Countrywide's Soggy Story

Is the lender liquid enough to make it through another crisis?
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Countrywide Financial

(CFC)

continued its steep ascent on Friday after executives sought to allay investor concern that the ailing mortgage lender still has liquidity problems.

"Our backup liquidity framework was certainly very much tested in the third quarter," said David Sambol, Countrywide's COO, during a two-hour plus conference call to discuss third-quarter earnings.

"While we certainly hope that we don't see another market stress ... like we did in the third quarter," Sambol said later in the call, "we are very much prepared ... should one come."

After posting a third-quarter loss of $1.2 billion for the quarter, or $2.85 a share, the Calabasas, Calif.-based company's shares catapulted 30% on Friday. Despite the loss, Countrywide had said it planned to return to profitability in the fourth quarter and in 2008.

Like other banks and lenders, the nation's largest lender has been plagued with writedowns on loans that the company could not sell as well as rising credit losses as home prices fell and borrower defaults rose.

As the markets for mortgage-backed securities essentially froze up this past summer, Countrywide faced a liquidity crisis so large that many investors feared the company would go under.

In August it was forced to draw down an $11.5 billion credit line. Later in the month it made a deal to sell

Bank of America

(BAC) - Get Report

$2 billion worth of preferred stock.

Countrywide said it had secured an additional $12 billion in borrowing through new or existing facilities in September.

During the past month, Countrywide's CFO Eric Sieracki said the company "significantly enhanced" its liquidity position, during the conference call. The company renewed a $10.4 billion asset-backed commercial paper facility. It also produced $6.25 billion of "new whole loan securities repo facilities," he said.

The company has a total of $157 billion worth of short-term borrowing capacity. At the end of the third quarter, Countrywide had drawn about $69 billion. It currently has an excess borrowing capacity of $33.6 billion of "highly reliable" short-term liquidity available, he added.

Countrywide is also scrambling to change its business model so that it has less reliance on the capital markets for funding loans in light of the deterioration of the mortgage industry.

Countrywide is integrating its mortgage operations into its bank subsidiary and plans to expand its retail banking franchise.

By the end of the year, Countrywide plans to add 50 retail "financial centers" to its current 150. The financial centers mainly operate with kiosks and just a few retail employees, allowing Countrywide to keep costs down and offer higher rates on deposit products.

Countrywide is currently offering some of the highest deposit rates in the industry. It currently offers 5.65% on a 1-year CD.

At least one analyst is skeptical about Countrywide's strategy for increasing liquidity.

"The challenge, in my opinion, is that they have found liquidity, but it appears to be at a very high price," said Fred Cannon, an analyst at Keefe, Bruyette & Woods.