Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Countrywide Financial - The Next Big Bankruptcy To Hit the Financial Markets

Companies / Financial Crash Nov 26, 2007 - 01:42 PM GMT

By: Money_and_Markets

Companies

Best Financial Markets Analysis ArticleMartin Weiss writes: As we warned you here in August ... and as I explained on CNBC a few days later ... America's kingpin of mortgages is on a collision course with bankruptcy.

Its name: Countrywide Financial

If it goes under, the impact on U.S. financial markets will be immediate; the damage to the U.S. economy, long-lasting.


So don't write this off as just another, fleeting chapter in the housing bust story.

Countrywide is the GM and Ford of the mortgage industry, originating $340 billion in loans in the first nine months of the year — more than the mortgage subsidiaries of Bank of America and Citigroup combined.

It's the company that can make or break the entire housing and mortgage industry.

If it goes broke, few stock or real estate investors will be able to escape the consequences. Many could lose everything.

Already, Countrywide has laid off about 12,000 employees, a number that could soon rise to 20,000 as mortgage originations plummet.

Already, Bank of America, which infused $2 billion of bailout funds into the company in late August, has seen nearly half its investment go down the drain. In just 93 days!

And already, investors who bought Countrywide's shares at its recent peak in February have lost four fifths of their capital. All in just 294 days!

Countrywide CEO Mozilo has apparently been urged by advisers to eliminate the company's dividend, saving about $350 million a year.

But that would hardly be enough.

The company admits it has a whopping $27 billion of delinquent subprime mortgages, more than the total mortgages (delinquent or not) held by some of the nation's largest banks.

At the same time, the company insists that it has enough cash or credit lines to get by.

For now, maybe.

But if Countrywide is in such dire straits at this stage of the crisis, what will happen as we cross over into 2008, when home foreclosures, already a national epidemic, reach pandemic dimensions?

Under the headline "More to Come," even the Wall Street Journal , typically reluctant to make dire forecasts, predicted on Friday that "the subprime loan crisis could accelerate as rates on loans reset."

And based on data from Banc of America Securities, the Journal charted a course for the industry that could be the final nail in the coffin for Countrywide, including the following facts about the nation's adjustable-rate mortgages (ARMs):

  • There will be a 6-fold surge in the number of subprime ARMs that are resetting at higher interest rates — from $6 billion per month in January of this year to $36 billion per month in the first quarter of 2008.

  • At the same time, we will see a similar surge in other ARMs that reset to higher rates — to over $50 billion per month.
  • Although homeowners often default on their mortgages and get forced into foreclosure when their rates go up, many subprime mortgages go bad in their first year or so, well before their interest rates have a chance to go higher.

The Mortgage Bankers Association estimates that 1.35 million homes will enter the foreclosure process this year and another 1.44 million in 2008. But even that dire estimate understates the impact of mortgage-rate resets now on the way.

Three More Urgent Questions for Countrywide CEO Angelo Mozilo

Question #1. What will happen when politicians twist the arms of mortgage companies like Countrywide to temporarily freeze their interest rates at current levels to help subprime borrowers keep their homes?

My answer: To what degree that gesture will help homeowners avoid foreclosures is unclear. But the impact on lenders is obvious: A big hit to their already-sinking cash flow as all subprime borrowers, whether delinquent or not, are allowed to continue making payments at the current rates — rates that were set artificially low to entice them into the loans.

Question #2. What happens when Fannie Mae and Freddie Mac, now cited as agencies that could help ease the pain for many homeonwers, find that they're in the same sinking boat?

My answer: Congress and the Fed will rush to help Fannie Mae and Freddie Mac — not Countrywide.

Question #3, the thorniest of all. What happens when the U.S. economy sinks into a recession?

My answer: The housing bust and mortgage meltdown we've seen so far have been deepening even without higher unemployment and even without falling incomes. In a recession, expect the Fed to pump in a lot more money overall, but to avoid mortgage company bailouts like a plague.

Despite All This, Wall Street's Leading Rating Agencies Have Not Yet Downgraded Countrywide Financial

Wall Street still seems to believe that Countrywide Financial, ground zero of the mortgage meltdown, can survive all this.

Indeed, last week, Moody's confirmed the company's investment grade credit rating. And the company also enjoys investment grade ratings from the two other major credit rating agencies — Standard & Poor's and Fitch.

