Is Countrywide Financial the Next Enron? 11 comments
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Some of you might have caught me on the new Fox Business Network Friday morning. Among other things, I was discussing the state of Countrywide Financial (CFC). I wanted to alert investors to this looming financial threat hanging over our credit markets. There was a lot more I wanted to say about it, but I didn’t have the time to get into all of the gory details.
Countrywide Financial, for those of you who don’t know, is THE 800-lb. gorilla in the mortgage lending space. These guys have made billions off the backs of mortgage payers all across America. The pitch was simple: offer artificially low adjustable rate mortgages, give a mortgage to anyone with a heartbeat, and watch the profits roll in.
And you know what? It worked!
Because every time the mortgage payment adjusted higher, Countrywide would come back to the borrower and say, "Hey, no problem. Let's refinance!" And that’s exactly what millions and millions of Americans did.
But guess what happened?
The bottom fell out of the real estate market, and many peoples' homes are now worth less than what they owe on them. If your house appraises for less than what you owe, you know what? You ain’t refinancing. And that’s exactly where we are right now. Millions of Americans are stuck with accelerating mortgage payments that they can’t borrow their way out of.
Before you judge these people too harshly, take a look around. These people are your friends, neighbors and family members. These aren’t ne'er-do-wells looking for a free ride. Most borrowers were financially uninformed regular people just looking for a shot at home ownership.
Is it a crime to be financially uninformed? No, it's not, but it should be a crime to take advantage of uninformed investors, and that’s what Countrywide did to the people who bought these crazy, exotic mortgages.
If you throw a drowning man a life raft, do you think he’s going to care about how much it costs? Of course not! His life is priceless, and that’s how people feel about their homes. Most people will go to any length to protect the roof over their heads, and Countrywide knows this.
Like any good loan shark/predatory lender, Countrywide knows that if you push too hard, the mark just won’t pay, and that's bad for business. So they recently came out with a “Home Preservation Program.” I think it should be called “Profit Preservation Program.” Maybe I’m being too harsh. Let’s examine this altruistic, humanitarian gesture so generously offered by Countrywide:
To date, approximately 6% of Countrywide’s 1.45 trillion dollars' worth of loans are loans categorized as in arrears; SO FAR.
But let’s face it. We’ve been around the block, we’ve been through the corporate lies of 1999-2003, and you and I know that number could be much, much bigger than 6%. We’d have to be idiots to believe that these guys aren’t playing around with the numbers to hide their true financial picture.
But let’s take the 6% at face value. That means about 87 billion dollars' worth of loans are on the verge of default. We are talking close to a half a million mortgages. That’s 500,000 Americans and their families who are in danger of becoming homeless. So what is Countrywide proposing?
The company is launching an outbound call campaign to restructure 16 billion dollars' worth of loans.
Sixteen billion out of eighty-seven billion. Are you kidding me?
To add insult to injury, the majority of the restructuring (ten billion dollars' worth) is only occurring in mortgages that have yet to reset their interest rates. These are people who already have a strong history of paying their mortgages on time. I think it’s great that they are rewarding those borrowers who pay on time, but how’s that supposed to help people who are already behind?
Another four billion of loans are being restructured for those borrowers who are unable to refinance and have an upcoming rate reset. This is great news to these borrowers, no question about it, but it isn’t enough.
The last two billion in restructurings are going to those borrowers who have already defaulted, but it only affects 10,000 borrowers.
All in all, Countrywide’s efforts will impact only 88,000 mortgages. What are the other 400,000 people supposed to do?
Suck it up?
Conclusion
This “Home Preservation” push is nothing more than fodder for the newspapers and media outlets. It gets Congress off their back for now, but compared to their entire loan portfolio of $1.4 trillion, $16 billion is a drop in the ocean.
That’s the hype, here’s the reality:
Countrywide could be in serious, serious financial trouble. The books say they have $100 billion in capital, but an asset is only worth as much as you can sell it for. To whom will they sell their mortgage bonds? There aren’t any buyers left.
