Countrywide Swings to $893 Million Loss
Countrywide Financial
(CFC)
reported a first-quarter loss far beyond Wall Street's worst expectations on Tuesday, as the mortgage lender boosted its reserves to cover bad loans due to a severe downturn in the U.S. housing market.
The Calabasas, Calif.-based company lost $893.1 million, or $1.60 per share, compared with a profit of $434 million, or 72 cents per share, a year earlier. Analysts' predictions varied from a loss of 88 cents per share to a profit of 80 cents per share, according to Thomson Financial. The average estimate was a profit of 2 cents per share.
Countrywide was forced to write down assets last quarter and increase reserves to cover future losses as home values declined and homeowners continued to default or become delinquent on mortgage payments. The company posted $3.05 billion worth of credit-related charges across all its divisions and added $1 billion to its reserve for such losses, which now totals $3.4 billion.
Countrywide said it will issue a 15-cent quarterly dividend on common shares on June 2, "despite its quarterly loss and the challenging market conditions." Holders of Series-B preferred stock will receive a dividend of $1,812.50 on May 15.
The mortgage company's shares were down a penny to $5.80 in recent trading. Countrywide stock has plummeted nearly 85% over the past year.
Countrywide's first-quarter results were a continuation of weak performance that started in mid-2007 as the credit crisis started to take shape. The troubled lender lost $1.62 billion during the second half and posted its first annual loss in over 30 years. Facing a plunging share price and an outlook for further housing-market deterioration, Countrywide agreed to a $4 billion buyout by
Bank of America
(BAC) - Get Report
in January, which is set to close during the third quarter.
The deal will create the largest U.S. mortgage company, but the combined entity still faces headwinds. Foreclosure filings more than doubled across the U.S. during the first three months of the year compared with the same period a year ago, research firm
RealtyTrac
said Tuesday. Nearly 650,000 properties received default notices, auction-sale notices and bank repossessions during the period, accounting for one in every 194 households.
The housing downturn has hit mortgage and banking companies nearly across the board. Pure-play mortgage lenders like
IndyMac
(IMB)
,
Freddie Mac
(FRE)
and
Fannie Mae
(FNM)
, to diversified lenders like
Washington Mutual
(WM) - Get Report
,
Sovereign Bancorp
(SOV)
and
Wachovia
(WB) - Get Report
, have all posted losses as a result.
Part of Countrywide's dilemma stems from its heavy exposure to markets like California and Florida, where the housing market has fallen faster and harder than in other parts of the country. California, which makes up more than 40% of Countrywide's portfolio, faced the largest amount of foreclosures and second-highest foreclosure rate during the first three months of 2008.
Countrywide has also suffered from nonprime loans, which are offered to customers with weak credit scores or which require little-to-no documentation. Countrywide was once the largest U.S. nonprime lender, with 11% of its portfolio attributable to such loans in 2005. It brought that portion down to 8% by the end of last year and did not produce any new nonprime loans in the first quarter.
Delinquency rates for Countrywide's subprime loans have skyrocketed and accounted for a notable portion of its charge-offs and reserves. About 36% of the company's subprime mortgages were delinquent last quarter compared with 9% for the overall portfolio. Those rates have risen from 20% and 5%, respectively, a year earlier.
Bank of America said last week that
it will discontinue nontraditional mortgages
like option-adjustable rate mortgages and "significantly curtail" others, including some Alt-A loans, which fall between prime and subprime. BofA already does not originate subprime loans. The company outlined plans on Tuesday to modify or work out at least $40 billion worth of troubled mortgages over the next two years in an effort to save more than 265,000 customers from losing their homes.
There were some bright spots within Countrywide's earnings report: It originated 6% more loans than in the year-ago period. Average daily applications were up sharply from fourth quarter, indicating that things may be improving from the end of last year.
Still, applications are down 36% from a year ago and Celent senior analyst Walter O'Haire noted that a large portion of those applications were not for new purchases of homes. That trend indicates "the last gasp of a refinance effort by consumers to pull any remaining equity out of their homes to pay off some higher interest debt -- credit card bills or auto loans," he said.
Another potential stumbling block are the class-action lawsuits against Countrywide and Bank of America, which allege that their deal undervalues Countrywide or otherwise breaches fiduciary duties. Additional suits are pending against Countrywide alleging that it misled investors about its lending practices and financial health or that directors and officers engaged in insider trading. The Federal Reserve, Securities and Exchange Commission and other state and local regulators are also investigating practices of Countrywide or its leaders, including CEO Angelo Mozilo's stock sales.
The companies and Mozilo have denied allegations and said they plan to defend themselves.
Looking ahead, O'Haire said the question remains whether the combined entity will be able to modify loans and help customers, while at the same time boosting its fee income. That is especially true, he said, "given the current hearings and calls for concessions from various quarters."