For most societal changing events, there comes a time when you realize we have reached a tipping point. Not any tipping point, but a point where it is impossible to go backwards. I believe we have hit that stage with housing. Imagine a graph that grows exponentially from cracks in the housing market to a full on panic. In the last presidential debates, candidates from both leading parties rolled out plans on fixing the economy and addressing the growing problems with the housing market. From more rate freezes to rebates, to tax cuts, all these ideas are being bandied about for political capital. Yet this credit bubble is larger than they are. This past week we had a market that fluctuated up and down with rumors flying all over the place. Let us examine the Countrywide deal.
The timeline goes like this:
Monday: Stock price is hovering around $7.6 and the market awaits for further information regarding the company. It is known that they will be reporting their earnings on January 29th and all eyes are on the largest originator in the country for signs of the housing market.
Tuesday: Stock plummets to $5.12 on news that delinquencies are rising and so are foreclosures. It is becoming clear that the company is not going to have stellar forth quarter earnings. Rumors start circulating that bankruptcy may be the only option for the company.
Wednesday: Continued worries about the company send the stock down to $4.43. It is now only a matter of time before it ends up in the graveyard with other mortgage companies. At least this is what appears to be the case. Most recognize this pattern since they saw it happen with New Century Financial and also American Home Mortgage.
Thursday: After starting the day trending lower the stock shoots up to $8.58 on rumors that Bank of America is in advanced talks for taking over Countrywide. The New York Stock Exchange contacted Countrywide because of “unusual” activity in the lenders stock.
Friday: It is formerly announced that BofA will be buying Countrywide for $4.1 billion in stock. Shareholders of Countrywide will be receiving 0.1822 of BofA stock for the deal. Countywide shares plummeted back down to $6.33 on this news. Something smells fishy about the deal and raises the eyebrows of many according to Seattlepi:
“The aggressive business practices of Countrywide, where employees were encouraged to push borrowers into shaky loans to rake in high fees, stand in sharp relief to the friendly, welcoming image Bank of America works hard to project.
“Overcoming all of the trauma of Countrywide employees, and convincing angry Countrywide customers that this company is now kind and benevolent is going to be no small feat,” said John Kanas, who headed North Fork Bank for 35 years, before overseeing its acquisition by Capital One; he left Capital One last year.”
It is an incredible cultural shift and the two companies couldn’t be further apart. This deal won’t go through so smoothly. Some are questioning the decision for the purchase:
“For instance, Lewis will have to reach out to distressed Countrywide borrowers whose credit profiles would have qualified them for low-cost loans but were steered into expensive mortgages.”
Couple of things here. First, this is not good for Countrywide employees and does not stop the internal problems that are still ticking within the company. If anything, it looks like BofA is gaining a lion share of the mortgage market and is trying to position themselves as a safe, secure, and diligent mortgage lender. The complete opposite of what Countrywide has been practicing on a large scale over the past few years. Something is going on deeper here and speculation abound is that certain folks simply did not want to see the largest mortgage lender of the country implode at a time when housing is already shaky. Having a large respectable bank like BofA buying up Countrywide may make many investors here and abroad think that we are approaching some sort of bottom in the housing market. The timing is also well suited considering the winter months usually see a drop off in inventory which is seasonal but this will be spun of course. The deal is expected to close by the third quarter and on paper, it looks like it will be neutral to BofA but again there is the law of unintended consequences:
“The first thing to do is come up with an algorithm to figure out who those folks are and how to deal with them,” said Herbert Sandler, who, with his wife, Marion, founded Golden West Financial, the giant California savings and loan bought by the Wachovia Corp. in 2006.
But Lewis has to some degree placed his own bank at risk. He must fix Countrywide while simultaneously absorbing the company’s employees, seeking to cut costs and managing its still-hefty exposure to the troubled mortgage market.”