But as we explained to you two weeks ago, the ratings issued by Moody's, S&P and Fitch are bought and paid for by the very companies that are being rated. (See " Next Phase of the Crisis: The Great Ratings Debacle .")

And as that money flows into the coffers of the rating agencies, it can corrupt the ratings process from start to finish: The rated companies are empowered to shop around for the most liberal ratings. They get sneak previews of the ratings before they're published. They can appeal downgrades and delay their publication. And, ultimately, they can fire the rating agency, taking their business elsewhere.

If disk jockeys accepted just a few bucks from record companies, it would be called payola and they could be carted off to jail. But when the Wall Street rating agencies take tens of thousands of dollars from companies like Countrywide for each rating they issue, that's supposed to be OK.

It's not OK. Even at its best, this is a system that often delays the needed reviews. When the long-overdue downgrades are finally announced, they're typically too late to warn investors with enough lead time to take protective action.

My view: Because of the biases built into the ratings process, the rating agencies often give too much credence to unrealistic promises made by the company's management.

Equally Unrealistic Is the Hope That the Fed Will Bail Out Companies Like Countrywide

Don't expect Ben Bernanke to come to the rescue.

He will have his hands full keeping the nation's thousands of commercial banks — his primary responsibility — out of trouble.

Mike Larson explains why in his article, " The New Savings and Loan Crisis ." (If you missed it, I highly recommend you read it now .)

His main point: Although banks have more capital than they did during the real estate-driven S&L crisis of two decades ago, the real estate mess today is far bigger than it was back then.

"Meanwhile," he writes, "mortgage giants Fannie Mae and Freddie Mac are in freefall. Freddie Mac shares dropped as much as 35% on Tuesday, the biggest drop since it went public in 1988, while shares of Fannie Mae plunged the most since the 1987 stock market crash."

And investor losses are mounting.

On December 7, 2006, if you had invested $10,000 in Freddie Mac shares, all you'd have left from that investment right now (based on Friday's close) would be a meager $3,790. The balance of your money — $6,210 — would be down the tubes.

And this is a government-sponsored enterprise that's supposed to have avoided the subprime mess!

You wouldn't have fared any better with shares in Washington Mutual. A $10,000 investment in its shares made on December 28, 2006 is worth only $3,926, even after a 5% bounce in the company's shares on Friday.

You'd have done a bit better with National City and Citibank shares, losing "only" about half your money. But I don't think that's exactly something you'd thank your broker for.

The moral of the story is three-fold:

First, the Fed is likely to focus its efforts on flooding the banking system with liquid funds to try to tamp down the mortgage mess. It's unlikely to squander precious resources on bailing out individual mortgage lenders like Countrywide, no matter how big they may be.

Second, I fervently hope you've heeded our warnings of many months ago to get the heck out of all financial stocks.

Third, I hope you have acted on our recommendations to move into the big bull markets Wall Street has been mostly ignoring — but can ignore no more.

I'm talking about the bull markets in ...

  • Gold, which has surged from under $300 an ounce just six years ago to $831.75 right now, including a $26 surge on Friday and another $8 rise since.
  • Crude oil, which has catapulted from under $20 per barrel to a new, all-time closing high of over $98 last week.
  • The euro , which will soon be close to double its value of just 6 years ago ... while the dollar continues to fall virtually nonstop, making new all-time lows week after week.

For years, these three markets — gold, oil and foreign currencies — were driven higher by fundamental imbalances in supply and demand.

Now, adding still more fuel to the fire, the Federal Reserve is flooding our economy with cash in a desperate attempt to ease the mortgage mess and credit crunch.

But as I explained to CNBC viewers on Friday, it's too little, too late for the U.S. economy ... and too much, too soon for the falling U.S. dollar. ( Click here to watch it now .)

A U.S. recession is unavoidable. And the only weapon the Fed has left to fight it — lower interest rates and more money pumping — is driving the dollar into a tailspin.

That's why, despite temporary rallies in the one and corrections in the other, financial stocks are likely to continue sinking, while gold, oil and foreign currencies are likely to continue rising.

Just be sure to stay on the right side. And no matter what your favorite investments may be, get out of the way of Countrywide Financial. If it fails, it could take many other real estate and financial investments down with it.

Good luck and God bless!

Martin

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in