Leading lender Countrywide is struggling

Analysts have discussed the possibility of a Countrywide bankruptcy.

LOS ANGELES TIMES

Angelo Mozilo, founder of Countrywide Financial Corp., has been fond of saying that the company became America’s No. 1 mortgage lender by being smarter than the competition.

In a classic harangue to Wall Street analysts early last year, Mozilo denounced upstarts for shoveling out too many loans, too easily, to too many people with bad credit, heavy debt and skimpy income.

“I’ve been doing this for 53 years, and I’ve never seen that situation sustained,” said Mozilo, who co-founded Calabasas, Calif.-based Countrywide in 1969. “Eventually they gag on it.”

Dozens of home lenders have indeed collapsed as defaults have surged on loans made to people with poor credit during the housing boom and as Wall Street has turned off the money tap that funded many of those subprime mortgages. But rather than emerging bigger and stronger, as Mozilo predicted, Countrywide, which made one of every six home loans in the U.S. in the first half of this year, now finds itself on the ropes, battling not just its own growing defaults but also a widening credit crunch stemming from the nationwide subprime meltdown.

Having trouble

On Wednesday, the company was said to be having trouble borrowing money on a short-term basis, securities analysts discussed the possibility of a Countrywide bankruptcy and the company’s stock price tumbled 13 percent, bringing its loss for the year to 50 percent.

“If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break,” said Merrill Lynch analyst Kenneth Bruce, who warned investors to sell their Countrywide stock, saying the company could go bankrupt if the worsening liquidity crunch gets bad enough.

A bankruptcy filing by the lender would make life uncertain at best for its 61,500 employees.

An insolvent Countrywide could also do more damage to the already weakened U.S. housing market, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication based in Bethesda, Md.

“It would be a huge shock to the U.S. housing system and the mortgage system as perceived around the world, and make an already bad situation terrible,” Cecala said.

Countrywide Bank

Homeowners who make their monthly mortgage payments to Countrywide should not be affected by the company’s troubles, experts said.

However, the turmoil could spook depositors at Countrywide Bank, an Alexandria, Va.-based savings and loan that has grown dramatically since Countrywide Financial bought it in 2000. Nearly 40 percent of the bank’s $57.7 billion in deposits were uninsured by the Federal Deposit Insurance Corp. as of March 31, according to the FDIC Web site.

“If something happens to the parent company, the bank should be able to stand alone,” said FDIC spokesman David Barr, who advised worried depositors to talk to the bank about structuring their accounts so they are completely insured. The FDIC insures individual accounts up to $100,000, but a married couple can insure up to $1 million in deposits at a single institution by setting up multiple accounts, Barr said.

A reversal

Countrywide spokesman Rick Simon said no one at the company would comment Wednesday on the bankruptcy speculation or would discuss details of the company’s situation.

“Management is completely focused on running the business in a changing environment,” Simon said.

Countrywide’s situation marks a stunning reversal for Mozilo, who proved to the world that with Wall Street’s help a company did not have to be have deposits like a bank to make millions of mortgages. Over the years, Mozilo’s pay packages — $45.2 million in 2005 alone — ballooned along with the his company’s fortunes.

Countrywide also bills and collects payments on $1.4 trillion in mortgages for itself and other lenders. What’s more, Countrywide is the largest customer for Fannie Mae, the big government-sponsored mortgage buyer. More than one-third of all mortgages sold to Fannie Mae comes from Countrywide.

“The question is — is Countrywide too large to fail? Will the Fed allow it or will it need to step in and bail it out?” Cecala said.