Quick Take: Countrywide's $11.5 Billion Surprise

Mortgage lender Countrywide (NYSE: CFC  ) is striking fear into many investors' hearts today by drawing down its entire $11.5 billion line of credit.

The press release from the company makes it clear that the company's operations aren't anywhere near the status quo, because of the current tightness in the credit and commercial paper markets. And the action has already been interpreted as a negative by Moody's (NYSE: MCO  ) , which downgraded the company's debt.

Countrywide has been vilified in the media lately because of its large amount of originations in subprime loans, jumbo loans, and other loans that don't conform to the standards of the traditional loans that Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) purchase and securitize. When things were going well, this didn't matter to anyone, but now, investors are avoiding any non-standard asset-backed security like the two-week-old pizza in the back of my fridge. That's a big cash flow problem for Countrywide, particularly if its defaults are rising at the same time.

Countrywide, however, is a diverse business that also does prime and conforming loans, operates a bank, and retains the servicing rights on most of the loans it originates. All of these other operations provide the company with streams of cash that are generally more predictable, far more so at the moment. In short, it isn't quite the same situation as Accredited Home Lenders (Nasdaq: LEND  ) , which appears to be hanging by a thread. That said, the seize-up in the credit market and commercial credit markets is undoubtedly causing a cash crunch for the company, since it's forced to hold onto loans it might otherwise sell and retain the servicing rights for.

Countrywide's survival depends on how long the current situation persists. I don't have a horse in that race, but my colleague David Meier thinks it's a possibility that Countrywide still had some liquidity available before drawing down its credit line. To me, that means the company felt it needed some extra cash on hand, because it saw a decent probability that problems in the credit markets will persist long enough to make things very uncomfortable for it. How much time Countrywide bought itself is the next big question for investors to explore. With the shares down 20% today, investors either think not very long or have no idea.

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Nathan Parmelee thinks the general sell-off in financial services is creating some great opportunities. He's made a couple purchases, but has no ownership stake in any of the companies mentioned here. The Motley Fool has an ironclad disclosure policy.

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