What percentage of that hundred billion is in mortgage paper, and what
percentage is in government securities? I wish I could tell you. If
you call them, maybe they will answer your questions, because investor
relations refused to answer mine. Instead, they referred me to a
series of voice mails, and when I finally did get someone on the phone,
they couldn’t answer my questions but promised they would get back to
me. (
It’s a very scary sign when a company engages in misdirection and obfuscation. Avoid this company at all costs. There is a second leg lower coming in the real estate market, and you don’t want to be caught up under it.
Disclosure: none
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This article has 11 comments:
What happened to the millions of shares CFC bought back this year? Do you think they're part of the $100 billion in capital? At what price? Any writeoffs here?
yourfilled@yahoo.com
author : Tricks of the Active Trader
However, I am less sanguine about your positioning borrowers as innocents. Most borrowers know a good loan from a bad loan, and it they don't they know financial lingo, the do know a) "there is no such thing as a free lunch", and b) "if it's too good to be true, it probably isn't true", etc.
My take is that the vast, vast majority of borrowers were complicit in taking low payment options to acquire real estate at any cost lest they should not participate in the huge appreciation fueled by low cost payments in tandem with both cheap and easy money.
Regardless as to whether we agree or disagree, about borrower complicity or innocence, there is plenty of blame to go around. In addition to borrower greed, there are lenders and mortgage brokers who offered the products, Realators who profited from them, regulators who ignored them, and investment bankers, hedge funds and credit reporting agencies who pushed them.
At the end of the day, I think the old axiom, if you want to dance you have to pay the fiddler, is appropriate, and borrowers will be, and should be, paying along with lenders, mortgage brokers, Realtors, and all those the Wall Street schmoes.
Forget it.
Marks on their paper? Who has any clue? Certainly not I. Anyone care to bet how much is "marked to myth"?
And buying back your own stock - with debt - when you know the market is going to shit is one of the most outrageous things I've seen a firm do. Of course it supported the price so Mozillo could unload HIS shares.
How about all the bagholders stuck with theirs?
These guys are a potential zero candidate.
What they're proposing is even MORE of what doesn't work. Their incessant calls piss off more borrowers than they bring into the fold. The bottom line is that the borrowers don't trust the lenders, and why should they?
If you call the servicer, you enter a special kind of hell where you're on hold for an eternity, and the same questions yield different answers, depending on who answers your calls.
CW has a special "hotline" for non-profits to call when handling a case. Funny, you have to "press 1 to continue to hold." This prompt is given about every 60 seconds, and if you miss a prompt, you're routed to a voice mail prompt, where they promise to return your call within 2 hours- and they don't.
You guys think this looks like a mess from the outside? You should see what goes on inside.
I've been saying for years that if investors knew how their money was "managed," they'd pull out of mortgages immediately. Any sense of fiduciary duty on the servicers' part is completely out the window. They can't even handle a FAX! Countless times, I've sent in faxes (to CW and all the other "brand names"), and "it's not in our system," or one rep can find it and three others can't. You get a warm transfer from someone who just had a conversation that required a third party authorization, and the next person claims "you're not authorized on this loan."
The interesting thing is that the "average" loss on a foreclosure is $50k. Servicers like CW have even begun to partner with nemesis NACA to try to help. However, Bruce Marks, NACA's CEO was quoted as saying that the fee paid to NACA "doesn't cover our costs."
If you were facing a $50k loss, how much would you spend to avoid it? The loss mit department is still seen as a customer service function, and as is common in CS, they're putting as little resources as possible into it... despite the "crisis."
Instead, the investors, and the servicers, want non-profits to pick up the slack, and they want to transfer their bad loans onto the taxpayers through FHA Secure and other governmental initiatives. There's already been a bailout on Wall Street. If you're the man on Main Street and you've bought a house that you can't sell, you have to face the consequences and take your medicine. If you're an investor who's stuck in some nuclear waste tranch 'cause Fitch told you is was the right thing to do, you look to everyone else to bail you out.
It's called personal responsibility... and it's lacking on all fronts.