Mortgage Lenders Face Long Rehab

Punk Ziegel & Co. analyst Dick Bove believes the mortgage industry will contract for four to six years before the glut of homes is worked off.

New-home sales at the end of October were about half of what they were at the peak of the housing boom in June 2005. The inventory of new homes hit a 17-year high in August. Existing-home sales are down 26% from February, and as of October, the inventory glut reached a 10.8 month supply, a multidecade high. Many economists believe home prices will fall another 5% to 15%.

Among some of the worst-hit lenders still in business, Countrywide posted a $1.2 billion loss for the third quarter, or $2.85 a share, sending its stock down 30% that day, amid concerns the company faces problems funding itself.

Washington Mutual has seen its profits wane as well, and just last week it announced plans to cut its dividend by more than half while it attempts to raise capital in the market for convertible preferred shares -- often a last resort source of funding for companies with balance sheet issues.

Any progress for borrowers and lenders in 2008 will depend largely on the path of interest rates. The beginning of the current credit crunch coincided with higher interest rates, as the Fed had inched the benchmark fed funds rate to 5.25% through 2006; the 10-year Treasury rate rose above 5% in June of this year.