Even thinking about the need to revamp their system to streamline these mortgage workouts will cost more than the amount they paid for the company. Yes, they will have write-offs including their $18 stock buy of Countrywide which wasn’t such a smart decision. Given that BofA does not have the magnitude of subprime, Alt-A, and option ARM mortgages that Countrywide has, they are entering into uncharted territory. Why not wait until bankruptcy to pick the company apart? Certainly there are good things with Countrywide but given their massive portfolio of risky mortgages that are set to reset this year and for many more years, something deeper is going on. How aggressive has Countrywide been? Take a look at this data provided by National Mortgage News:
Top Originators Q3 2007:
Countrywide: $94 billion
Wells Fargo: $68 billion
Chase Home Finance: $51 billion
Bank of America: $48 billion
CitiMortgage: $45 billion
WaMu: $33 billion
Now let us look at the top subprime lenders:
Top Subprime Servicers at 9/30/2007 (by servicing volume):
Countrywide: $120 billion
Chase Home Finance: $75 billion
CitiFinancial: $64 billion
Option One Mortgage: $62 billion
Ocwen Loan Servicing: $51 billion
You would think that with such a large amount of subprime loans already in their servicing portfolio, they would have slowed down but take a look at the amount they originated in Q3 of 2007:
Top Subprime Originators in Q3 2007:
Wells Fargo Home Mortgage: $3.38 billion
Countrywide: $3.32 billion
Option One Mortgage: $3.28 billion
Chase Home Finance: $2.8 billion
Keep in mind that BofA is nowhere in the subprime world and if they are to acquire Countrywide, they are going to all of a sudden inherit a large portfolio of these loans? There has to be more than meets the eye here. BofA stayed out of the subprime world and almost overnight, they would be one of the leaders of the subprime game. And you’ll love this statistic:
“Countrywide continued to shift away from risky subprime loans to people with shaky credit histories, with fundings totaling just $6 million last month, down from $3.73 billion in December 2006.”
So basically without subprime, they don’t have much. They originated as many subprime loans in December of 2006 as the price tag BofA is willing to purchase them at. You will also have to wonder what is going to happen with all these loans on the books. How will they blend this into the overall company? What does this mean for the remaining 50,000 employees for the company? Is there some implicit guarantee by the government regarding these loans to BofA? Even by BofA’s own data it looks like we are nowhere out of the water with toxic mortgage products:
Thus concludes another week where the Fed is sacrificing the dollar, bad companies are propped up, and the middle class is once again squeezed and will most likely fit the bill. Joe and Mary main street USA have been diligently saving in their 401(k) and are seeing big hits. Without consumer spending, this economy is coming to a screeching halt and for those to say a recession isn’t likely to happen are simply misleading the public. American Express and holiday sales are not shoring up any further confidence. This deal is also big for California since Countrywide is based out of Calabasas, near Malibu. This isn’t good considering the California budget shortfall and the Governor proposing letting out inmates, closing state parks, and cutting healthcare services to the poorest as a way to balance the problems. But the job losses are signifiant as reported by the LA Times:
“The troubled mortgage lender is a major presence in the business and residential corridor that straddles Los Angeles and Ventura counties on both sides of the 101 Freeway. More than 600 people work at the headquarters complex in Calabasas, with about 4,500 more a few miles to the northwest in Simi Valley.
Thousands more work at sites scattered from the west San Fernando Valley to Thousand Oaks, as well as in offices throughout Southern California.
How many of those jobs will be jettisoned by Bank of America Corp., the North Carolina-based financial giant that has agreed to buy Countrywide for $4.1 billion, is unclear. But when one corporation buys another, it generally expects cost savings, and that usually translates into job cuts.
“You just ruined my day,” dry cleaner Doug Tempo said after learning of Countrywide’s takeover. “Business is slow enough. I don’t need another hit.”
However their is a silver lining offered by the House Financial Services Committee:
“Mr. Mozilo could display some goodwill by donating any severance pay he stands to receive to the nonprofit housing counselors trying to prevent foreclosures,” said Sen. Charles Schumer, a New York Democrat who heads the Congress Joint Economic Committee.
“Hopefully, this deal will clean up the company’s harmful business practices that victimized homeowners across the nation and fueled the subprime mess,” Schumer said in a statement.
The chairman of the House Financial Services Committee also said Mozilo should surrender some of his wealth to help some of the millions of American homeowners now facing default.
“I am calling on Angelo Mozilo, who will be profiting from this transaction personally, to donate a substantial portion of the $150 million he has collected over the last several years to nonprofits and other institutions that are helping us deal with the problem he helped to create,” said Frank, a Massachusetts Democrat.”
Anyone want to make a wild guess on how much money is actually going to be donated?
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Bloomberg published an article this morning about 
Last year was fairly robust for on-demand software IPOs, as seen with companies like 
and 
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