One of Countrywide’s largest sources of mortgage volume was retail mortgage brokers. From the one person mom and pop shops, to the mid-sized regional mortgage brokers/bankers, to small locally owned banks that didn’t want to service their own mortgage loans because their volume wasn’t high enough to warrant the cost in a loan servicing center.

Countrywide was the wholesale shop that didn’t turn down loans. They had the loosest underwriting and the highest rebates (and/or SRPs) paid on Main Street. Remember all the Fast ‘N Easy 90% no (income or asset) doc loans you originated? Remember those 3.00 point rebates for Option ARMs with the 3-year prepay (plus the 1.00% origination fee)?

Fellow mortgage originators please put on your thinking caps with me.

Back in August 2007, BofA invested $2 billion in Countrywide with the option to buy the stock at $18 per share. Countrywide’s stock today is trading at $6.46. Oops!

Now BofA wants to invest another $4 billion (using BofA stock) to purchase all of Countrywide. That’s a $6 billion total investment.

What affect will this have on the mortgage origination market?

In November 2007 BofA shut down its wholesale loan centers.

Couple of reasons there for that:

The usual — that the delinquency and foreclosure rates of mortgage broker originated loans were 4-6 times the levels of BofA retail originated loans.

Wall Street’s secondary market for mortgage securities has almost gone over to tiered pricing for mortgage broker originated (if not stopped buying broker originated loans) versus retail employee originated loans.

Increased outright fraud with mortgage brokers.

And the biggie — no buyback obligations from mortgage brokers for bad loans that everyone else out there is on the hook.

What are mortgage brokers gonna do if BofA shuts down Countrywide wholesale? Do you really think that BofA will keep the Countrywide wholesale doors open? If I was a Countrywide wholesale employee, I would be updating my resume this morning.

What are Countrywide retail originators gonna do? Their options will be to work inside a BofA retail bank or BofA loan origination center. Not a bad idea for them, as long as they produce a minimum $1 million per month in fundings.

What about the Countrywide loan servicing employees? BofA services their mortgage loans in Greensboro, NC. That’s a long ways to commute for all Countrywide’s people working in Calabasas, CA.

And that doesn’t even begin to answer the $64,000 question: Why would BofA pay $6 billion for a company they could have purchased outright for $3 billion (Countrywide’s stock value yesterday)?

Yeah I know BofA already invested $2 billion that Countrywide burned through. And the $18 Countrywide strike price is now laughable (I’m glad I wasn’t the fool who came up with that number).

The real question we all want to know is how bad is Countrywide’s loan servicing portfolio? Rumors creeping out on The Street is that Countrywide has a very serious REO problem they are not reporting as of yet.

Follow me here. Merrill Lynch and Citigroup today announced another $10 billion plus mortgage related writedowns respectively for the 4th quarter of 2007. Like they didn’t already know this information 2-3 months ago? Whaddya think, we’re stupid? We already knew that. Just be honest and tell us ALL the damage upfront.

Just since April 2007, Countrywide’s REOs nationwide have climbed from 10,769 to 15,783 — a 47% increase. In California alone, Countrywide’s REOs have risen from 2,361 to 4,051 – a whopping 72% increase in just seven months. What are these numbers gonna look like in 1-2 years? Any math geeks want to extrapolate that one?

Some of us out there have been saying this subprime, Alt-A, no doc, low FICO, declining real estate values, mortgage implosion will reach $400 billion in losses. That’s some serious money.

Anyone who has ever worked with affluent customers knows one thing for certain. Affluent people don’t like to LOSE money. They don’t mind making less than market returns. They just hate to lose money.

Big corporations are the same way. It used to be that a $100 million loss was catastrophic. Multiply that number ($100 million) by 4,000 and we’re starting to get a sense of the real problems out there in the mortgage finance industry.

Let’s all understand that the real reason BofA bought Countrywide is strictly for access to the loan servicing consumers. Period. BofA wants to cross-sell HELOCs, credit cards, checking accounts, overdraft protection, business checking, auto loans, etc., etc., etc.

My only concern is the price BofA paid. Countrywide’s stock price might very well have gone to zero in bankruptcy. Why pay an additional $4 billion for something you could buy for a buck ($1) as long as the federal government would guarantee your mortgage loan losses?

Yeah, I know it’s hard telling your shareholders that you just threw $2 billion down the drain with your initial investment in Countrywide. But another $4 billion on top of that?

Time tells all truths.

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This entry was posted on Monday, January 21st, 2008 at 6:00 am and is filed under mortgage industry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.