What is Countrywide's Lending Operation Worth?

To answer the question posed above, we'll first exclude the insurance, the bank, and other assets and liabilities to get a base figure, then roll in Countrywide's (CFC) balance sheet issues with poorly performing loans. Keep in mind that our question is: if an investor could buy Countrywide's lending operation only (and avoid their balance sheet), what would be the discounted present-value?

To get to a baseline figure, let's further assume a no-growth scenario where Countrywide is in a steady state: They accumulate and lose the same amount each year on their portfolio of loans, which starts at a size 5 times yearly originations (i.e. 20% go on and off their servicing platform).

Using the last 3 months of production, Countrywide will originate about 292B per year. Given the state of the mortgage market, that's probably a reasonable figure for the longer range (i.e. the market will likely shrink more, then recover).

Say Countrywide - assuming away recent problems - could earn (using their bank and other methods) 1% net spread between the debt they issue and the yield on the loans they've already accumulated (5 times their yearly originations, remember). Say further that 1% net is after subtracting credit losses. Their expenses (per year) are about 7.8B. They also earn fees. Assume they close 1.5M in loans per year (292B / 195K ave loan amt, rounded to 1.5M), half of which are retail ($3000 in revenue) 10% wholesale, 40% correspondent (the current mix). As an average, say they earn $1800 per loan in fees assuming the mix stays the same. That's an additional 2.7B in income, which is light if their retail begins to gain over wholesale and correspondent (seems likely in this market).

Assume the cost of capital to a strong-handed acquirer for buying Countrywide is 11.5% and Countrywide long-term growth is 3%. Later we'll get a value with much higher cost of capital and much worse loan performance.

(Even with a simple model there are a lot of assumptions).

So we have (1460B from 5Y originations x 1% interest margin net of credit losses + 2.7B fee income - 7.8B operating expenses: which includes depreciation as an estimate of capex) / (.115 - .03) = 112B. For a bank with stable, well risk-managed funding costs (i.e. asset/liability match), Countrywide is an attractive opportunity - if (1) enough competitors fall out of the market and (2) there is enough capital in the buyer to sustain through the rough patch.

In a distressed market, 20% discount rate premium over growth isn't unlikely. Say the Net Interest Margin is 1.5% (i.e. the bank pays 3.5% on CDs when fixed rates are 6%. The extra 100 bp spread will be taken by additional expenses, credit losses, other transition costs not accounted for below). 1460B x 1.5% + 2.7B fee income - 7.8B operating expenses / .20 = 84B. Take roughly double the loss estimate in the 'Balance Sheet' section below (44B) and the worth is 40B. That's at a discount rate of 20% with a bad loss scenario.

In this "last man standing" game, as long as Bank of America (BAC) can get access to necessary capital or has a decent book themselves, Countrywide + Bank of America stays around.

Balance sheet: If 5% of Countrywide servicing (nearly 1.5T) goes bad at 30% loss severity, assuming Countrywide is on the hook for all the losses, that would mean 21.9B, far exceeding their equity of 13.1B on their interims. The issue is they cannot bring their future cashflow earnings to "the present" to pay the liabilities. But a company that has a lot of capital to pay the losses can get the value, assuming something crazy down the road doesn't happen.

Severity assumptions: Say affected properties go down 40%. The average property with loan issues started at 100 and is now 60. With an LTV on the 1st of 75% at inception, the current value of property against the loan is 60/75 or a 20% loss (remember, this is an average case). Take another 10% for foreclosure procedures, litigation, property destruction, selling expenses, etc. That is a 30% hit per loan. This is the key to unlocking the value for a buyer, as they have to absorb these losses to get the origination platform.

I assume BK is out, because the authorities won't let Countrywide go under and disrupt the market, so they'll nudge a private buyer to pick them up prior to BK.

If 20% of the loans go under at 30% loss severity and Countrywide is on the hook for all those losses, that's 43.8B in losses -- we've used 44B above.

It is unlikely Countrywide is on the hook for losses because they've probably used significant structural and external credit enhancement as a requirement of the buyers in the past when buying Countrywide securitizations. That means the future losses will hit the securitization structure (the lower rated tranches or the overcollateralization piece), the insurers, and the buyers, rather than hit Countrywide. Given that situation, our loss severity appears reasonably conservative. The full analysis of all loans and potential off-balance sheet liabilities exceeds our back-of-the-napkin approach).

