Countrywide faces uphill ride during bust cycle

LOS ANGELES – Sept. 17, 2007 – Countrywide Financial Corp. grew from a two-man start-up in 1969 to become the nation’s leading mortgage lender by deftly riding out housing boom-and-bust cycles.

This time around, however, the ride has been a lot rougher, leaving the company in a scramble to regain its footing as the housing market has turned from boom to bust.

To survive, it’s been forced to borrow billions of dollars, announce thousands of job cuts and dramatically restructure its lending practices to nearly eliminate risky subprime loans to borrowers with shaky credit that have led to massive foreclosures and defaults in the housing market.

“In an absolute level sense, this is the biggest challenge” Countrywide has ever faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.

Several analysts think Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.

But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.

“At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo,” Cannon said.

Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders move to focus on prime loans, a sector once dominated by Countrywide.

Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.

The company didn’t lead the charge to make those loans, “but as an industry leader, they were right there,” said Robert Napoli, an analyst with Piper Jaffray.

The Calabasas, Calif.-based company’s loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.

Countrywide and the rest of the industry also got caught up in the frenzy to make nontraditional loans then resell the mortgages for hefty profits to Wall Street banks.

Fortunes dove when demand for those loan packages plummeted amid rising defaults. During a conference call with Wall Street analysts in January, Countrywide Chairman and Chief Executive Angelo Mozilo said the company expected rising delinquencies and a weak housing market but was “well positioned and extremely optimistic about our prospects to continue generating growth and superior returns over future cycles.”

Since then, Countrywide stock has dropped about 60 percent and is now trading around $19 a share.

In a recent letter to employees announcing as many as 12,000 layoffs, he characterized the current housing market cycle as “the most severe in the contemporary history of our industry.”

The interest rate upheaval during the 1990s had a mixed impact on the company. Low rates at the start of the decade helped boost business amid a surge in refinancing.

When interest rates began to plunge at the start of this decade, Countrywide joined the rest of the industry in rushing to feed an unprecedented demand on Wall Street for home loans.

In recent weeks, the company has drawn down on an $11.5 billion line of credit and raised $2 billion by selling a stake to Bank of America.

It’s also closed the door to all subprime loans except for those it can sell back to U.S. government-backed lenders.

“Countrywide is quickly adjusting to market conditions and ... now has the breathing room to do so,” said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm.