Countrywide Home Loans – Analysis

Countrywide Home Loans is one of the larges mortgage companies in the United States. The company was founded in 1969 and the business is focused primarily on real estate finance and related activities. For years the company has been consistently among the top mortgage companies in the country. Recently, the mortgage industry has been in turmoil. Adjustable rate mortgages and a poor housing market are a few of the factors that are causing the industry to be essential turned upside-down. Even when faced with today’s poor housing market and a time when many mortgage companies have either closed their doors or filed for bankruptcy protection, Countrywide Home Loans has survived its own struggle to remain one of the most profitable mortgage companies in the United States.

A majority of Countrywide’s revenue is generated through two sources. One of those sources is through loan origination. Loan origination is the process in which the lender actually funds the loan. An example would be when a borrower decides to refinance or purchase a home, the borrower will work with the lender to approve their loan so the lender can close and fund the loan. The other source of revenue is through loan servicing. This process is after the loan has closed and the lender gets paid for collecting payments from borrowers.

Not only will Countrywide service their own loans, but they also buy loans from other lenders and brokers to add to their portfolio. After reports of net income of over 2 billion dollars the past two years, Countrywide is not on pace to reach that target this year (http://finance.google.com/finance?q=NYSE:CFC). The company’s sluggish reports are more of a reflection of the current state of the market then of its own strategies.

“Over the past few years, the most common type of sub prime loan has been adjustable-rate mortgages known as the 2/28 ARM. Since mid-July, five of the six biggest sub prime mortgage lenders stopped offering 2/28 ARM’s.”( http://bankrate.com/brm/news/mortgages/subprime_20070726_a1.asp?prodtype=mtg). A 2/28 ARM is an adjustable rate mortgage that is fixed for only the first two years and then becomes an adjustable rate mortgage after that. One major company who has fallen during the housing decline has been New Century Mortgage.

“New Century has become the premier example of a group of companies that grew rapidly during the housing boom, selling working-class Americans with questionable credit huge numbers of “sub prime” loans with “teaser” rates that typically rose after the first two years. This business transformed the once-tiny New Century into a lending powerhouse that was held up as a model of the mortgage industry’s success.”( http://www.washingtonpost.com/wp-dyn/content/article/2007/05/06/AR2007050601402.html).

The quick rise to the top was a short peak as New Century Mortgage was one of the largest companies to go under. “New Century listed liabilities of more than $100 million in its Chapter 11 papers filed with the U.S. Bankruptcy Court in Wilmington, Delaware – the largest bankruptcy case to date in the sub prime mortgage sector. (http://www.iht.com/articles/2007/04/02/business/loans.php)” New Century was a sub prime lender. A sub prime lender is a lender that lends money to borrowers with less than perfect credit. A major reason for the collapse of the sub prime market was because many borrowers were given adjustable rate mortgages but were qualified only on the payment during the fixed period. These products were pitched as “band-aid loans”.

The product was being sold since rates were at an all time low and borrower’s had equity in their home so they were able to afford to pay off all of their credit card debt with the refinance. A vast majority of these loans were 30 year loans where the interest rate was fixed for only 2 years. What has happened and will continue to happen will be that the loan will enter its adjustment period and borrowers will not be able to afford their new payment. Since property values have stabilized, borrowers will no longer be able to refinance and cash out and the equity on their homes since there is no longer equity in the home.

The chain reaction to that is homes will go into foreclosure; investors will tighten their standards on buying loans which is essentially wiping out the sub prime market. “In addition, tightened lending standards stemming from the sub prime crisis likely mean fewer buyers, pushing down home prices. http://money.cnn.com/2007/08/10/real_estate/mortgage_rates/index.htm?postversion=2007081016”.

Countrywide has avoided become victim to this problem for a few reasons. One reason is that the company offers a wide product mix. The company does not have a niche market. They offer A through C paper products. An “A Paper” is considered a borrower with excellent credit and a solid job history. A “C Paper” borrower is described as someone who have blemishes on their credit and/or they are delinquent on the mortgage payment currently on in the recent past while “B Paper falls in between. The majority of loans underwritten today are still “A Paper” loans. Since Countrywide offers a wide variety of loan products, the company can withstand the blow of defaulting loans since it has a large portfolio of good loans.

A majority of the mortgage lenders who went out of business were strictly “Non A-Paper” or sub prime lenders. Another reason how Countrywide has avoided going under is because the company services their own loans. This has enabled Countrywide to hold on to there sub prime loans in a market in which investors have little interest. Most mortgage lenders do not have that luxury. Not only does Countrywide have the cash on hand to service sub prime loans, they still have billions of dollars available to them in warehouse lines. The ability of not being dependent on investors buying their loans has greatly impacted Countrywide’s ability to remain profitable during the mortgage fallout.

“The nation’s biggest mortgage lender sells two-thirds of its loans to government-sponsored enterprises like Fannie Mae, which are under mandate to keep buying loans.

http://www.forbes.com/feeds/ap/2007/08/03/ap3984906.html”. “In a Securities and Exchange Commission filing, the Calabasas, California-based company said it was at midyear using $93.3 billion of its $283.6 billion of short-term liquidity, leaving $190.3 billion untapped. It listed $3.8 billion of long-term debt maturing within six months. http://money.cnn.com/2007/08/06/news/companies/countrywide_liquidity.reut/index.htm”.

Countrywide is also staying active in the retail mortgage market in order to survive. “Countrywide Financial Corp. will buy up to five retail loan origination branches in Georgia, Florida and North Carolina from HomeBanc Corp. (http://www.bizjournals.com/jacksonville/stories/2007/08/06/daily20.html”.

By buying smaller companies, Countrywide is able to maintain its footprint in the retail mortgage market without having to open new branches. The company can transition the newly acquired branches to comply with the company’s standards. Countrywide is also reaping the benefits just because they are a large company that can withstand the blows from a down market. “”The consolidation will drive the business completely to the largest players,” said Brenda White, managing director at Deloitte & Touche Corporate Finance LLC in New York, who consults on acquisitions. http://www.sltrib.com/business/ci_6569222“.

A major advantage to being a large lender is that the company will not be affected by the sharp increase in foreclosures and delinquent mortgages. “Countrywide said expected foreclosures as a percentage of unpaid principal rose to 1.04 percent from 0.46 percent a year earlier, and 0.96 percent in June.

Delinquencies rose to 5.10 percent from 4.11 percent last July, and June’s 4.98 percent. http://money.cnn.com/2007/08/14/news/companies/bc.countrywide.lending.reut/index.htm postversion=2007081411”.

Even with all of the turmoil that is currently plaguing the mortgage industry, there will always be profits to be had. Due to the fact there they will always be the need for homes; there will also be a need for money to be lent to them. Barring circumstances where borrowers do not need to borrow money, there will always be a market for lending institutions. Since Countrywide has grown to the size that they currently are, they have the resources available to withstand any dangers that may come across in the coming months. As companies continue to close their doors, large companies like countrywide will be able to continue to lend to borrowers which will enable them to remain one of the largest and most profitable companies in the mortgage industry.