Countrywide Moves to Ease Mortgage Misery

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While the program is springing more from practical considerations than any charitable impulse, the primary beneficiaries will be hedge funds, foreign banks and other institutions that have loaded up on mortgage-backed securities, not Countrywide itself, said Gary Gordon, an equities analyst at Portales Partners, an independent research firm in New York, who has a buy rating on the stock.

By helping borrowers keep their homes, however, Countrywide will be able to maintain good relations with clients who are on the hook for these loans, he added.

The program is probably also a pre-emptive move ahead of a call by regulators at some future date demanding that servicers modify loans instead of allowing resets to occur, said Cannon, who has an underperform rating on the stock Servicers would prefer to do it voluntarily in order to maintain the freedom to negotiate more favorable terms with borrowers, he said.

Consumer rights groups such as Americans for Fairness in Lending say the program won't help those most in need – homeowners whose loans are already in default. The 82,000 mortgages the program will cover are indeed a drop in the bucket compared with the 500,000 ARMs due for imminent resets that Housing and Urban Development Secretary Alphonso Jackson recently said he expects to go into foreclosure.

Some borrowers, however, would be better off losing their homes and moving on, whether to rent or buy a more affordable place to live now that home prices are coming down, Cannon said.

In its operational results for September, Countrywide said delinquencies in its mortgage loan servicing portfolio rose to 5.87% from 5.05% in August, but attributed nearly half the increase to there being four fewer business days in September than in August.

The company also said mortgage loan fundings fell 44% from a year ago to $21 billion in September, while its servicing portfolio grew by $215 billion, or 17%, from a year earlier to $1.46 trillion at the end of September, or 17%, from Sept. 30, 2006.

The market is awaiting word on just how hard the credit turmoil hit the company's bottom line. On Oct. 4, Friedman Billings Ramsey cut its third quarter estimate from breakeven to a loss of $3.00 a share and shaved its target price to $20 from $22, saying it now believes the profit impact from disruption in the non-agency mortgage market is higher than previously anticipated, but still hard to pinpoint.

"As the economic bid for non-agency mortgage loans deteriorated during August and September, we believe significant mark-to-market adjustments of loans held in the pipeline and reduced gain-on-sale margins will result in negative earnings during the third quarter of 2007," the note said. FBR predicted Countrywide will write down 5% to 10% of the value of its non-agency loans held in the pipeline, as record additional write-down of subprime residuals and a higher level of credit loss provisioning. (FBR has a market perform rating on the stock and seeks to do investment banking with the companies it covers in its research reports.)

With more subprime obstacles to surmount, the stock will probably trade close to its book value for the foreseeable future, the FBR note said.

As pro-active as Countrywide plans to be in contacting distressed borrowers, ultimately it's up to the borrowers themselves to reach for the extended hand.

Previously, Countrywide has said that in 20% of the homes it has foreclosed on, it never had any contact with the homeowners, Cannon said. Among the key steps distressed homeowners must take to qualify for refinancing: "You've got to call them back," said Cannon with a chuckle.