Countrywide Financial, the Next Enron?
Friday, October 26, 2007 | Teeka TiwariRating:
Some of you might have caught me on the new Fox Business Network this morning. Among other things, I was discussing the state of Countrywide Financial (CFC). I wanted to alert investors to this looming financial threat hanging over our credit markets. There was a lot more I wanted to say about it, but I didn’t have the time to get into all of the gory details. Countrywide Financial (CFC), for those of you who don’t know, is THE 800-lb. gorilla in the mortgage lending space. These guys have made billions off the backs of mortgage payers all across America. The pitch was simple: offer artificially low adjustable rate mortgages, give a mortgage to anyone with a heartbeat, and watch the profits roll in.
And you know what? It worked!
Because every time the mortgage payment adjusted higher, Countrywide would come back to the borrower and say, "Hey, no problem. Let's refinance!" And that’s exactly what millions and millions of Americans did.
But guess what happened?
The bottom fell out of the real estate market, and many peoples' homes are now worth less than what they owe on them. If your house appraises for less than what you owe, you know what? You ain’t refinancing. And that’s exactly where we are right now. Millions of Americans are stuck with accelerating mortgage payments that they can’t borrow their way out of.
Before you judge these people too harshly, take a look around. These people are your friends, neighbors and family members. These aren’t ne'er-do-wells looking for a free ride. Most borrowers were financially uninformed regular people just looking for a shot at home ownership.
Is it a crime to be financially uninformed? No, it's not, but it should be a crime to take advantage of uninformed investors, and that’s what Countrywide did to the people who bought these crazy, exotic mortgages.
If you throw a drowning man a life raft, do you think he’s going to care about how much it costs? Of course not! His life is priceless, and that’s how people feel about their homes. Most people will go to any length to protect the roof over their heads, and Countrywide knows this.
Like any good loan shark/predatory lender, Countrywide knows that if you push too hard, the mark just won’t pay, and that's bad for business. So they recently came out with a “Home Preservation Program.” I think it should be called “Profit Preservation Program.”
Maybe I’m being too harsh. Let’s examine this altruistic, humanitarian gesture so generously offered by Countrywide:
To date, approximately 6% of Countrywide’s 1.45 trillion dollars' worth of loans are loans categorized as in arrears; SO FAR.
But let’s face it. We’ve been around the block, we’ve been through the corporate lies of 1999-2003, and you and I know that number could be much, much bigger than 6%. We’d have to be idiots to believe that these guys aren’t playing around with the numbers to hide their true financial picture.
But let’s take the 6% at face value. That means about 87 billion dollars' worth of loans are on the verge of default. We are talking close to a half a million mortgages. That’s 500,000 Americans and their families who are in danger of becoming homeless.
So what is Countrywide proposing?
The company is launching an outbound call campaign to restructure 16 billion dollars' worth of loans.
Sixteen billion out of eighty-seven billion. Are you kidding me?
To add insult to injury, the majority of the restructuring (ten billion dollars' worth) is only occurring in mortgages that have yet to reset their interest rates. These are people who already have a strong history of paying their mortgages on time. I think it’s great that they are rewarding those borrowers who pay on time, but how’s that supposed to help people who are already behind?
Another four billion of loans are being restructured for those borrowers who are unable to refinance and have an upcoming rate reset. This is great news to these borrowers, no question about it, but it isn’t enough.
The last two billion in restructurings are going to those borrowers who have already defaulted, but it only affects 10,000 borrowers.
All in all, Countrywide’s efforts will impact only 88,000 mortgages. What are the other 400,000 people supposed to do?
Suck it up?
Conclusion
This “Home Preservation” push is nothing more than fodder for the newspapers and media outlets. It gets Congress off their back for now, but compared to their entire loan portfolio of $1.4 trillion, $16 billion is a drop in the ocean.
That’s the hype, here’s the reality:
Countrywide could be in serious, serious financial trouble. The books say they have $100 billion in capital, but an asset is only worth as much as you can sell it for. To whom will they sell their mortgage bonds? There aren’t any buyers left.
What percentage of that hundred billion is in mortgage paper, and what percentage is in government securities? I wish I could tell you. If you call them, maybe they will answer your questions, because investor relations refused to answer mine. Instead, they referred me to a series of voice mails, and when I finally did get someone on the phone, they couldn’t answer my questions but promised they would get back to me. (It’s Friday morning, and I’m still waiting for their callback.)
It’s a very scary sign when a company engages in misdirection and obfuscation. Avoid this company at all costs. There is a second leg lower coming in the real estate market, and you don’t want to be caught up under it.
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“Let the Game Come to You.”
Teeka Tiwari
Chief Investment Officer
Point & Profit
