[A-List] Top Lender Sees Mortgage Woes for 'Good' Risks

["Yoshie Furuhashi" <critical.montages@xxxxxxxxx>]

<http://www.nytimes.com/2007/07/25/business/25lend.html?_r=1&hp=&oref=slogin&pagewanted=print>
July 25, 2007
Top Lender Sees Mortgage Woes for 'Good' Risks
By VIKAS BAJAJ

Countrywide Financial, the nation's largest mortgage lender, said
yesterday that more borrowers with good credit were falling behind on
their loans and that the housing market might not begin recovering
until 2009 because of a decline in house prices that goes beyond
anything experienced in decades.

The news from Countrywide, widely seen as a bellwether for the
mortgage market, initiated a sell-off in the stock market, which is at
its most volatile in more than a year. The Standard & Poor's 500-stock
index fell 30.53 points, or 2 percent, to 1,511.04, its biggest
one-day drop in nearly five months. The dollar dropped to a new low
against the euro, edging closer to $1.40 to 1 euro. Stocks opened
sharply lower in Japan this morning.

The slumping housing market has become the biggest worry for the stock
market, which just four days ago set records, because of its potential
impact on the broader economy and financial system.

Countrywide's stark assessment signaled a critical change in the
substance and tenor of how housing executives are publicly describing
the market. Just a couple of months ago, some executives were
predicting a relatively quick recovery and saying that most home loans
would be fine with the exception of those made to borrowers with weak
credit who stretched too far financially.

Executives at Countrywide had for some time been more skeptical than
others but the bluntness of their comments yesterday surprised many on
Wall Street. In a conference call with analysts that lasted three
hours, Countrywide's chairman and chief executive, Angelo R. Mozilo,
said home prices were falling "almost like never before, with the
exception of the Great Depression."

Nationally, home prices have not fallen in the 35 years or so that the
government and private services have tracked them. Some researchers
like Robert J. Shiller of Yale have compiled data that goes as far
back as 1890 and shows that home prices fell for several years during
the 1930s.

Mr. Mozilo said that because of a large number of homes on the market,
the housing sector would continue to suffer until sometime in 2008 and
not begin recovering until 2009.

Shares of Countrywide fell 10.5 percent, or $3.56 yesterday, to
$30.50. The stock steadily declined during the conference call,
falling as far as $29.50 before recovering.

Countrywide's earnings were the latest in a series of shocks that have
rattled the markets in the last two months. Recently, Bear Stearns
said two of its hedge funds were virtually worthless after brash bets
on investments backed by risky mortgages with billions in borrowed
money.

Last month, the usually optimistic Robert I. Toll, the chairman and
chief executive of the luxury home builder Toll Brothers, acknowledged
that housing might not rebound before April 2008. In early February,
Mr. Toll had told Wall Street analysts the industry was "at the
beginning of the comeback trail."

Bond ratings agencies have begun to downgrade and re-evaluate mortgage
securities, which has virtually shut down the market for certain debt
offerings that specialize in home loans. That, in turn, has made it
harder for some private equity firms to finance buyouts.

Countrywide, Wells Fargo and other lenders have also stopped offering
a popular subprime loan that carried a fixed rate for 2 years and an
adjustable rate for 28 years.

Investors are demanding more in return for holding junk bonds and
yesterday pushed the yields on the securities to 8.4 percent, the
highest they have been in nearly two years, according to KDP
Investment Advisors, a research firm.

What was added to the worries yesterday was the idea that even
credit-worthy homeowners would default on mortgages at higher rates as
home prices fall — and that even a well-run company like Countrywide
could be hit by big losses.

At the end of April, home prices were down 2.1 percent from a year
ago, according to an index that tracks 20 large metropolitan areas
compiled by the research firm Case-Shiller. That compares with an 11.2
percent increase from April 2005 to April 2006.

Countrywide said about 5.4 percent of the home equity loans to
customers with good credit that it held an interest in were past due
at the end of June, up from 2.2 percent at the end of June 2006. By
comparison, more than a fifth of subprime loans were past due at the
end of June, up from 13.4 percent a year ago.

"Where you will see prime borrowers have trouble is where they took
the riskiest of adjustable-rate mortgages and put nothing down with a
first and second combined," Thomas Lawler, a housing economist, said.

Many of Countrywide's home equity loans were second mortgages made to
people who were financing the full or nearly full cost of their homes.
These loans are particularly risky because when house prices are
falling and a home is foreclosed and resold, the holder of the first
lien is paid off and often there is little left to apply to the second
mortgage.

"Countrywide is highlighting what is an industrywide problem," said
Christopher C. Brendler, an analyst with Stifel Nicolaus, an
investment firm in St. Louis. A second mortgage "is really an
unsecured loan like a credit card."

Countrywide said its customers who are falling behind on payments
appear to have lost jobs, had a divorce or fallen ill. Many are living
in homes that are no longer worth what they were when the loan was
made and cannot refinance because lenders have become stricter.

The company reported second-quarter earnings fell 33 percent, to $485
million, largely because it had to write down the value of loans and
other assets by $923 million.

Another problem is how Countrywide pays Mr. Mozilo, 68, and one of the
company's two founders. Though he is considered a pioneer in the
mortgage business, he has become a target for shareholder activists as
more attention has focused on executive pay in general and on the
lucrative rewards reaped by mortgage executives in particular during
the housing boom.

On the conference call yesterday, one investor asked Mr. Mozilo how he
could justify selling stock while Countrywide was buying shares, which
have fallen.

In the last five years, Mr. Mozilo has exercised options and sold
shares for a profit of nearly $380 million, according to data compiled
by Thomson Financial. Starting last fall, Mr. Mozilo significantly
increased the number of shares he was selling on a regular basis for
profits of more than $130 million.

"The decision to buy back stock is a collective decision that emanates
from the financial operation of the company and is based on what is in
the best interests for the shareholders," he said, noting that he has
all the shares he received when he started the company nearly 40 years
ago. "It's totally unrelated to the issue of my sale of stocks."

Julie Creswell contributed reporting.

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Yoshie