underwrite loans that left little disposable income for borrowers’ food, clothing and other living expenses. A different manual states that loans could be written for borrowers even if, in a family of four, they had just $1,000 in disposable income after paying their mortgage bill. A loan to a single borrower could be made even if the person had just $550 left each month to live on, the manual said.

The bullish argument on Countrywide goes: Countrywide is so big that they will be the only lender left standing and will gain huge market share.

Mortgage lending is a commodity business. Lenders don't have valuable brands. They attract business by offering a competitive rate (the prime model) and/or by not asking borrowers very many questions (the Alt-A model).

In fact, many people hate Countrywide. And the NY Times article suggests that their business model was to abuse their customers.

When Congress holds hearings about the housing collapse, which they will but only well after the horse is out of the barn, they will be looking for companies to pillory.

If Countrywide is still around, it will be a perfect target.

Update: I just saw something that makes me much more confident in my Countrywide short and put options position. The manager of Second Curve Capital, appears to be a Countrywide sympathizer. That article is a straw-man argument that knocks down the least damning elements from the New York Times article.

Second Curve gets fawned over for its "branch hunts" where the hedge fund staffers go around to bank branches to examine their customer service. Good idea, except that if you ignore what the bank is investing its deposits in, you make mistakes. After all, Second Curve owned New Century stock.

Tom Brown quote:

"Given the level of investor panic surrounding the subprime borrower lately, I'm feeling very greedy regarding subprime lenders these days, and am especially greedy over subprime-mortgage lenders," Brown wrote on Feb. 27. "This is one of those times in investing, I believe, when it will pay to be very, very aggressive."

Comments

[Paul Meisel:]

I find it difficult to believe, that after several years of conversations and consideration, that Ken Lewis and BoA are so stupid that they bought into a company that won't recover. Certainly BoA has top notch M&A and business development people and a better understanding of both credit markets and financial balance sheets than almost any outside investor.

That Countrywide was in difficulty was undoubtable -- but with BoA taking a big stake, their eventual recovery to at least reasonable health is highly likely, and complete failure highly unlikely.

2007 Aug 29 11:15 AM

[xmanalyzer:]

Many seem to believe that the government would not allow countrywide to go bankrupt because it is the largest lender. They are wrong. A government has a stake in trying to bail out banks, in order to avoid a run on banks. Countrywide, on the other hand, is merely a lender. Let me correct that: a usurous lender. If it goes out of business, customers will get loans elsewhere. In addition, the public is served by eliminating such institution with damaging consumer practises as illustrated by NYT article. As for their banking side, theat can be easily absorbed on an independent basis into another institution.

If cfc is not allowed to go into bankruptcy soon, then we are in real trouble. Why? Because countrywide will risk most of its bank's side deposits for its questionable loans. That will simply feed on itself, creating even more problems.

Someone needs to step in immediately to examine countrywide, and shut it down, before they burn more of their banking customers' deposits in order to shore up a faulted lending side...

2007 Aug 30 06:01 AM

[User 106732:]

I hate countrywide. I hate angelo mozilo. That is all.

2007 Sep 12 04:30 PM

[User 106732:]

I hate countrywide. I hate angelo mozilo. That is all.

2007 Sep 12 04:30 PM

[gridflash:]

Well, BOA didn't buy into Countrywide without a plan, and the includes BK. Countrywide has a large distribution channel that BOA could use for it's growing inventory of foreclosures. That $2B buys them a seat at the BK table to negotiate for control of that infrastructure.

2007 Sep 13 05:02 PM