This column was originally published on RealMoney
on Feb. 6 at 7:32 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney,
The conundrum of Countrywide (CFC) going up even as another subprime dealer, Mortgage Lenders Network, goes under, may be answered by a simple tenet: The weak hands are going under, leaving the biggest and best to triumph.
When I pulled up with Angelo Mozilo, the man who built Countrywide -- the man who is Countrywide, some would say -- we joked about how strong Countrywide's business is because it has always "modeled" the bad loans better than anyone. One of the mistakes made by the analyst community is believing that any loans that go under could be death to a lender. In truth, the good ones model what will happen under a lot of scenarios, and it is pretty clear that Countrywide has the best models. Always has.
When the company's stock got bid up on takeover rumors, despite insider selling, I expected it to come right back down.It didn't because what's really happening is the long-awaited shakeout. There have been too many crummy players in this business. You are seeing the small ones go under -- and some larger private ones, too. What you aren't seeing is the pullback in the major brokerages' business that is emblematic of a recognition that the margins got too bad in the subprimers that they bought to get the flow for mortgage back. You heard this if you listened closely on all the big brokers' conference calls. If the brokers are pulling back and the smaller independents are going belly up, that leaves Countrywide to reap the benefits of the inevitable expansion in margin that comes from the end of the price wars for subprime. That's why it is going up. That's why it will continue to go up. That's why Countrywide is still a buy, despite the problems in housing and the headlines about how bad this business is.