echos: re CFC -
Here's an article from 'the street.com' -
Countrywide Financial (CFC) shares took another hit Tuesday, as an analyst downgraded the stock on worries about government-sponsored mortgage giants Freddie Mac (FRE) and Fannie Mae (FNM) .
Countrywide stock sank almost 12% after Fox-Pitt, Kelton analyst Howard Shapiro said the nation's largest mortgage lender's viability to remain in business is likely in jeopardy if Freddie and Fannie -- both beset by third-quarter losses -- are not able purchase its loans. Shapiro downgraded the stock to in line from outperform, in a note titled "The Lifeline is Withdrawn."
Shapiro said Countrywide's "survival strategy has depended on access to the secondary markets through [government-sponsored entity] purchase and resecuritization," in a note to clients. "That strategy is less viable in an atmosphere where the GSEs themselves are capital constrained and may need to shrink."
The downgrade comes as Freddie reported a $2 billion net loss for the third quarter, sending shares swooning lower by 26%. The government-sponsored agency attributed the loss to increased money it needed to set aside for credit losses as well as a markdown in the value of its assets.
Freddie also said it hired two investment banks to help it look into raising capital and it is seriously considering cutting its dividend in half after posting the big quarterly loss.
Shapiro says that the mortgage crisis could indeed get worse after Freddie's announcement.
"Freddie Mac and Fannie Mae have provided essential liquidity in a time of crisis," he wrote. "Now that that liquidity function has essentially been withdrawn, it will mean, in our opinion, a further exacerbation of the housing downturn, even less credit available and steeper downturns in home prices. At this point, some kind of policy response is absolutely essential, in our opinion."
Freddie Mac's news is troublesome because it is one of the largest purchasers of residential mortgage loans. These loans are considered less risky, because the GSEs require strict documentation on the mortgages and do not purchase some of the more exotic loans that were created in the last few years, such as negative amortization loans and other subprime loans.
The big mortgage finance firm's ability to purchase loans is particularly important these days, as the market in which Wall Street firms purchase mortgages in order to create securities and other complex instruments from the pools of loans remains frozen for the most part. As the market for mortgage-backed securities seized up this summer, it forced lenders to retract from the originate-and-sell business model and concentrate only on originating loans that could be sold to the GSEs.
Lenders, including two of the largest independent names, Countrywide and IndyMac (IMB) , have been hit hard by the freeze-up in secondary markets, as well as falling home prices. Both companies have had to cut staff as originations slowed. Currently the two lenders only originate loans that are eligible to be purchased by the GSEs.
Shapiro's downgrade also comes one day after shares of Countrywide plummeted nearly 13%, as market participants refreshed concerns about the Calabasas, Calif.-based company's liquidity, which may not be ample enough.
Shares of Countrywide were most recently down $1.24 cents to $9.33 -- reaching yet another 52-week low and hitting, for the first time, single-digit prices.
AI
