Banking & Finance

Countrywide Punished Over Quarterly SEC Filing Disclosures (CFC)

Countrywide Financial Corp. (NYSE:CFC) has filed its 10-Q quarterly report with the SEC, and the stock has gotten hammered in after-hours trading with a drop of more than 10%.  Investors should understand that many of these comments may have been included in prior filings and may have already been telegraphed by the company.  But right now in our credit crunch and liquidity squeeze Wall Street is just shooting first.  It isn’t even that they will ask questions later, because right now it’s just a status of shooting and walking away. 

Many of the pre-packaged quarterly disclosure statements and possible scenarios outlined herein sound ghastly as well, but these are frequently covered as risk factors in every filing.  After a huge down day like today, it’s no wonder that after-hours trading is being so hard on Countrywide.  After this reaction to a quarterly filing, you can bet that Countrywide’s CEO Angelo Mozilo will be on CNBC and elsewhere in media outlets Friday trying to bring about at least some calm and to state that many of these disclosures are routine (or at least somewhat) in the sector.

The company has also said that it believes the changes may hurt near-term but will ultimately help it in the long-run.  (If this was truly believed on the surface, then the shares wouldn’t be down over 10% in after-hours.)

We do not believe that any of our off-balance sheet arrangements have had, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Our material contractual obligations were summarized and included in our 2006 Annual Report. There have been no material changes outside the ordinary course of our business in the contractual obligations as summarized in our 2006 Annual Report during the six months ended June 30, 2007.

Here are some of the comments on the next page out of the end of the SEC filing that are hitting the stock:


We believe the current environment of rapidly changing and evolvingmarkets will provide increasing challenges for the financial servicessector, including Countrywide. Specifically, in the near term, we mayexperience:

·  Continued pressure on housing values and mortgage origination volumes
·  Increasing delinquencies and foreclosures
·  Continued disruptions in the secondary mortgage and debt capital markets and
·  More restrictive legislative and regulatory environments.
As a result of these conditions, Countrywide and other lenders may be experiencing, among other things, the following:
·  Lower loan production volumes
·  Lower margins on loans produced
·  Higher credit losses on delinquent loans and subordinated interests
·  Reduced access to secondary mortgage and debt capital markets and
·  Increased cost of debt.

In response to the current environment, Countrywide is making changesto tighten the underwriting guidelines for loan products offered andadjusting loan pricing to reflect market conditions. Further reductionsin the Company’s funding volume could result. Additionally, we expectto retain more loans in our portfolio of loans held for investment orto hold additional loan or security inventory until market conditionsimprove. In an effort to ensure the adequacy of our funding liquidity,we continue to transition
to more reliable funding sources, which may be more costly. We are alsooptimizing our organizational structure through, among other things,the planned integration of Countrywide Bank and Countrywide Home Loans.

While we expect these conditions may impact our earnings in the nearterm, we believe that the challenges facing the industry shouldultimately benefit Countrywide as the mortgage lending industrycontinues to consolidate.

P. 96 Housing Values

Housing values affect us in several ways……

Recently, we have seen housing price declines, including recentdeclines in housing values in many metropolitan statistical areas inthe United States. We expect housing values to remain stagnant ordecrease during the near term which will affect our credit lossexperience and may affect our willingness to offer certain mortgageloan products, both of which could impact our earnings, particularly inthe short term. Over the long term, we expect that housing appreciationwill be positively correlated with both consumer price inflation andgrowth in personal income.

P.96-97 Secondary Mortgage Market Investor Demand

Changes in investor demand for mortgage loans can have a significantimpact on our ability to access the secondary mortgage market as acompetitive outlet. In 2007, we have seen an increase in investorrequired yields, first for nonprime loans or securities followed byprime home equity loans and then nonconforming loans, together with alessening in the liquidity of such loans and securities caused byreduced investor demand. In addition, certain credit rating agencieshave announced that changes are pending to their securitization ratingsprotocol. These factors have reduced our ability and
willingness to sell such loans or securities into the secondarymortgage market and the availability and pricing of such loans toconsumers. Our gain on sale margin may be impacted in the short term

P. 97 Impact of Declines in Credit Performance

With the current contraction in the U.S. housing market and theresulting slowdown in price appreciation (or price depreciation in manymarkets), along with worsening economic conditions, we may experienceincreased credit losses in the near term. In 2007, we have observed amarked decline in credit performance (as adjusted for age) for recentvintages, especially those loans with higher risk characteristics,including reduced documentation, higher loan-to-value ratios or weakcredit scores. Deterioration in the credit performance of these loanshas resulted in increased credit losses and impairment of our relatedcredit-subordinated interests and higher claims under ourrepresentations and warranties. Credit markets are rapidly changing andevolving and we expect these changes to impact the housing market,demand for our mortgage-backed securities, our future credit losses andthe availability of credit enhancements for the loans and securities wesell and invest in, which may impact future earnings.

P. 97 Funding Liquidity

In the third quarter through the filing date of this Form 10-Q, fundingliquidity in the financial services sector was constrained primarilydue to changes in secondary mortgage market investor demand. Variousmortgage lenders have experienced operating difficulties and haveextended asset-backed commercial paper facilities or filed forbankruptcy protection. These events have further constrained fundingliquidity in the sector.

We have maintained access to our traditional, highly reliableshort-term liquidity sources. In view of current unprecedented marketconditions, we are accessing other pre-existing funding liquiditysources, procuring new sources and accelerating the integration of ourmortgage company with the Bank. As a result of this acceleratedintegration, a significantly higher percentage of our mortgage bankingfundings will occur in the Bank sooner than originally planned. TheBank has significant liquidity sources available to fund our mortgagebanking operations. While we believe we have adequate fundingliquidity, the situation is rapidly evolving and the impact on theCompany is unknown.

Right now opinion on this won’t matter.  A drop of this magnitude is hard to ignore, and this puts the stock back within striking distance of a 52-week low.

Jon C. Ogg
August 9, 2007

Jon Ogg can be reached at; he does not own securities in the companies he covers.

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