Countrywide Falls Off the Cliff

Countrywide Financial (NYSE: CFC  ) has shed more light on just how nasty the nationwide housing market has become. The embattled mortgage lender has announced a fourth-quarter loss of $422 million, compared with a gain of $622 million for the same period last year.

Because of the pending Bank of America (NYSE: BAC  ) acquisition, there was no conference call. That was probably just fine with CEO Angelo Mozilo, who can avoid having analysts and investors grill him. His company will have enough pain do deal with down the road.

Two out of three ain't bad
Perhaps most shocking was the announcement that 33% of all subprime-mortgage loans that Countrywide holds were delinquent in the fourth quarter. That's a massive number, and it illustrates just how incredibly complacent and unrealistic loan issuance became during the real estate boom of the past decade. Granted, these are subprime loans, so they inherently hold higher risk of delinquency than more traditional, higher-quality loans do. But a 33% delinquency rate clearly points to a massive blunder in underwriting standards that sold houses to folks who simply couldn't afford them.

In addition, Countrywide made provisions for credit-related losses of $924 million for the fourth quarter, or roughly 12 times what it set aside in Q4 2006. If annualized out, yearly provisions for write-offs would total $3.7 billion, equal to the company's current market capitalization. Makes you really stop and think about what you're "buying" for a share of stock, doesn't it?

Just a wee bit off
Also providing a big slap in the face for investors, whose shares have lost more than 80% of their value in the past year, are the comments Mozilo made during the Q3 conference call that Countrywide would return to profitability in Q4. The dazzling failure of his prediction doesn't necessarily hurt his credibility any more than his trademark tan hurts my eyes, but it does highlight just how uncertain even short-term events have become in the cesspool of mortgage debt plaguing the market.

To its credit, Countrywide is taking steps to halt some of the rocky lending practices that got it into this mess in the first place. Stricter lending practices -- in this case, making loans to only those who have more than a shot-in-the-dark chance at paying their mortgage -- have increased the percentage of loans Countrywide can pawn off to government-sponsored giants Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) .

If Countrywide can claim any glimmer of light, it's been the reassurance from Bank of America CEO Ken Lewis that he plans on keeping his word in accruing the company. Tuesday's report from Countrywide showed that its most recent book value stood at $22 a share, a far cry from the nearly $8 per share that B of A would shell out if the deal were to go through at today's prices. That shows you just how distressed the assets are perceived to be.

Deal of desperation?
A recent Wall Street Journal article suggested that a primary driver of the B of A deal was fear from Countrywide that government regulators would crack down on its business practices. Specifically, Countrywide was coming up short on the cash it needed to fund its business operations, and it had nearly tapped out its financing from the Federal Home Loan Bank system. By becoming part of the Bank of America family, Countrywide could put such fears to rest, since it will gain wide access to the bank's massive cash stash stemming from customer deposits.

Such news isn't joyful for investors, who face a huge spread between Countrywide's current share price and the price they'd receive if the proposed deal is completed -- enough of a disparity to fuel wide speculation that the deal might not come to fruition at all. With other megabanks, such as Citigroup (NYSE: C  ) and Merrill Lynch (NYSE: MER  ) , fighting to raise enough capital just to patch up their balance sheets, some investors questioned what Bank of America was doing by scooping up Countrywide, since doing so could inject yet more toxic debt onto its balance sheet.

In any case, Countrywide's latest quarter continues the blues that we've heard all too much from companies attached to anything associated with residential real estate. As I've noted in the past, the only surefire cure for this bubble is to wash out the excess that's been built up over the years. The question now becomes whether Countrywide, among others, will end up as victims or survivors.

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