Lender Countrywide Taps
Credit Facility for Funds

Countrywide Financial Corp. drew down an entire $11.5 billion line of credit to boost its cash position and said it would shift its mortgage-lending business into its bank unit, moves that acknowledge the sharp funding pressure on the largest U.S. mortgage lender by loan volume.

The steps come a day after bankers said Countrywide, long viewed by Wall Street as one of the most solid mortgage companies, had lost access to the market for commercial paper -- where companies secure short-term funding -- and Merrill Lynch & Co. warned that the lender could face a liquidity pinch.

Countrywide's shares were down 25% at $15.90 early Thursday afternoon on the New York Stock Exchange. The cost of protecting the company's debt against default soared by 67%, indicating sharply increased concerns about the company's creditworthiness. Moody's Investors Service cut Countrywide's credit rating to the lowest investment-grade level, Baa3, citing the "significant" decline in its access to debt markets.

The developments show how the trouble that began in the subprime corner of the mortgage market have shot through to the very top of the industry. Just last week, Countrywide had said its sources of liquidity were adequate. But concerns about exposure to risky mortgages have virtually shut down the markets where lenders like Countrywide resell their loans, and anxiety has poured into the markets where companies raise short-term cash.

Countrywide also said it will all but stop issuing loans that don't comply with standards set by U.S. government-sponsored entities Fannie Mae and Freddie Mac, joining a growing number of lenders in a retreat that will further tighten the availability of loans. The steps are necessary, as investors aren't buying loans that aren't backed by those entities.

Countrywide said the steps will allow it to stay in business through the current market turmoil. "Countrywide has taken decisive steps, which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise," President David Sambol said in a release.

The bank line that Countrywide has tapped appears to be the one identified in its first-quarter report with the U.S. Securities and Exchange Commission as backing up the company's commercial-paper borrowings. Such credit facilities give lenders confidence they will be repaid and typically aren't drawn down except in situations of stress. The credit facility is from a syndicate of "40 of the world's largest banks," Countrywide said.

Usually a cheaper alternative to bank loans, commercial paper is the domain of companies with stellar credit ratings and is typically used to fund expenses such as inventories. Countrywide had $8.1 billion in commercial paper outstanding at the end of June, according to the SEC filing, but market participants said it ran into trouble accessing the market Wednesday.

In recent days, many mortgage lenders have found themselves unable to tap the commercial-paper market. As recently as Tuesday, Thornburg Mortgage Inc. said it has had difficulty raising money through issues of commercial paper and asset-backed securities.

The move to put the bulk of its mortgage-lending business into Countrywide Bank would allow Countrywide to hold more loans on its books rather than try to sell them into a balky secondary market that isn't buying many of them, constraining a key source of funds. The shift also allows Countrywide to tap deposits and the Federal Home Loan Bank system for funding.

Countrywide already originates more than 70% of its volume through Countrywide Bank, and the company intends for nearly all origination to be in the bank by the end of next month. With the tightening of lending standards, Countrywide expects that 90% of the loans it originates could be bought by Fannie Mae and Freddie Mac or meet the bank's investment criteria.

Countrywide shares slumped as much as 16% Wednesday after Merrill Lynch slashed its investment rating on the stock to "sell" from "buy." The sell call from analyst Kenneth Bruce came just two days after he published a note rating Countrywide stock a "buy." A Merrill Lynch spokeswoman declined to make Mr. Bruce available to discuss the abrupt switch, which the report attributed partly to rapid deterioration in the credit markets. Until Wednesday's note, Merrill reports on Countrywide over the past two years had consistently forecast share-price gains.

Moves by central banks to pump more money into the financial system in recent days raised some hopes for an easing of pressure on mortgage lenders such as Countrywide. "We had hoped, too optimistically in hindsight, that the market would calm down on the injection of liquidity," Mr. Bruce wrote. "It has not, in our view."

In a report titled "Liquidity Is the Achilles' Heel," Mr. Bruce said demands for more collateral or repayments from lenders, along with forced asset sales, could weaken Countrywide. He said the risk of such a "liquidity event" at Countrywide is rising.

In one scenario, he wrote, if creditors were to cut off funding to Countrywide, forcing it to sell assets in a weak market, "then it is possible for [the company] to go bankrupt." Wall Street analysts rarely raise such scenarios in published research for fear of alarming the market.

Countrywide officials have said the company has enough cash to survive the credit-market turmoil. During a recent conference call with analysts and investors, Chief Executive Angelo Mozilo said, "We are certainly not going to have any issues funding the company," pointing to its "very conservative liquidity management philosophy" and "adequate, diversified, reliable sources of liquidity available." But he also said, "The pressure point would be short-term funding."

Countrywide said it had access to $190.3 billion in short-term liquidity at the end of June. What it called "highly reliable" short-term financing, including its commercial-paper holdings, came in at $46.2 billion. And the lender listed $3.8 billion in long-term debt that matures within six months.

-- Aparajita Saha-Bubna and Ruth Simon contributed to this article.

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