The following is an email sent 10/26/2007 to some of my Realtor clients. Their is no attachment to this post (not sure how to do that yet!) but I believe all the salient information is included. Again, I am posting these now because I am fairly sure I will want to reference them at a later date.
Attached is a rather interesting article regarding Countrywide. I am including some thoughts here and I want to make it clear that I am not picking on any one lender and especially not on Countrywide. I do believe Countrywide can be instructive, however, as to what is happening now and what is to come. As Countrywide goes, so goes the industry. I have also included an attachment from a previous email regarding loan resets. According to the article, “Countywide lost $1.2 billion in the third quarter… Countrywide’s first quarterly loss in 25 years. Yet its shares soared Friday after the nation’s largest mortgage lender said it expects to be profitable this quarter and next year”. Now I do not pretend to know as much as the asset managers that watch these stocks and I certainly do not know what the future holds. I hope Countrywide is accurate in their predictions and that the soaring shares which greeted the news are warranted. I am, however, painfully aware of the market’s relatively myopic view; rarely looking further than the party streamers amidst any cause for celebration. I must say that I am a bit perplexed by Wall Street’s jubilation and Countrywide’s rosy assessment. Let’s take a closer look at the numbers.
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According to the New York Times (Countrywide to Help Restructure Loans 10/24/2007) Countrywide services approximately $1.46 trillion in loans.
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In the Mortgage Reset Table attached we can see the total loans resetting (not just Countrywide)
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$153 billion in loans reset in the 3rd quarter
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$165 billion in loans are resetting in the 4th quarter
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$278 billion in loans are resetting in the 1st quarter of ‘08
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$233 billion in loans are resetting in the 2nd quarter of ‘08
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Now, even though the above numbers are for all lenders, let’s assume that most lenders will be looking at a similar ratio of reset increases. While we are on the subject, let’s assume that everything else will hold constant (including the assumption that Countrywide’s percentage of defaults going forward will remain similar to what it is now). We will see later why holding everything else constant may give us a rosier picture of Countrywide’s health than merited, but let’s give the benefit of the doubt. In the attached article we see that “Countrywide reserved $934 million for bad loans in the third quarter… (and) moved about $12 billion in nonconforming loans to its held-for-investment portfolio after having to take a write-down on them”. This was against the 3rd quarter reset number of $153 billion. Yet going forward we see “the company took a $690 million impairment charge for home-equity and subprime loan residuals in anticipation of future credit losses”. This is against a fourth quarter where we expect to see an 8% increase in the number of resets. Let’s give that one to Countrywide as a part of their aggressive reaction to the credit crunch and massive downsizing. Going forward a little further, however, we are looking at first and second quarter ’08 reset increases of 82% and 52% respectively. That is a three quarter total of $676 billion in resets against $350 billion for the first three quarters of ‘07; a 190% increase, yet Countrywide is decreasing their set aside by 26%! Now let’s take a closer look at our assumption that everything else will remain constant. It is widely accepted that the loan resets for the first three quarters were primarily comprised of sub-prime loans. The upcoming resets, however, are predominately ARMs and option arms which went to more main-stream credit risks. We have documented previously where Countrywide Chairman and Chief Executive Angelo Mozilo has proclaimed the limited exposure Countrywide has to the sub prime market. It would seem reasonable then, to assume that their exposure to the upcoming resets will be even greater than what has been seen thus far. Leaving out the entire discussion of Countrywide’s exposure to the option arms that made up a majority of their portfolio and you can still see my utter consternation when it comes to Countrywide’s outlook and the stock market’s acceptance of that outlook.
I have said before that I hope I am wrong. Others certainly believe so. Bank of America essentially bet that Countrywide stock would be over $18/share two years from now when they “bought” a portion of the company. Of course the stock was trading close to $18 at the time and is now down to around $15/share even after the exciting news about Countrywide’s vastly improved future. I am not in any way going to suggest that in-house optimism is anything but genuine, or that some of Countrywide’s insiders found “dumping” stock at $13/share to be less enjoyable than when it was $18/share… but I am concerned about Countrywide’s future. It bears repeating: as Countrywide goes, so goes the industry.
Filed under: LENDERS, POLITICAL & ECONOMIC FOLLY , Countrywide, option arms
[...] I was more than a little confused by Wall Street’s reaction to Countrywide’s pronounceme…. I wrote about it then and I guess I am writing again with a childish “told you so.” Countrywide is underestimating their financial obligations in my humble opinion and it seems rather obvious to even the casual observer. But as I have pointed out, main stream media is missing the real problem as well. In a world of doom and gloom I am loathe to admit it, but these players are not doom and gloomy enough. That is all well and good because their misjudgments serve them and it is easy for us to follow the ball when we follow the money. More difficult to follow, however, is Wall Street’s desire to play along. [...]
[...] initial problems at Countrywide can be seen as far back as May of last year. The set-asides at Countrywide were woefully inadequate, in my opinion, and that seems to have been borne out. WaMu went down the exact same path and [...]
[...] initial problems at Countrywide can be seen as far back as May of last year. The set-asides at Countrywide were woefully inadequate, in my opinion, and that seems to have been borne out. WaMu went down the exact same path and [...]