Through The Fly's Eyes: Countrywide Financial
from Larry Ramer of Theflyonthewall.com
Should We Say “Mortgage Mess?”
The latest evidence of the magnitude of the subprime loan crisis came from Countrywide Financial (CFC). Countrywide, the nation’s largest mortgage lender, reported yesterday that its Q2 profits sank 33%. Countrywide’s shares dropped 10.5% on the news, and the company’s CEO suggested that the subprime mess will get worse before it gets better.
“This is a huge battleship and we’re headed in the wrong direction,” said Countrywide CEO Angelo Mozilo, referring to the mortgage situation.
After hearing that assessment, only very brave investors would be ready to buy shares of Countrywide and other companies that rely heavily on U.S. mortgages. It seems that the shares of Countrywide and other mortgage lenders may drop further before they start to rebound.
Also, in the wake of Countrywide’s report, the “subprime mess” may just instead be the “mortgage mess.” Countrywide’s results suggest that the rising delinquency and default rates may be spreading to “prime” borrowers, including many people with home equity loans. There have also been reports, which we detailed in a blog earlier this month, that banks’ lending standards on mortgages for commercial properties have been far too lax.
This developing mortgage mess has tremendous implications for the whole market and the entire economy. Of course, all the industries closely connected to real estate, such as companies that make materials used in construction, are taking big hits. But the real problem will come as lenders pass the crunch of rising default rates onto borrowers. The nation’s big lenders, including Citigroup (C), Wells Fargo (WFC), and Bank of America (BAN) are reporting more loan defaults. The impact of those defaults will naturally be passed onto other borrowers. Already, there are persistent reports that financing leveraged buyouts is not as easy as it used to be. Businesses seeking to borrow money may also have a harder time.
Furthermore, many companies, from hedge funds to investment banks to insurance companies, invest in mortgage-linked bonds and securities. The erosion of these mortgage-linked investments also seems set to reverberate through the economy.
However, most American consumers have not yet been directly affected by the mortgage mess, and they continue to spend heavily. Perhaps more importantly, consumers and businesses in other countries, notably India and China, have not been affected by our mortgage problems. The revenue and profits that many American companies, including banks, are obtaining from outside the U.S. is keeping our economy healthy and the market bullish, with only a few hiccups here and there. The global economy certainly has its advantages.