Countrywide Moves to Ease Mortgage Misery

The lender says a new refinancing plan could help homeowners avoid foreclosure. But the biggest beneficiaries may be financial players like hedge funds

On the eve of the mortgage rate resets for a swath of subprime and prime mortgages, Countrywide Financial (CFC) on Oct. 23 unveiled a new program that will help up to 82,000 homeowners avoid foreclosure by allowing them to refinance or modify their mortgage loans. But analysts say that the program, which the company's COO called an "unprecedented remedy" in a press release, is just calling public attention to something that Countrywide and other large mortgage servicers have already been doing.

The largest mortgage lender in the U.S. said it has created a special finance unit with about 2,700 employees to work with borrowers who, for the most part, are current on their mortgage payments but may have trouble continuing to make payments once their adjustable rate mortgages reset at higher levels.

Calabasas, Cal.-based Countrywide may need a bit of good P.R. in advance of its third-quarter earnings release, scheduled for Oct. 26. Analysts expect the company to report a net loss of $1.10 a share.

The company said it's prepared to refinance up to $10 billion in mortgages and modify the terms of another $4 billion in mortgages that don't qualify for refinancing. The company will give borrowers who qualify the option to refinance into a prime loan or one insured by the Federal Housing Administration. For borrowers with credit issues, the company will offer Fannie Mae or Freddie Mac's expanded criteria programs. So far this year, Countrywide said it's helped more than 31,000 borrowers refinance to prime fixed-rate mortgages totaling more than $5 billion.

Countrywide also plans to offer an pre-determined reduced rate to borrowers of an additional $2.2 billion who are late on their loan payments and having trouble paying because of a recent rate reset.

In addition to sending out letters to borrowers as much as 180 days before a scheduled mortgage reset to ensure that borrowers understand their options, Countrywide said it plans to set up face-to-face meetings with distressed homeowners by hosting seminars around the country, participating in foreclosure prevention workshops, teaching borrowers about possible foreclosure scams, and offering loan workouts on-site.

The company also said it will work with non-profit and community groups across the U.S. in grassroots efforts to contact and counsel distressed borrowers, particularly in communities with unusually high foreclosure rates.

Investors didn't warm to the news. Countrywide shares fell 4% to finish at $15.05 on Oct. 23.

"Almost always, it's better to work with borrowers than to foreclose. Foreclosure is and always has been an extremely expensive and onerous process, for the lender as well as the borrower," said Frederick Cannon, an equities analyst at Keefe, Bruyette & Woods.

Standard & Poor's said the program should help some borrowers avoid foreclosure but it "will also likely obfuscate Countrywide's financial results, as charge-off levels and delinquent loans will likely be lower than they ordinarily would have been, with the risk that charge-off levels will later rise if these same borrowers are unable to keep pace with terms of the renegotiated loans." S&P reaffirmed its hold rating on the stock and its target price of $19 a share. (Standard & Poor's, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP)).

Cannon at KBW said he doesn't share that concern, as the $16 billion in loans that the program will address aren't necessarily ones that Countrywide holds on its own books but loans that it is servicing for other originators. Including the $3 billion is subprime mortgages it has originated since the end of June, Countrywide has a total of only $8 billion of subprime loans on its books, he said. (KBW has received compensation for investment banking services from Countrywide within the past 12 months.