Will Countrywide be the Titanic of the mortgage industry? Will it be the massive cratering that forces regulators, government and the media to shine a bright light on the lending industry and blow-up and re-write the way business is done in this industry? Is Countrywide the next Enron? Is Angelo Mozilo this decade’s Kenneth Lay? Will the rapid unwinding of the secondary market mechanism leave them no option but to go belly-up?
Item 1A of our 2006 Annual Report presents risk factors that may impact the Companys future results. In light of recent developments in the mortgage, housing and secondary markets, those risk factors are supplemented by the following risk factor:
Debt and secondary mortgage market conditions could have a material adverse impact on our earnings and financial condition
We have significant financing needs that we meet through the capital markets, including the debt and secondary mortgage markets. These markets are currently experiencing unprecedented disruptions, which could have an adverse impact on the Companys earnings and financial condition, particularly in the short term.
Current conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future. The Company attempts to mitigate the impact of debt market disruptions by obtaining adequate committed and uncommitted facilities from a variety of reliable sources. There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to operate at profitable levels. The Companys cost of debt is also dependent on its maintaining investment-grade credit ratings. Since the Company is highly dependent on the availability of credit to finance its operations, disruptions in the debt markets or a reduction in our credit ratings, could have an adverse impact on our earnings and financial condition, particularly in the short term.
The secondary mortgage markets are also currently experiencing unprecedented disruptions resulting from reduced investor demand for mortgage loans and mortgage-backed securities and increased investor yield requirements for those loans and securities. These conditions may continue or worsen in the future. In light of current conditions, we expect to retain a larger portion of mortgage loans and mortgage-backed securities than we would in other environments. 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.
While this isn’t groundbreaking (we’ve heard this from everyone else) it is just another sign that Countrywide is really not that much different from everyone else. They do have a depository arm in Countrywide Bank which should help (some) but they fund so many loans and rely on investor purchases to such an extent that their deposits could not even come close to keeping up with the funding requirements of the mortgage lending group.
Without the capital markets these mortgage lenders are all screwed. If liquidity and investor confidence does not return quickly to these markets the major depositories will be the only ones that will get out alive.
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[Source: Blown Mortgage]
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