Quote from NathanGresham:
I decided to placed a more accurate title for CFC in order for folks not to be enticed to buy a fastly sinking ship. Here is an article that will appear tommorrow in USA today trashing CFC!
Just getting worse all the time and the major media coverage has only just begun!
Investing: Reaching for Countrywide now may leave a scar
By John Waggoner, USA TODAY
Wall Street has many colorful yet obvious maxims, such as "Buy low, sell high," "Cut your losses short and let your profits run" and "Don't make toast in the bathtub."
Today's proverb is "Don't catch a falling knife." The metaphorical knife in question is Countrywide Financial (CFC), but it applies to any financial object in free fall.
Countrywide is a large real estate lender â the second-largest retail mortgage lender in the country. It is caught in two unfortunate developments. The first is the overall slowdown in real estate. Home prices have fallen sharply in several areas of the country, unsold houses are piling up on brokerage listings, and mortgage delinquencies are rising.
The second is the collapse of the subprime mortgage market. A subprime borrower is typically one with spotty credit who doesn't qualify for a garden-variety mortgage. For such borrowers, the lender might offer a low, fixed rate for two years and an adjustable rate the next 28 years, an arrangement called a 2/28 loan. Usually, the adjustable rate is sharply higher than the initial rate. The lender might also lend the home buyer the down payment, in the form of a second mortgage.
Countrywide was a leader in subprime lending, primarily through its Full Spectrum Lending Division. But subprime borrowers have had a hard time keeping up with payments. That's particularly true as 2/28 loans made during the housing boom have begun to reset to higher rates. In addition, delinquencies on prime home equity loans jumped to 4.6% in June, vs. 1.8% a year earlier.
FIND MORE STORIES IN: Freddie Mac | Fannie Mae | Investing | John Waggoner | Funds
At its conference call Tuesday, Countrywide lowered its earnings guidance for the rest of the year, saying it expected the housing slowdown to last through 2009. The stock price plunged 10% that day. Countrywide was, at least on Tuesday, a falling knife.
Should you have grabbed it? With the serene certainty of hindsight, we can say no. The stock rose just 2 cents Wednesday and was an active participant in Thursday's meltdown. It closed Thursday at $29.25.
In general, the advice against buying a stock in free fall is good. It's better, of course, to buy Countrywide at $29 rather than at its high of $45 this year. But companies often take awhile to work out their troubles. In the case of Countrywide, a rotten real estate market isn't the only problem. Bad loans don't appear all at once. Borrowers don't like to default, and they resist doing so. The process can take years to work out.
Moody's expects overall mortgage delinquencies to soar to a record 3.6% next summer. Adjustable-rate mortgage (ARM) defaults will leap to nearly 10% by mid-2008, Moody's predicts, and subprime ARM defaults could hit 20% by the fall of 2011.
It's always possible for matters to get worse. "This is going on when employment numbers are strong," notes Stuart Plesser, equity research analyst for Standard & Poor's. An uptick in unemployment, Plesser says, could raise mortgage delinquencies much higher.
Wallace Weitz, manager of the Weitz Funds, is a big holder of Countrywide stock; it's about 6% of the Weitz Value fund's portfolio. "We have a lot of scars on our hands," he says. He plans to hold the stock, in large part because he thinks the company will emerge stronger from the current crisis, and with fewer competitors. But even Weitz cautions against trying to grab the stock while it's falling.
"It's a matter of knowing yourself," he says. "There's no sense in dipping into Countrywide if you're going to panic and sell it at $24."
Sentiment : Strong Sell
