Stick With a Proven Winner in Countrywide

That said, there is a meaningful offset. Most critics of these loans assume that a very high percentage of these borrowers will wait until the reset date, experience the huge shock in the monthly payment and default. This is not happening for two reasons.

First, borrowers are becoming more educated about this payment shock and are looking to refinance ahead of it. Second, the low interest rates right now and the tremendous capacity in the subprime mortgage market allow borrowers to refinance. Countrywide posted a fascinating slide on its Web site in its presentation at the Merrill Lynch Banking Conference this week, showing that two-thirds of those loans with resets on or before Dec. 31, 2007, have already been refinanced into other loans. Without a recession (and I'm no economist), the Pay Option furor appears overblown.

Notable Points

Countrywide's management, led by Angelo Mozilo, co-founder and CEO, has guided the company successfully through several credit cycles. When an investor is concerned about credit exposure, continuity of management is very important. This management team has built a valuable franchise that is inexpensive relative to its peers.

Finally, Countrywide is the largest originator of U.S. residential mortgages, with 15% market share. Bank of America (BAC Quote) is No. 6, with roughly 5% market share.

In a recent conference call, Bank of America said it was likely to consider disruptive strategies in mortgages, like it has with online trading. I look forward to learning more about what Bank of America plans in this product area, but an event occurred last week that piqued my interest.

Countrywide has a bank subsidiary that invests in mortgage loans it originates and provides warehouse lending to other originators, funded by deposits it accepts. Last week, Countrywide announced it was going to apply to the Office of Thrift Supervision for a thrift charter, changing the entity from a bank to a thrift.