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Market Scan
Countrywide Breaks Into The Piggy Bank
Evelyn M. Rusli, 08.16.07, 10:40 AM ET





Things are looking grim for America's largest mortgage lender.

On Thursday, Countrywide Financial (nyse: CFC - news - people ) said it will have to draw on an $11.5 billion credit line to ease its liquidity jam. The dramatic move fanned speculation that the embattled lender was on the brink of bankruptcy.

Shares of Countrywide plummeted 15.1%, or $3.21, to $18.08, in early Thursday trading. So far this year, the shares have lost 56.9% of their value.

Countrywide said it will draw on the entire credit line provided by a consortium of 40 of the world's largest banks. The company also announced it would speed up plans to shift its mortgage production operations business into its bank unit. Countrywide already originates more than 70% of its total volume through the bank. "Nearly all of our volume will be originated by our Bank by the end of September," Chief Operating Officer, David Sambol said on Thursday.

"As we have previously discussed, secondary market demand for non-agency mortgage-backed securities has been disrupted in recent weeks," Sambol said, "Along with reduced liquidity in the secondary market, funding liquidity for the mortgage industry has also become constrained." The sudden announcement, and particularly Countrywide's decision to draw on its entire credit line, is a desperate move for the beleaguered lender.

In the wake of the subprime meltdown, Countrywide Financial -- along with many other mortgage lenders-- finds itself with a heavily devalued loan portfolio. Amid rising defaults, investors have fled from mortgage-related investments, devastating demand for Countrywide's assets. Meanwhile, the ongoing credit crunch threatens its cash access. On Tuesday, Merrill Lynch (nyse: MER - news - people ) analyst Kenneth Bruce downgraded the company to "sell," and said it could face bankruptcy if it fails to secure short-term borrowings. Like other mortgage lenders, Countrywide relies on the sale of commercial paper, a form of short-term debt that is usually cheaper than bank loans.

In recent days, Countrywide has reiterated its confidence in its cash reserves. On Friday, the company described the markets' problems as "unprecedented disruptions" but assured investors that it had access to sufficient cash to support operations in the near term. In a recent filing, the company said it had access to $186.5 billion in available liquidity and $46.2 billion in highly reliable short-term funding. However, it remains unclear how long Countrywide's cash stash will last, if the credit crunch lingers. (See: "Credit Fears Chill Countrywide Financial." )

Meanwhile, Countrywide is making moves to beef up its portfolio. On Thursday, the company said it was tightening its underwriting standards for loans, to ensure that more are "conforming" loans, assets that are eligible to be purchased by Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people )," government-sponsored companies that buy up mortgages that mean their lending standards. Countrywide expects 90% of its loan portfolio to be conforming.

-- The Associated Press contributed to this article.




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Companies: CFC | MER | FNM | FRE

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