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Countrywide’s CEO sees housing-led recession

Calling the current credit crunch “one of the greatest panics I've ever seen in 55 years of financial services,” Countrywide Financial CEO Angelo Mozilo said Thursday that the ongoing housing slump will likely push the U.S. economy into recession.
/ Source: news services

Calling the current credit crunch “one of the greatest panics I've ever seen in 55 years of financial services,” Countrywide Financial CEO Angelo Mozilo said Thursday that the ongoing housing slump will likely push the U.S. economy into recession.

The financial markets took some solace from news that the largest U.S. mortgage lender had taken steps to shore up its finances as it struggles with a liquidity crunch with an infusion of $2 billion from Bank of America to help stabilize the company.

But Countrywide still faces longer-term problems as the financial storm rocking the credit markets continues. Mozilo said the turmoil in the mortgage market and the ongoing housing slump are far from over.

“I don’t see a light here at the moment,” Mozilo told CNBC. “Something could happen to change that overnight, but it seems to me we just have a way to go to work our way through this.”

Countrywide’s financial problems reflect a much wider turmoil in the U.S. mortgage market, which has prevented some creditworthy borrowers form getting loans at any price. Mozilo said he believes the ongoing housing slump will eventually push the U.S. economy into recession.

“I've been proven wrong so far,” he said. “I can't believe when you're having this level of delinquencies — [home] equity is gone, the tide has gone out — that this doesn't have material effect on the psyche of the American people and eventually on their wallets.”

Late Wednesday, Bank of America, the second-largest U.S. bank, said it bought non-voting preferred stock that yields 7.25 percent and can be converted into Countrywide common stock at $18 per share, 17.5 percent below the shares’ Wednesday closing price. Countrywide shares soared on the news.

Mozilo said that his company was forced to turn to the lender that initially put up the money to start the mortgage company after its other sources of capital, including the commercial paper market, dried up. The mortgages Countrywide is writing are “the best quality of loans in 10 years at the best price in five years and yet nobody wants to buy them,” said Mozilo.

To ease the panic in the credit markets the Federal Reserve recently cut its discount lending rate and has been urging banks to borrow money from its discount window. Banks have been reluctant to step up and borrow because of the possible perception they are in trouble, but four banks stepped up Wednesday to borrow some $2 billion from the window.

Mozilo said that option was not available to Countrywide because, while a portion of its business falls within the banking system, the bulk of its mortgage assets are held in a part of the company that is not eligible to borrow from the Fed.

“We’d love to do that [but] it couldn’t be done,” Mozilo said.

The $2 billion investment by Bank of America, which Mozilo called a “win-win" for both companies, helped bolster confidence in the troubled mortgage lender.

One immediate sign was a sharp drop in the cost of insuring Countrywide’s debt from a default by the company. The cost of insuring $10 million of Countrywide bonds annually for five years was $177,500, down from $330,000 late Wednesday, according to Sid Bakst of Weiss, Peck & Greer. That brings the so-called credit default swaps back to levels last seen at the start of the month, before Countrywide ran into trouble getting short-term funding.

But analysts said mortgage lender was not out of the woods yet.

“This investment by Bank of America in Countrywide should be a positive step in helping to alleviate pressure on Countrywide’s liquidity, and in restoring confidence in the mortgage firm,” said Philip Kibel, an analyst at the bond rating agency Moody’s. “However, Countrywide’s overall liquidity and access to funding remain strained due to continued dislocations in the mortgage markets, and these matters, among others, need to be addressed before Moody’s would resolve its the ratings review.”

Prior to the investment, Countrywide shares had fallen 49 percent this year as delinquencies and foreclosures increased, leading to a shortage of credit needed to make new home loans.

Worries about Countrywide’s health led many customers at its bank unit to withdraw money, including deposits that were federally insured. On Monday, Countrywide placed advertising in several newspapers to assure depositors their money was safe.

On Thursday, Mozilo said those worries had been caused by analyst report by Merrill Lynch raising the prospect that the company was headed for bankruptcy, a report Mozilo called “totally baseless and irresponsible.”

“Our depositors — primarily senior citizens — stood on line frightened to death that Countrywide would go bankrupt and lose their money,” said Mozilo.

While he said “no company can guarantee” they won’t go bankrupt, “I can tell you there is no more chance for bankruptcy today for Countrywide than there was six months ago or two years ago. We are a very solid company.”

The investment by Bank of America came six days after Countrywide stunned investors by tapping an entire $11.5 billion credit line because it was having difficulty selling short-term debt.

This raised concerns about how well the Calabasas, Calif., -based company could navigate the credit crisis afflicting a wide range of U.S. lenders. At least two analysts said bankruptcy was possible if market conditions worsened.

Countrywide made 17.4 percent of U.S. mortgage loans from January to June, according to newsletter Inside Mortgage Finance. Charlotte, N.C.-based Bank of America ranked fifth, with a 6.7 percent share.

Countrywide’s market value was about $12.6 billion as of Wednesday’s close. The Bank of America investment raised speculation that it would eventually seek to buy Countrywide outright.

“Eventually I think they’d be looking to acquire the whole firm,” said Ganesh Rathnam, an analyst at Morningstar Inc. in Chicago. “I don’t see why they would otherwise buy $2 billion into it.”

But Mozilo played down that possibility on Thursday.

“There may be things down the line they can do for us better than we can do and vice versa,” he said. “So I think there area strategic initiatives that could be developed overtime. But no, there is not even a thought of Bank of America - at least in my mind - buying Countrywide.”