Countrywide: The Good, The Bad, Or The Ugly?
Countrywide’s announcement on Tuesday that it was starting a $16 billion program to help borrowers keep their homes landed with a dull thud on Wall Street. Yet even though the preservation program may not directly enhance Countrywide’s bottom line it could help boost the health of the U.S. housing and mortgage markets. But investors were not impressed. The Calabasas, Calif.-based company’s shares slid 4.0%, or 63 cents, to $15.05 on Tuesday afternoon.

Countrywide: The Good, The Bad, Or The Ugly?
Ruthie Ackerman, 10.23.07, 6:40 PM ET

There's an old saying that if you owe the bank a little bit of money, they own you, but if you own the bank a lot of money, you own them. The logic behind that adage was highlighted Tuesdaay when mortgage lender Countrywide Financial said it would ease terms to thousands of borrowers who might otherwise lose their homes to foreclosure because they couldn't afford their monthly debt repayments.

Countrywide’s announcement on Tuesday that it was starting a $16 billion program to help borrowers keep their homes landed with a dull thud on Wall Street. Yet even though the preservation program may not directly enhance Countrywide’s bottom line it could help boost the health of the U.S. housing and mortgage markets.

But investors were not impressed. The Calabasas, Calif.-based company’s shares slid 4.0%, or 63 cents, to $15.05 on Tuesday afternoon.                  
                                               Countrywide Financial
                                           
It may just be a case of too little, too late with Countrywide Financial (nyse: CFC - news - people ) Chief Executive Officer Angelo Mozilo’s face plastered all over the news after he made millions on stock sales as the mortgage lender headed into dire financial straits. With the Securities and Exchange Commission reportedly scrutinizing those sales, investors may be looking to invest elsewhere. (See “ SEC Investigates Countrywide CEO”)

Countrywide’s home preservation program will help borrowers at risk of default refinance or modify adjustable-rate mortgages resetting in 2008. Countrywide said it would reach out to about 82,000 borrowers. It sees itself refinancing about $10 billion in loans, modifying an additional $4 billion and contacting borrowers of $2.2 billion in loans who are late and having trouble paying because of a recent rate reset.

David Sambol, president of Countrywide, said he didn’t believe that any of the company’s subprime borrowers who are trying to make payments should lose their homes because of the rate reset. “Unprecedented times call for unprecedented remedies,” he said.

On Oct. 16, Federal Reserve Chairman Ben Bernanke cautioned that the struggling U.S. housing market would be a significant drag on the economy into 2008. (See “ Bernanke: Not The Bottom Yet”)

The pin that burst the housing bubble’s balloon started with subprime mortgages, which are loans made to borrowers with less-than-sterling credit histories. As borrowers started defaulting on their loans, home prices began to fall, increasing the pressure on the housing market and endangering the bond investors who provided the capital for the mortgages. Eventually, bond investors began to shun all kinds of risky loans, putting pressure on the world economy.

The problem was exacerbated by mortgages with low initial rates that then reset to much-higher market interest charges after two years. Borrowers who could afford the teaser rates could not count on rising real estate prices to allow them to refinance or sell their homes at a profit, as had been the case during the bull market in housing during the early years of this decade.

Last week, Treasury Secretary Henry Paulson said the financial industry should provide immediate help for homeowners trying to refinance, which is exactly what Countrywide is doing.

Fox-Pitt Cochran Caronia analyst Howard Shapiro said Countywide’s plan is the most prudent and smartest thing the mortgage lender could do. By helping borrowers to keep their homes, Countrywide is not only saving itself the cost of foreclosure, but it is preventing social and economic disruption. Still, said Shapiro, it is unclear how much it will cost the company to ease its borrowing terms.

Countrywide is not the only lender to offer this type of program. Washington Mutual (nyse: WM - news - people ) announced a similar program, Shapiro said.

Bart Narter, senior analyst with Celent, a Boston-based financial research and consulting firm, sees Countrywide’s announcement as choosing the lesser of two evils. Countrywide does not have a huge loan renegotiation department and organizationally it’s a shift in thinking, he said. But, “it’s the smartest thing for them to do right now given the really bad environment because they’ll lose less money and there will be no further damage to the market.”

Countrywide said so far this year it has completed 20,000 loan modifications and helped more than 40,000 borrowers stay in their homes through existing programs.

http://www.forbes.com/markets/2007/10/23/countrywide-mortgage-preservation-markets-equity-cx_ra_1023markets34.html