Tuesday, August 28, 2007

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.

Edit: 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."


Anonymous said...

It looks like your countrywide short is going as well as a Cramer call.

Anonymous said...

I am among the legions of mortgagees that have loans being serviced by Countrywide. My experience is nothing less than a nightmare. My home ended up in foreclosure after two missed payments and a late payment. My attempts to get caught up were met with repeated phone calls to their call centers in Mumbai, India where they knew nothing of my loan status and only wanted to harass me and question me about why my payment was late. No one in Mumbai even entertained the idea that I might be eligible for a loan modification agreement or repayment program. I received several phone calls from customer service representatives who indicated that I was ineligible for a modification and that foreclosure was a forgone conclusion. One person spoke such horrible English that I had to ask her to repeat almost every sentence she said, which resulted in her calling me names and hanging up on me. I spoke with one person in early December who indicated that I was eligible for a Modification Agreement and said that she would set me up for this and send me the paperwork. I received the paperwork three weeks later, albeit, after Countrywide filed papers in court to foreclose on my property. The agreement required that I obtain title insurance and a step modification agreement, which after numerous phone calls by a title insurance sales person, proved to be unnecessary and part of an "old" agreement form that was never deleted. I was repeatedly told by customer service representatives at Countrywide that they could not access information about my account unless it was approved or released by the Loan Negotiator. This was someone who has never spoken to me or attempted to contact me and was unable to be reached via telephone. I was advised by the customer service representative to go to their website, however, I have been locked out and any information about my account is "frozen". Likewise, I am unable to even e-mail them due to this connection being locked at their website.

For a company that is tanking, one would think that they would show some effort to make payment on loans more expedient or efficient, as well as encourage good customer relations/service, which may foster better relations and possibly more referrals or loan applications by consumers.

While the customer service representatives I have spoken to indicate that my Modification Agreement has been accepted, I have yet to receive written confirmation of this, speak to the loan negotiator, or obtain access to my account on-line.

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CP said...

Classic: "It looks like your countrywide short is going as well as a Cramer call."