Countrywide Financial Posts Loss

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Countrywide Financial Posts Loss on Overdue Mortgages (Update3)

Jan. 29 (Bloomberg) -- Countrywide Financial Corp., the mortgage lender that Bank of America Corp. plans to buy, lost $422 million in the fourth quarter, failing on its promise to return to profitability. The shares rose 7.4 percent as concern eased that Bank of America might renege on the takeover.

The net loss equaled 79 cents a share, compared with a profit of $621.6 million, or $1.01 a share, in the year-earlier period, the Calabasas, California-based company said in a statement today. The loss was more than twice the 28 cents predicted in a Bloomberg survey of analysts.

Chief Executive Officer Angelo Mozilo agreed Jan. 11 to sell Countrywide, the biggest U.S. mortgage lender, for about $4 billion in stock to Bank of America, the nation's second- biggest bank. Investors have speculated the bid might be revised if Countrywide didn't fulfill Mozilo's October vow to restore profit by year-end.

"Some investors thought it would be even worse,'' said David Olson, president of Wholesale Access Mortgage Research in Columbia, Maryland, in an interview today. "Some people think Countrywide is worth nothing."

Bloomberg

Where did our tax dollars go? The Federal Home Loan Bank of Atlanta advanced $51.1B of our tax dollars to Countrywide Bank.

In exchange for the $51.1 billion in advances, Countrywide pledged $62.4 billion in loans, nearly 80% of its entire investment portfolio, as collateral. Of that, almost half consisted of pay option ARMs, most of them underwritten without any income verification. Delinquencies on the company’s pay option ARMs leaped 78% in the last quarter.

Senator Schumer's Letter to Federal Home Loan Bank

[A HERETIC I AM]

1. The money isn't "our tax dollars"

The FHLB system does not use federal tax money to fund its operations.

This page from their web site describes how funds are raised.

“How FHLBanks Raise Money: FHLBanks issue debt to institutional investors through the Office of Finance. These products are rated Aaa/AAA by Moody's and Standard & Poor's respectively. FHLBank debt is the joint and several liability of all the FHLBanks.”

Each year, 30 percent of FHLBank net earnings are paid into two separate programs. Ten percent of gross earnings go to the Affordable Housing Program (AHP) and 20 percent of the net income is paid into REFCORP. These statutory obligations are tantamount to a 30 percent federal levy on FHLBank income.

And from this page:

While the Federal Home Loan Bank System's mission reflects a public purpose, all 12 regional Banks are privately capitalized and do not receive any taxpayer assistance.

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2. GSEs are privatized in the U.S. sense where taxpayers pay for the risks and private holders get rich

In a 2003, testimony to Congress titled ‘Effective GSE Supervision Will Lower The Cost Of Home Ownership (PDF)’ and reports from groups such as FMWatch (PDF) and the Council for Citizens Against Government Waste (CCAGW) affirms that GSEs are taxpayer subsidized and/or backed by an implicit taxpayer guarantee.

FM Watch explains that the rating agencies give GSEs an AAA rating regardless of how much debt they issue. Their AAA rating is a direct consequence of their GSE status; that is, predominantly the unprecedented liquidity afforded their unlimited debt in the bond markets.

[A HERETIC I AM]

3. The taxpayers haven't paid for the risks - yet.

I am pretty sure I understand the point you are trying to make, but it is not entirely accurate to suggest that the taxpayers of this country have laid out money already to mitigate risk or insure the various GSE's loans. Also, none of the articles you linked mention the Federal Home Loan Banks. The FHLB system is separate from the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae)


In support of your position however, I looked for contrary evidence and found this article published by the Congressional Budget Office

The following paragraph and the ones that follow it at the link do indeed raise red flags.

The implicit guarantee is communicated to investors in capital markets through a number of provisions of law that create a perception of enhanced credit quality for the enterprises as a result of their affiliation with the government. Those provisions include a line of credit at the U.S. Treasury; exemption from the Securities and Exchange Commission's (SEC's) registration and disclosure requirements; exemption from state and local income taxes; and the appointment of some directors by the President of the United States. In addition, although federally chartered and federally insured banks face a limit on the amounts that they can invest in other types of securities, that limit does not apply to the GSEs' securities. Taken together, those statutory privileges have been sufficient to overcome an explicit denial of federal backing that the GSEs include in their prospectuses.

In short, the primary reason these GSE's are able to achieve the high credit ratings they do is because it is implied that the Federal Government (yes, that's us taxpayers) will step in if it becomes apparent that there will be defaults on the bonds issued by these organizations. It is important to remember that the Government is not required to do so. Again, Implied guarantee. Ginnie Mae is another thing entirely and there the guarantees provided by Ginnie Mae backed securities are EXPLICITLY backed by the Government In other words, Fannie and Freddie bonds could possibly default if the Government did not step in. Ginne Maes can not default because the Government WOULD step in.

But again, it is unlikely and it does it appear to be the case that the money "advanced", as you put it, to Countrywide had as its source, taxpayer funds.

edited for clarity

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4. Thanks for clarification.

What impact do you believe the shaky (failing??) standings of the bond insurers will have on this trillion dollar agreement with GSEs?

