Countrywide Moves to Ease Mortgage Misery

The largest mortgage lender in the U.S. said it has created a special finance unit with about 2,700 employees to work with borrowers who, for the most part, are current on their mortgage payments but may have trouble continuing to make payments once their adjustable rate mortgages reset at higher levels.

Calabasas, Cal.-based Countrywide may need a bit of good P.R. in advance of its third-quarter earnings release, scheduled for Oct. 26. Analysts expect the company to report a net loss of $1.10 a share.

The company said it's prepared to refinance up to $10 billion in mortgages and modify the terms of another $4 billion in mortgages that don't qualify for refinancing. The company will give borrowers who qualify the option to refinance into a prime loan or one insured by the Federal Housing Administration. For borrowers with credit issues, the company will offer Fannie Mae or Freddie Mac's expanded criteria programs. So far this year, Countrywide said it's helped more than 31,000 borrowers refinance to prime fixed-rate mortgages totaling more than $5 billion.

Countrywide also plans to offer an pre-determined reduced rate to borrowers of an additional $2.2 billion who are late on their loan payments and having trouble paying because of a recent rate reset.

In addition to sending out letters to borrowers as much as 180 days before a scheduled mortgage reset to ensure that borrowers understand their options, Countrywide said it plans to set up face-to-face meetings with distressed homeowners by hosting seminars around the country, participating in foreclosure prevention workshops, teaching borrowers about possible foreclosure scams, and offering loan workouts on-site.

The company also said it will work with non-profit and community groups across the U.S. in grassroots efforts to contact and counsel distressed borrowers, particularly in communities with unusually high foreclosure rates.

Investors didn't warm to the news. Countrywide shares fell 4% to finish at $15.05 on Oct. 23.

"Almost always, it's better to work with borrowers than to foreclose. Foreclosure is and always has been an extremely expensive and onerous process, for the lender as well as the borrower," said Frederick Cannon, an equities analyst at Keefe, Bruyette & Woods.

Standard & Poor's said the program should help some borrowers avoid foreclosure but it "will also likely obfuscate Countrywide's financial results, as charge-off levels and delinquent loans will likely be lower than they ordinarily would have been, with the risk that charge-off levels will later rise if these same borrowers are unable to keep pace with terms of the renegotiated loans." S&P reaffirmed its hold rating on the stock and its target price of $19 a share. (Standard & Poor's, like BusinessWeek, is a division of The McGraw-Hill Companies (NYSE: - )).

Cannon at KBW said he doesn't share that concern, as the $16 billion in loans that the program will address aren't necessarily ones that Countrywide holds on its own books but loans that it is servicing for other originators. Including the $3 billion is subprime mortgages it has originated since the end of June, Countrywide has a total of only $8 billion of subprime loans on its books, he said. (KBW has received compensation for investment banking services from Countrywide within the past 12 months.)

While the program is springing more from practical considerations than any charitable impulse, the primary beneficiaries will be hedge funds, foreign banks and other institutions that have loaded up on mortgage-backed securities, not Countrywide itself, said Gary Gordon, an equities analyst at Portales Partners, an independent research firm in New York, who has a buy rating on the stock.

By helping borrowers keep their homes, however, Countrywide will be able to maintain good relations with clients who are on the hook for these loans, he added.

The program is probably also a pre-emptive move ahead of a call by regulators at some future date demanding that servicers modify loans instead of allowing resets to occur, said Cannon, who has an underperform rating on the stock Servicers would prefer to do it voluntarily in order to maintain the freedom to negotiate more favorable terms with borrowers, he said.

Consumer rights groups such as Americans for Fairness in Lending say the program won't help those most in need homeowners whose loans are already in default. The 82,000 mortgages the program will cover are indeed a drop in the bucket compared with the 500,000 ARMs due for imminent resets that Housing and Urban Development Secretary Alphonso Jackson recently said he expects to go into foreclosure.

Some borrowers, however, would be better off losing their homes and moving on, whether to rent or buy a more affordable place to live now that home prices are coming down, Cannon said.

In its operational results for September, Countrywide said delinquencies in its mortgage loan servicing portfolio rose to 5.87% from 5.05% in August, but attributed nearly half the increase to there being four fewer business days in September than in August.

The company also said mortgage loan fundings fell 44% from a year ago to $21 billion in September, while its servicing portfolio grew by $215 billion, or 17%, from a year earlier to $1.46 trillion at the end of September, or 17%, from Sept. 30, 2006.

The market is awaiting word on just how hard the credit turmoil hit the company's bottom line. On Oct. 4, Friedman Billings Ramsey cut its third quarter estimate from breakeven to a loss of $3.00 a share and shaved its target price to $20 from $22, saying it now believes the profit impact from disruption in the non-agency mortgage market is higher than previously anticipated, but still hard to pinpoint.

"As the economic bid for non-agency mortgage loans deteriorated during August and September, we believe significant mark-to-market adjustments of loans held in the pipeline and reduced gain-on-sale margins will result in negative earnings during the third quarter of 2007," the note said. FBR predicted Countrywide will write down 5% to 10% of the value of its non-agency loans held in the pipeline, as record additional write-down of subprime residuals and a higher level of credit loss provisioning. (FBR has a market perform rating on the stock and seeks to do investment banking with the companies it covers in its research reports.)

With more subprime obstacles to surmount, the stock will probably trade close to its book value for the foreseeable future, the FBR note said.

As pro-active as Countrywide plans to be in contacting distressed borrowers, ultimately it's up to the borrowers themselves to reach for the extended hand.

Previously, Countrywide has said that in 20% of the homes it has foreclosed on, it never had any contact with the homeowners, Cannon said. Among the key steps distressed homeowners must take to qualify for refinancing: "You've got to call them back," said Cannon with a chuckle.