Merrill raises specter of Countrywide bankruptcy

Posted by: Dean Foust on August 15, 2007



Want to know how bad it’s getting out there. This bad: Shares of Countrywide Financial fell yet again today—the fifth straight down day for the mortgage lender—following a report in which Merrill Lynch analyst Kenneth Bruce raised the prospect that Countrywide could be forced to file Chapter 11 bank “Effective insolvency” would result should creditors force Countrywide to sell assets at depressed prices or investors lose confidence in its ability to raise cash, Kenneth Bruce, a Merrill analyst in San Francisco, said in a research note today.

Shareholders shouldn’t “understate the importance of liquidity,” Bruce wrote, according to this story by Bloomberg reporter Elizabeth Hester. “If liquidations occur in a weak market, then it is possible for CFC to go bankrupt,” said Bruce, who downgraded Countrywide to “sell” from “buy.”

Merrill’s bombshell comes shortly after Countrywide issued a statement intended to comfort investors that it had access to credit lines that would more than meet its funding and liquidity needs.

mozilo.gifMost interesting to me, though, it that just last week Countrywide CEO Angelo Mozilo reaped nearly $1.3 million by exercising 92,000 options. I know, I know, Countrywide has stressed in the past that these ongoing sales by Mozilo are planned under a trading plan set up with the SEC some time back (and which critics have questioned, as I pointed out at the end of this blog entry a few weeks ago). I’m sorry, but it doesn’t pass the smell test with me that Mozilo has been selling shares on the way. Call me old-fashioned, but I’m from the school that says the captain goes down with the ship, and even takes the bullet, like the captain of the Titanic. And he doesn’t profit while shareholders are losing money.

Reader Comments

Roberta Murphy

August 15, 2007 3:02 PM

I am an active real estate broker in the San Diego real estate market, and am spending an inordinate amount of time trying to clean up real estate messes left by others.

It is likely no coincidence that the majority of defaulted loans we encounter show Countrywide as the lender. They were one of the first in our area, though, to fully staff a loss mitigation department. That is probably the busiest unit in the entire company.

Just me

August 16, 2007 9:18 AM

I still say..home prices's have to drop 25-40% and all issues will go away!!! Current avg. home prices's continue to be over-inflated due to our greed

Paul

August 16, 2007 11:52 AM

Just Me - You are right - Prices have to come down at least 25% then the market will have "corrected" itself. Anyone who lives in a shack and thinks it's worth 300+ or more is living in fantasy world. Probably pigs fly by his house too.

Kevin

August 16, 2007 6:31 PM

Dont blame the consumer. It was the Real Estate Agents and Loan Brokers driving up those inflated prices. If anyone is guilty of greed... its them.

someone

August 16, 2007 8:20 PM

Anyone out there think I should be concerned on a CFC loan I am scheduled to close on 8-24-07?

Tim

August 17, 2007 11:11 AM

To Someone: Anyone in the process of closing any real estate loan anywhere in California should be reaching out to other brokers to have a couple of fall-back positions ready. Also, consider very seriously whether it is in your best interests to close right now. Existing house rents in many good neighborhoods are depressed due to the glut of available units - you may be able to rent the same house you are buying for half of your anticipated PITI. Now may be a prudent time to take a year lease, save a little more, and look to see if prices continue to fall. Next year, it may be possible to buy the same house for 10% less with a larger downpayment.

Someone

August 17, 2007 11:56 AM

Tim, I am actually in Rogers Ar. and am putting down approx. 65% on a home that appraised for 59k more than I am paying. What do you think?

john

August 18, 2007 1:58 PM

Three months back there was news that countrywide will be bought by bank of america.
So bankruptcy was looming over them for quite some time.They were waiting for angello mozillo to sell his stocks.They need 40B to fund loans for a month.All they got from 40 banks is 11B.
So the math shows bankruptcy is imminent.Also i saw an article today that 56% of the deposited money in countrywide bank is not FDIC insured.
So lot of people might loose their deposits also......

Griffin

August 19, 2007 12:36 AM

I don't understand how 40% of the deposits with Country Wide are not insured by the FDIC if the they are a FDIC member....I thought this would be 100%....can someone please explain....I have a large CD with Country Wide

Monica

August 20, 2007 2:18 AM

Hey future-Arkansas homeowner, proceed with buying your home but put as little down as possible and milk the tax deductible interest for all it's worth...It's one of the few things the government GIVES us. Use any liquid money to pay off other existing non-deductible interest (credit, car, boat- (judging by your down payment, you probably have no debt)) and put the rest in a safe investment that could pay out the liability of the home if you ever NEED to (loss of income etc). This gives you more deductions, more liquidity and return on your money instead of it being locked into your house.
Good luck!

Dave

August 20, 2007 12:49 PM

Monica -- Not so fast.... It depends on how much the home is worth / the annual amount of mortgage interest.

Remember -- the standard deduction for a Married couple is $10,700, $5,350 for filing single. So the government is already giving you that...

It's only the amount of your mortgage interest + other deductions (property tax, donations to charity, etc.) ABOVE the standard deduction that you're really taking advantage of.

Alex Barns

August 22, 2007 5:54 AM

One of the questions that will always run around
my head is about the share payment schemes. I do not understand what is the point in receiving share incentive awards if you are not free to seel them. I might be narrow minded and living in West London, but I do not see anything wrong in Mozilo Actions.

wayne

January 8, 2008 8:24 PM

what are peoples thoughts on CD's through countrywide? should we casho out the CD's early even though they are FDIC insured?

Cindy Chaffold

January 8, 2008 8:49 PM

Home prices need to fall?? Yeah, right. Okay, we need to refinance our crappy ARM to be able to pay our house payment and we can get a loan... but, guess what? Our home that we bought for 216,000 now appraised at 190,000. I have been screwed, chewed up and spit out and now this... and house prices need to fall? That has nothing to do with it. It's the type of loan that is offered and that people think they are lucky to get to buy a home and in the end, you will lose it anyway. Looks like we will have to walk away.

Fred Rohleder-Relocation Director

January 17, 2008 2:40 PM

The loans that are going into default are loans that should not have been made in the first place. Instead of Mozilo being questioned about his shares, he should be held accountable for the actions of his company. Have we all forgoten Enron so quickly? I wokr for a Berkshire Hathaway Company and we NEVER made the kind of loans that are causing such a problem. Now we don't have the issues that many lenders are facing.

Fred Rohleder-Relocation Director

January 17, 2008 2:40 PM

The loans that are going into default are loans that should not have been made in the first place. Instead of Mozilo being questioned about his shares, he should be held accountable for the actions of his company. Have we all forgoten Enron so quickly? I wokr for a Berkshire Hathaway Company and we NEVER made the kind of loans that are causing such a problem. Now we don't have the issues that many lenders are facing.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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