Countrywide says debt market chaos is “unprecedented”
August 9th, 2007, 5:33 pm · 12 Comments · posted by Mathew Padilla, Reporter
Countrywide Financial Corp. today said the market for debt it needs to fund itself is experiencing “unprecedented disruptions” that could impact its future profits and financial condition.
In its second-quarter filing with the SEC, the lender said there is less liquidity in the debt market and greater “risk premiums.” I imagine Countrywide means it may have to pay higher yields on its own debt or produce more collateral, or both. Anyway, the lender said it needs to maintain investment-grade ratings on its debt, and that is not a sure thing.
It also said the market to sell home loans on Wall Street is experiencing “unprecedented disruptions” caused by a drop in investor demand.
To be sure, official quarterly reports with the SEC often contain a lot of ominous-sounding boiler plate language. But using the term “unprecedented disruptions” twice in one filing stands out.
Here’s more from the company:
“While our capital and liquidity positions are currently strong and we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate, our capacity to retain mortgage loans and mortgage backed securities is not unlimited. As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition.”
August 9th, 2007 at 5:49 pm
Wow. Earlier this week we were getting press release saying “everything is fine, don’t worry about us”. Did anyone actually believe them?
August 9th, 2007 at 7:25 pm
CFC down almost 13% in aftermarket, $25.00.
August 9th, 2007 at 8:20 pm
“our capacity to retain mortgage loans and mortgage backed securities is not unlimited. ” - you have to love this use of the double negative
August 9th, 2007 at 8:41 pm
“we believe we have sufficient capacity to hold additional mortgage loans and mortgage backed securities until investor demand improves and yield requirements moderate”
Curious statement. It presumes that Countrywide has some feel for when “investor demand improves and yield requirements moderate” relative to its cash position. If they have a crystal ball that good where the secondary market is concerned, they should share it with the rest of Wall Street. Or, perhaps they know something about Freddie and Fannie gearing up to purchase and securitize mortages.
My guess is it’s spin to control dumping of its stock. NOBODY knows when investor demand and moderating yield requirements will return. Probably not until after all the bult of the resets have moved through the pipeline this Fall and the credit markets know how those loans are performing after the resets.
August 9th, 2007 at 11:55 pm
Ok here are some interesting points that I think need to be made.
Matt said: “In its second-quarter filing with the SEC, the lender said there is less liquidity in the debt market and greater ‘risk premiums.’ I imagine Countrywide means it may have to pay higher yields on its own debt or produce more collateral, or both”
I am not sure what you mean by debt. Most of their debt is involved with their credit facilities and commercial paper for their loans and the rate is based on the 3 month LIBOR at around 5.4%. Their debt is going to be based on an index like the 3 month LIBOR. Hence positive spread on loans held for sale. So what they mean is in the secondary market when they try to sell their loans they are demanding higher yields/rates. Instead of selling them they are keeping them with the hopes that the market will improve.
Now here is what I find interesting in regards to loans held for sale. On page 81 it gives a hypothetical of a 50 and 100 bps upward change in rates. Loans held for sale would drop by $476 and $978 million but with hedging the drop would be $29 and $66 million. They did adjust their LHFS to fair market value but it was based on June. So if they were to adjust for the fair market value of today 100 bps would only be the start. They may say they have plenty of liquidity but if they mark to market the loans they have they could be subject to margin calls. Unless the commercial paper lines don’t care about margin requirements.
August 10th, 2007 at 8:07 am
This blog is getting a heck of a lot more interesting than Lasner’s. The housing market is falling apart brick by brick and Lasner is writing about what some “real estate professional” says are the best colors to paint your house for sale or the importance of granite counter tops .
August 10th, 2007 at 8:51 am
To Graphrix,
It sounds like you’re focusing on just debt tied to Countrywide’s home loans, the loans it makes to consumers and sells to investors or holds on its books.
But the lender, as well as any corporation, also issues debt or securities to fund operations (make payroll etc.) or do other stuff like buy another company. In its 10Q, Countrywide said that this debt market, the corporate bond market, is in chaos. That’s separate from the secondary market for its home loans, which is also in chaos.
And Countrywide is saying it’s not sure the rating agencies will keep its corporate debt, its bonds issued to fund operations, at investment grade.
-Matt
August 10th, 2007 at 10:01 am
I- heart- matt this blog is filled with important information
and data the posters are more intelligent and enlightened
and it posts immediatley whats not to like??????
August 10th, 2007 at 10:50 am
Matt,
I agree and in way that was my point. They don’t have much debt other than the debt tied to credit facilities. I don’t have the time to check the 10Q until later but IRCC they really didn’t have that much debt. I see where there is confusion on what they mean.
I agree with rants this blog is way better than Lansner’s. I think his officially died yesterday. No comments for over 24 hours now?
August 10th, 2007 at 1:37 pm
How did this happen what was the goverment thinking when all this money got pumped into the real estate market artificialy inflating values this will go down as the greatest swindle in American History all of the big mortgage companies made a fortune in the last 5 years so what do they care if the foreclosure rate is at an all time they have allready made billions the fed should have done something sooner dont we have laws that protect us from being robbed we need true mortgage reform now this will make the S&L scandal look like nothing