While the stock may be worth zero as an individual hold because of the business cannot self-fund, the company is probably worth quite a bit to a buyer like Bank of America, as long as the buyer doesn't have any funding issues.

In summary, although this analysis misses some important pieces, the back-of-the napkin calculation illustrates that there can be value in buying operational platforms, even though the overall environment will probably be very negative for some time.

Disclosure: Jim Bradley works as a corporate financial consultant and holds no position in Countrywide.

Comments

[sunburned:]

So Jim, after all that - What is countrywide worth?

2008 Jun 05 11:59 AM

[H2O:]

Countrywide is worthless - there using the - were just a servicer of the loans - There dumping off their bad loans - to the investors - and the buyer of those bad loans - are on the hook.

simple example - I put 25,000 court ordered equity in this house - countrywide used the auction system to take my second lien and get rid of my equity - basically stealing it - however - all the work done on this house - I am taking with me - which means - this house is basically worthless - or the investor countrywide dumped the loan on - will have to put 25,000 plus into this house to make it livable.

So the investor got a 37,000 fee based price - original loan was 24,000 countrywide added 13,000 in fees.

so a 62,000 dollar house with 25,000 of work torn back off - the investor will have 37,000 + 25,000 + work of work to make the house livable - so the cost to the investor is 62,000 - a wash - and a down turn market - a loss of 15% or more of property price - The investor has effectively lost his butt - on investing - in countrywide house's.

Secondly - all the investors are not on lien - countrywide is a servicer - just like a lawn mower - they too don't have legal claim to the houses - they sold that right - and the investors never put liens on the houses.

So simply - countrywide holds no right to foreclose on any house - they sold that right to the investors - and the investors holds no liens on any of the houses registered with the counties across America.

So if a foreclosed victim asked for the owner of the note to show - they have registered that ownership - within the time frail allowed - statute of limitations - most home owners - legally own their homes.

So if a home owner decides to take the equity work with them - or fights in court. Most note buyers - have nothing to stand on. Investors are not and have not legally registered their claim on the house's - with the counties.
IDIOTS countrywide sold you worthless paper - and did not register you as the rightful owner with the proper authorities - and now just think how much back taxes you owe.

2008 Jun 05 12:38 PM

[sunburned:]

H2O needs to go back and do a little more homework about how mortgagebanking works. For one thing, when loans are sold on a servicing-retained basis, a contract is signed that essentially delegates to Countrywide -or any servicer- power of attorney(and the obligation) to work for the investor.

2008 Jun 05 12:45 PM

[Jim Bradley:]

sunburned - Depends if a buyer can separate their operations from their obligations. That's why the analysis focused mostly on the operations. With their obligations, you'd have to come up with a loss severity estimate (i.e. how bad is housing going to get) before a final figure emerges. I've given a few ballpark estimates of severity.

2008 Jun 05 06:28 PM

[H2O:]

Corporate Lien
On Countrywide and House at '''''''''''''''''
– Due to a deceptive act perpetrated on Myself -
''''''''''' – '''''''''''' – and the People of
Oklahoma – and The People of These United States.
False Foreclosure – Countrywide is a servicer – Not The -
Loan Holder.

On the House at ''''''''''''''''''''''... Countrywide
was listed as the mortgage holder – With the county -
However Countrywide had sold the loan – and went from owner
to servicer – With the buyer of said loan – Not filing the
papers of ownership with the country.
Therefore – The awarded 25,000 court ordered lien on said house
– Is hereby – Replaced on said house – Until countrywide can prove
who the actual owner is – and why said owner - of said loan – did
not file with the county – Land Office – and pay all the fee’s to
the county – For buying said loan.

This was a very deceptive foreclosure on the said house – Countrywide
had already sold the loan – and the proper owner – did not file for
themselves – and deceptively let the court think – Countrywide was the
legal owner – of said house.
This Lien - Is not released due to the sale of Countrywide to BAC.

Dumping the scam of there predatory lending - and deceptive foreclosures
Within the Legal system.

2008 Jun 05 09:21 PM

[Deep Value:]

Who cares? We all know CFC is broken but BAC knows how to fix it. Jim's analysis is right on in my opinion... with pretty conservative estimates on operations. BAC may get off the hook with regard to many of CFC's liabilities as well.

CFC is trading at only a 10% spread on the deal value but I believe BAC in trading at about 50% of it's intrinsic value.

2008 Jun 05 10:18 PM