Mortgage Lender's Bankruptcy Would Have Severe Impact on Consumers

Weiss Research Recommends Four Steps for Self Protection

Jupiter, FL January 9, 2008 Countrywide Financial, the nation's largest mortgage lender, is on a collision course with bankruptcy, with potentially severe impacts on the ability of U.S. consumers to refinance their homes or get new mortgages, according to Weiss Research analysts Mike Larson and Martin D. Weiss.

Countrywide is at ground zero of the mortgage crisis, commented Weiss. It exhausted many of its extraordinary financing options last year and is ill-prepared for the rising mortgage defaults and home foreclosures that are widely expected this year. Already, the credit quality of Countrywide's mortgage servicing portfolio has deteriorated, with 7.2% of the mortgages its servicing delinquent in December, up sharply from 6.5% in November and 4.6% a year earlier.

Weiss' conclusion: With the mortgage market and economy continuing to slide, it's likely Countrywide will suffer intolerable losses. Thus, in the absence of extraordinary intervention, we believe it could be difficult for Countrywide to avoid failure, with a potentially severe impact on consumers.

Larson delineates the following four areas in which consumers would be affected in the event of a failure, and to a large extent, even if a failure is avoided:

Impact #1. Consumers would find it more difficult to get new mortgages or refinance their existing loans.

Many other lenders that specialize in higher-risk lending have already gone bankrupt such as Delta Financials and New Century Financial. Plus, many more have substantially exited the business, including NovaStar Financial, Decision One (part of HSBC), Option One Mortgage (owned by H&R Block. These events have significantly reduced the availability of mortgages to consumers.

However, Countrywide Financial is far larger. Therefore, the impact of a failure would likely be greater. Countrywide Financial funded $408.2 billion in residential mortgages in 2007, the most in the industry. It is also the second-largest subprime originator, the second-largest Alt-A lender, and the third-largest jumbo mortgage lender.

Should Countrywide be forced to file for bankruptcy, the loss of tens of billions of dollars of mortgage lending capacity will likely make mortgage credit far scarcer.

Impact #2. Surviving mortgage lenders will further tighten standards and cut back more on mortgage lending. More than 55% of lenders polled in a recent Federal Reserve survey are tightening standards on subprime mortgages. Six in 10 were making it tougher for borrowers to get "nontraditional mortgages" including Alt-A and interest-only financing — and more than four in 10 were raising the bar for prime borrowers. That is the highest since the Fed's survey began in 1990.

If Countrywide files for bankruptcy, this trend will accelerate. Credit score requirements will rise. Borrowers will be forced to put up larger down payments. Investor loans and stated income financing will get much harder to find. So-called "80-20" mortgage schemes, where a borrower gets an 80% first mortgage and a 20% second loan to avoid private mortgage insurance, will also become much harder to arrange. Second-lien lenders that fund the "20" piece of those deals are already getting hammered with losses.

Impact #3. With mortgage financing increasingly scarce, home sales will fall further. We have just learned that pending home sales fell 19.2% from a year earlier in November. They are down 31% from their April 2005 peak, with new home sales down an even sharper 53% from their July 2005 peak. Looking ahead, Larson forecasts sales could slump by as much as another 10% in 2008 as lenders like Countrywide rein in their loan operations, the unemployment rate rises, and the economy slips into recession.

Impact #4. Home prices will continue to sink. The decline in nationwide home prices from a year earlier is currently measured at 3.3% by the National Association of Realtors and 6.1% by S&P/Case-Shiller. Larson expects they will fall another 5% to 10% in 2008, with sharper declines in markets that have the largest supply overhang, the most overextended speculators, and the worst affordability due to the most stretched home price-to-income ratios. These include California, Florida, Nevada, Arizona, and other select markets in the Northeast.

Recommendations for Consumers

In anticipation of a possible failure or severe contraction in Countrywide's business, and in light of the continuing deterioration in the broad mortgage market, Weiss Research recommends the following steps for consumers:

1. Homeowners that are under pressure to refinance their mortgage should try to complete the transaction as soon as possible. But if they are unable to find affordable financing, or if the terms of the new loan would only add to their financial woes down the road, they should devote their efforts to exploring other alternatives. These can include renting their existing home and moving to a less expensive rental, tightening their household budget, and seeking supplemental sources of income.

2. Homeowners that have a mortgage with Countrywide should not be affected by a failure. In the event of a failure, the company itself may continue to service the mortgage under court protection. Or, a successor company would take over that function. However, if homeowners are currently in the process of acquiring a mortgage from Countrywide, that process could easily be disrupted by a failure, and they should start now to also seek other alternatives.

3. Consumers in the market for a new home should seriously consider waiting for several months before buying, while renting, or living with family, in the interim.

4. Consumers in the market to sell their residential property should consider pricing it more aggressively to attract buyers now and to avoid further, possibly steeper, declines in the months ahead.

***

Martin Weiss and Mike Larson, editors of MoneyandMarkets.com and Safe Money Report, have been at the forefront of warning about the dangers associated with the housing bubble. Their April 2005 report "How to Wade through the Mortgage and Real Estate Cesspool" provided a list of 25 lenders, home builders, and related companies that investors should avoid, including Countrywide Financial. Mike Larson's 2007 white paper entitled "How Federal Regulators, Lenders, and Wall Street Created America's Housing Crisis: Nine Proposals for a Long-Term Recovery" (http://www.weissgroupinc.com/whitepaper1/) detailed the past causes and future consequences of the crisis in July of 2007. And Martin Weiss predicted a possible bankruptcy for Countrywide in November of last year. (See https://www.moneyandmarkets.com/the-next-big-bankruptcy-9279).  
The authors are editors of MoneyandMarkets.com.