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Countrywide Denies Bankruptcy Rumors

The mortgage lender's stock continued to slide on more bad news, this time from Freddie Mac.

Updated from 2:03 p.m. EST

Countrywide Financial


denied rumors that it was on the verge of bankruptcy Tuesday, as the mortgage giant's stock traded below the $10 mark for nearly the entire afternoon.

In a statement released shortly before the market's close, Countrywide said it continues to have "ample liquidity and capital and will be a beneficiary of ongoing mortgage market consolidation."

The Calabasas, Calif.-based company said as of Oct. 31 it had $35.4 billion worth of "highly reliable liquidity," up from $33.6 billion in September. Countrywide Bank also has enough liquidity available "to meet its projecting operating and growth needs" and has significant contingent liquidity to meet evolving market conditions."

Countrywide shares closed down 2.7% to $10.28 Tuesday, after dipping as low as $8.21 during the trading day. The stock is down nearly 15% for the week and 50% since the Oct. 1 close.

Aside from the bankruptcy rumors, shares were hit hard by an analyst downgrade on worries about government-sponsored mortgage giants

Freddie Mac



Fannie Mae



Fox-Pitt, Kelton analyst Howard Shapiro said the nation's largest mortgage lender's viability to remain in business is likely in jeopardy if Freddie and Fannie -- both beset by third-quarter losses -- are not able to purchase its loans. Shapiro downgraded the stock to in line from outperform, in a note titled "The Lifeline is Withdrawn."

Shapiro said Countrywide's "survival strategy has depended on access to the secondary markets through

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government-sponsored entity purchase and resecuritization," in a note to clients. "That strategy is less viable in an atmosphere where the GSEs themselves are capital constrained and may need to shrink."

The downgrade comes as Freddie reported a

$2 billion net loss for the third quarter, sending shares swooning lower by 29%. The government-sponsored agency attributed the loss to increased money it needed to set aside for credit losses as well as a markdown in the value of its assets.

Freddie also said it hired two investment banks to help it look into raising capital and it is seriously considering cutting its dividend in half after posting the big quarterly loss.

Mortgage companies have been hit hard by an increase in defaults and a deterioration of home prices. Concerns about the state of the mortgage arena have caused an overall drop in confidence about debt securities that have been underwritten by banks and mortgage firms that have ties to unsavory mortgage loans.

The bad mortgage paper has unsettled the markets and hobbled lenders including big firms like Countrywide and



, which have been forced to retrench their operations to stay afloat. Both companies have had to cut staff as originations slowed. Currently the two lenders only originate loans that are eligible to be purchased by the GSEs.

Shapiro's downgrade also comes one day after shares of Countrywide plummeted nearly 13%, as market participants refreshed concerns about the Calabasas, Calif.-based company's liquidity, which may not be

ample enough.

Shapiro says that the mortgage crisis could indeed get worse after Freddie's announcement.

"Freddie Mac and Fannie Mae have provided essential liquidity in a time of crisis," he wrote. "Now that that liquidity function has essentially been withdrawn, it will mean, in our opinion, a further exacerbation of the housing downturn, even less credit available and steeper downturns in home prices. At this point, some kind of policy response is absolutely essential, in our opinion."

Freddie Mac's news is troublesome because it is one of the largest purchasers of residential mortgage loans. These loans are considered less risky, because the GSEs require strict documentation on the mortgages and do not purchase some of the more exotic loans that were created in the last few years, such as negative amortization loans and other subprime loans.

The big mortgage finance firm's ability to purchase loans is particularly important these days, as the market in which Wall Street firms purchase mortgages in order to create securities and other complex instruments from the pools of loans remains frozen for the most part. As the market for mortgage-backed securities seized up this summer, it forced lenders to retract from the originate-and-sell business model and concentrate only on originating loans that could be sold to the GSEs.

On Monday, Countrywide CEO Anthony Mozilo appeared to be upbeat during a phone interview with


. "I'm grateful I had the team here when I did," he said, according to the wire service. "So I think we can come out of the other side of this thing, certainly stronger and more mature than ever."