[A HERETIC I AM]

7. Much of this is admittedly WAY above my pay grade! - It's difficult to say, though

I am by no means a Bond Trader but I have a basic understanding of how MBIA, AMBAC and the like operate and what they do. I just went to the MBIA website to see what I could see and noticed that their latest annual report is 2006 and it is 97 pages long! I did find that they claim better than 75% of their insured portfolio is rated A* or better.

AMBAC is the same. The 2007 reports have not been released. I find it interesting that their 10 year stock charts appear almost identical.

MBIA (Symbol MBI)
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=mbi&sid=0&o_symb=mbi&freq=2&time=13

AMBAC (Symbol ABK)
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=abk&sid=0&o_symb=abk&freq=2&time=13

The confidence rug has been pulled out from under them (or they walked off it, one of the two)

It does not appear that any of the large monoline insurers actually back any GSE issued debt though. The GSE's don't need it because they have the government to point to. So I think (and again, I am NOT a bond trader, nor an expert on this asset class by any means) the answer to your question is "minimal". I say that because even though a bond insurer might have its corporate credit rating downgraded, that alone does not mean that a given basket of GSE issued bonds will be more likely to default. The effect the insurers have on what price a particular bond they insure is traded at is generally a positive. The idea that if an issuer comes into financial difficulty and looks as if it will not be able to make interest payments to bond holders or have an outright default, a company like AMBAC will write a check is a very positive incentive for underwriters when bidding for a new issue as well as for traders to have more confidence when selling or buying a bond on the secondary market. Even though the financial picture of an issuer, be it a city, county, state - what have you - may not have deteriorated, the loss of confidence in the ability of the insurer to pay will force the traders to demand higher yields and as a consequence the price of a given bond will fall. The problems AMBAC, MBIA and their brethren are experiencing is due to them insuring all the Mortgage Backed Bonds issued by the likes of the Countrywides and/or the major underwriters that bought the loans to begin with. Their credibility has been called into question as well as the very real possibility of them becoming insolvent if they have to pony up insurance claims on a massive scale. There are articles that say they " have a more than 70 percent chance of going bankrupt". I would think neither AMBAC or MBIA knows for sure just how bad it might get for them but I am willing to bet they are doing everything they can to fix the problem.

The impact in the overall bond market is more difficult to specifically determine. Treasuries have seen their prices bid up lately. A 4.25% coupon, 10 year Treasury bond will cost you over $1,040 to buy these days and is yielding about 3.7%. (30 yr Treas. costs over $1,100) Conversely, you can buy a AAA rated 5% coupon 10 year Corporate bond for about the same price yielding a little over 4% The truly well rated bonds will hold their value or go up in price. Those in doubt will see their prices bid down. How large either side of that equation is is anybodies guess.

Here is how it will directly affect those of us that have 401(K)'s, IRA's or other accounts; If you have invested in a bond fund inside one of the aforementioned accounts and that bond fund has in it's portfolio bonds that are being traded lower this week than they were a month ago, the NAV of the fund will suffer, but not really by that much. If the fund manager is forced to rid the fund of downgraded bonds because of the terms of the prospectus, then more problems can set in. Those can be the result of taking a large loss on a position that has lost value considerably. If the fund had a $5,000,000 position in ACME Rubber Chicken 5% 10 year debentures that he bought at par and now can only get $890 a piece for them, that is certainly going to affect the NAV of the fund as well as the yield it is paying. This is REGARDLESS of whether or not the ACME Rubber Chicken Company is has a stellar set of books or not. If the traders value their bonds lower, the fund manager is screwed. It really isn't that serious if you are a longer term investor, though. Most conservatively allocated bond funds don't change in price too terribly dramatically over time. Most trade in a fairly narrow range and only move one or 2 to maybe 3 dollars in price per share. Higher yielding funds are going to have more dramatic swings, just like the bonds they hold.

Remember, bonds are essentially loans that mature at "Par" or $1,000 (With a few exceptions). As long the issuer is able to make the steady stream of interest payments and can pay back the bond holders upon maturity, no loss will be suffered by the holder of the bonds regardless of the price actually paid for them. No one would buy a bond if it had a negative Yield To Maturity at the time of purchase.

*Anything below a "Baa" rating by Moody's or a "BBB" Rating from Standard & Poor's is considered "Below Investment Grade" and the further down the rating list, the more a bond is considered "Speculative". When ratings reach the level of "Caa" They have entered the realm of "Junk" status. The reliability of the ratings assigned various classes of bonds by these rating agencies has been called into question lately but I think they will get their houses in order. They both have an enormous amount riding on their ratings being seen as reliable and accurate.

The full list of ratings given by Moody's looks like this; Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2, Baa3, Ba1, Ba2, Ba3, B1, B2, B3, Caa1, Caa2, Caa3, CA, C, D.
Standard & Poor's system looks like this; AAA, AA+, AA, AA- A+, A, A-, BBB+, BBB, BBB-, BB+, BB, BB-, B+, B, B-, CCC+, CCC, CCC-, CC, C.

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8. Dupe

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9. Thanks again for taking the time to respond. nt

[Warpy]

5. News flash! Water is wet!

I can't believe BoA expected that dog to hunt.

I just hope they go over their books carefully and that a few perp walks result.

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6. You may have noticed, I am still stuck on the Nov 2007 transaction

If it was known in Nov 2007 that Countrywide's portfolio contained all of this worthless paper, what gave it value at the time of BoA great deal?

:shrug: