If time is money, Countrywide Financial Corp. borrowed $11.5 billion on Thursday to buy itself some and ward off bankruptcy — the fate that has befallen some of its smaller competitors in the crumbling mortgage industry.
The question is: Was it enough?
In recent weeks, the Calabasas-based company, the nation’s largest mortgage lender by volume, has sought to reassure investors that it has the financial resources to ride out the credit crunch that has rocked the mortgage industry.
It had to tap those resources Thursday to shore up its balance sheet, drawing on its entire unsecured credit line from a syndicate of 40 banks.
The announcement sent its stock tumbling about 11 percent and prompted one credit rating agency to downgrade its rating to near-junk bond status.
Shares of Countrywide tumbled $2.34, to $18.95. The stock has lost more than half its value since January.
Countrywide accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.
Equity analyst Friedman, Billings, Ramsey Group Inc. said a continued iliquidity crunch for more than three months could send Countrywide into bankruptcy.
Other analysts said the credit situation will have far-reaching consequences.
“We’re in this situation where one of the biggest home lenders in the country is in significant financial difficulty and is being forced to take fairly extraordinary action to maintain it’s financial viability,” said Tony Hughes, managing director of credit risk for Moody’s Economy.com
“This means the threat of a credit crunch is very real. It means that mortgage finance generally will be hard to come by,” he said.
Goldman Sachs analyst James Fotheringham said, “it would not be in this country’s best interest to have its largest mortgage lender cease operations.” He did not elaborate.
Fotheringham said in a research note the country has yet to see the worst of the ongoing mortgage credit crunch.
“Industry trends are not improving,” he wrote. “Home prices are 13 percent to 14 percent overvalued (which could take several years to play out).”
Countrywide said it hopes to have nearly all of its loan volume funded through its Countrywide Bank FSB subsidiary by the end of the year.
“Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise,” Countrywide President and Chief Operating Officer David Sambol said in a statement.
John Kriz, a managing director of Moody’s real estate finance team, believes Countrywide now has enough liquidity to meet debt obligations through 2008.
Homeowners who make their monthly mortgage payments to Countrywide should not be affected by the company’s troubles, experts said.
The company’s credit agreements require it to maintain a net worth of at least $7.68 billion and places some restrictions on the company, including limiting the amount of debt that its mortgage servicing unit can accrue to $100 million, according to a filing with the Securities and Exchange Commission.
Credit rating agency Moody’s Investors Service downgraded Countrywide’s senior debt rating to “Baa3” from “A3,” citing Countrywide’s funding problems.
A ratings downgrade essentially makes it more expensive for a company to borrow money. Countrywide could be further downgraded if it continues to face liquidity problems, Moody’s said in a statement.
The new rating is Moody’s lowest investment-grade mark. Any downgrade would take Countrywide into “junk” status, which would keep many large institutional investors from owning its debt.
On Wednesday, Merrill Lynch & Co. downgraded Countrywide to “Sell,” just days after calling it a “Buy,” attributing the change to the rapid deterioration of the credit market.
The nation’s credit worries have grown as the secondary market for mortgages all but disappeared in recent weeks. Investors have worried about the value of loans and rising delinquencies and defaults.
Mortgage lenders rely on the secondary markets to borrow money to make more loans. The problems started as subprime mortgages — loans given to customers with poor credit history — started going delinquent and defaulting at faster rates.
The problems have spread to the broader mortgage market, making investors nervous about nearly all types of loans that cannot be purchased by Fannie Mae or Freddie Mac.
Such “conforming” loans are considered safer because Fannie and Freddie are government-sponsored entities. Countrywide said some 90 percent of the loans it originates from now on will be conforming loans or will meet its internal bank criteria.
The move to beef up its portfolio of conforming loans could erode Countrywide’s earnings prospects, because such loans “suffer thin margins barely covering overhead costs,” Fotheringham wrote.
“Credit costs are set to increase even further than we had anticipated as riskier loans are added to an already troubled portfolio,” he wrote.
By adjusting its product mix to originate Fannie and Freddie-approved loans almost exclusively, Countrywide will be cutting out most subprime, alt-A and jumbo loan products.
Alt-A mortgages are given to customers who either have minor credit problems or who cannot provide full income documentation required to get a traditional prime loan.
Jumbo loans are mortgages for more than $417,000, the cap at which Fannie and Freddie will purchase loans. Jumbo loans typically are given to customers with excellent credit history.