Wednesday, August 15, 2007

Countrywide, Thornburg Downgraded As Credit Crunch Continues

Bad news for the nation's largest mortgage lender as a result of the credit crunch and the subprime mortgage fall-out:

Aug. 15 (Bloomberg) -- Countrywide Financial Corp., the biggest U.S. mortgage lender, was downgraded to ``sell'' by Merrill Lynch & Co., which raised the possibility of bankruptcy if the company loses access to short-term financing.

``We cannot understate the importance of liquidity,'' Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note today. ``Effective insolvency'' would result should Countrywide's creditors force it to sell assets at depressed prices or investors lose confidence in its ability to raise cash, he wrote.

``If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,'' said Bruce, who had rated Countrywide a ``buy'' since April 2005, according to data compiled by Bloomberg. Countrywide trades under the ticker CFC.

Countrywide's shares have dropped 42 percent this year on concern a credit crunch in the mortgage industry will erode profit at the Calabasas, California-based company. Bankers have curtailed lending to mortgage providers and demanded more collateral, forcing more than 70 companies to seek buyers or shut since the start of last year.

In other mortgage lending news, Thornburg Mortgage, says it cannot find investors for its prime jumbo mortgages and has had to stop offering them to home buyers.

Moody's has downgraded its rating of Thornburg.

Thornburg shares fell 46% yesterday and rumors swirl that it will have to file bankruptcy though Thornburg President Larry Goldstone said he has no intention of filing chapter 11 because the company has "been able to meet all of our obligations...We've been rolling over and financing our portfolio. It's been an amazing struggle to get that done."

Why do the Countrywide and Thornburg stories matter?

If the nation's largest mortgage lender is looking at bankruptcy down the road, that's a big problem.

And if a mortgage lender that specializes in prime jumbo mortgages to really rich people with good credit cannot get financing for its mortgages, that's a big problem.

Notice how we haven't heard anybody say that the subprime mortgage mess is "well-contained" anymore.

UPDATE: Foreclosures and delinquencies among home loans that Countrywide services rose in July to their highest level in at least several years, the mortgage lender said yesterday:

The company also said it made 14 percent fewer home loans in July than in June after tightening lending standards, while daily mortgage applications fell 15 percent to a nine-month low. It nevertheless added more than 1,100 workers as many smaller rivals curtailed lending or folded.

Countrywide said expected foreclosures as a percentage of unpaid principal rose to 1.04 percent from 0.46 percent a year earlier, and 0.96 percent in June. Delinquencies rose to 5.10 percent from 4.11 percent last July, and June's 4.98 percent.

July's totals are the highest that Calabasas, California-based Countrywide has reported in its monthly data reports since at least March 2002.

Long way to go before this all shakes out. Countrywide said last week that it expects to be one of the few mortgage lenders to survive the subprime mess and credit crunch.

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