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Market Scan
Credit Fears Chill Countrywide Financial
Evelyn M. Rusli, 08.10.07, 5:30 PM ET

Things are going from bad to worse for Countrywide Financial.

According to America's largest home loan lender, Countrywide Financial, (nyse: CFC - news - people ) the serious crunch in the debt and secondary mortgage markets could batter its financial condition in the near-term.

In a Securities and Exchange Commission filing submitted late Thursday, the embattled lender described the markets' problems as "unprecedented disruptions." Following this dire prediction shares of Countrywide Financial fell 13.8% in Friday pre-market trading, however the decline eased to a 5.6% drop, or $1.61, to $27.05 in Friday afternoon trading.

Because Countrywide Financial depends heavily on credit to finance its operations, the tumult in the debt markets could jeopardize its ability to secure that funding. "Current conditions in the debt markets include reduced liquidity and increased credit risk premiums for certain market participants. These conditions, which increase the cost and reduce the availability of debt, may continue or worsen in the future," the company said. In a sign that the credit crunch has turned severe, multiple foreign banks rushed to inject liquidity on Friday. Also on Friday, the Federal Reserve pumped $38 billion into the system, in addition to the $28 billion boost announced on Thursday.

To minimize the impact of the global debt crisis, the company has looked for credit lines from multiple sources.

Countrywide Financial reiterated that it could not guarantee that it will be able to secure sufficient financing: "There can be no assurance, however, that the Company will be successful in these efforts, that such facilities will be adequate or that the cost of debt will allow us to operate at profitable levels."

Meanwhile, investor appetite for mortgage-related securities has largely dropped off, as the subprime crisis continues to fester. This reduced demand for mortgage loans has crippled the value of these assets. In this environment, the company plans to hold on to a greater portion of its mortgage loans and mortgage-backed securities, instead of selling them off at bargain-basement prices. For now, Countrywide Financial believes it has sufficient cash to keep its portfolio. (See: "Deadbeats Dog Countrywide." )

This week, Countrywide Financial assured investors it had access to deep cash reserves. On Monday, in another filing with the SEC, Countrywide revealed it had $186.5 billion in available liquidity. It addition, the company has access to $46.2 billion in highly reliable short-term funding. Countrywide has aggressively asserted the health of its current financial condition. Late last week, the company's Chief Financial Officer Eric P. Sieracki said: "Our mortgage company has significant short-term funding liquidity cushions and is supplemented by the ample liquidity sources of our bank." (See: "Countrywide Shows Off Its Cash." )

While its recent statements clearly articulate Countrywide's confidence in its short-term outlook, Thursday's filling also highlights the possible cracks that could shatter its foundations. Increased defaults have already forced over 50 lenders into Chapter 11 this year. As the biggest independent lender,Countrywide should be able to weather the credit and subprime storm. Still, with no signs that the tempest is ready to lift, how long can Goliath hold?

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