Countrywide's Profit Vow
May Call for Closer Look
Countrywide Financial Corp. cheered investors last week by pledging a quick return to profitability, boosting the stock price that day 32%.
But some analysts warn that the nation's largest home-mortgage lender by loan volume hasn't gone far enough in marking down the value of mortgage securities it holds and may have trouble delivering on that profit vow.
In 4 p.m. New York Stock Exchange composite trading, Countrywide's stock fell 47 cents, or 2.7%, to $16.83. The share price is down 60% so far this year, dropping its market value to just under $10 billion.
The Calabasas, Calif., company Friday reported a loss of $1.2 billion for the third quarter. The loss reflected write-downs in the value of loans and securities, higher provisions for credit losses and charges related to a plan to shed as many as 12,000 jobs, or 20% of its work force. Even so, executives, including Chief Executive Angelo Mozilo, accentuated the positive, maintaining the quarterly dividend at 15 cents a share and projecting profits in the current quarter and in 2008.
"Not so fast," Frederick Cannon, an analyst at Keefe, Bruyette & Woods, said in a research note Monday, predicting that the stock will "underperform" the market.
Because investors have grown so jumpy about the surge in defaults on mortgages, lenders like Countrywide can no longer fund themselves with short-term borrowings in the capital markets, such as by issuing commercial paper. So Countrywide is relying heavily on collecting more deposits at its savings-bank unit, Countrywide Bank. But Countrywide has yet to show that it can "earn above its cost of capital" under this new model at a time when the outlook for losses from defaults is unclear, Mr. Cannon says.
To attract money, Countrywide is promoting some of the highest rates in the country on certificates of deposit. Monday, its Web site touted a 5.65% annual yield on six-month certificates of deposit. That compares with a national average of 3.42%, according to a survey by Bankrate.com.
In a conference call Friday, Countrywide executives said they expect to bring those rates down soon as the company expands its capacity to collect deposits by opening more kiosks in its loan offices where people can sign up for CDs or money-market accounts.
Even so, the high rates dangled by Countrywide suggest that it can raise funds "only at very high prices," wrote Mr. Cannon, whose firm has done investment-banking work for Countrywide in the past 12 months. Mr. Cannon says he doesn't own shares in Countrywide.
Countrywide recorded write-downs or losses on sales of loans and related securities totaling about $1 billion in the third quarter. It also added $934 million of provisions against bad debts, up from $293 million in the second quarter. Countrywide officials characterized those moves as conservative. But Mr. Cannon and another analyst, Paul J. Miller Jr. of Friedman, Billings, Ramsey & Co., both questioned whether Countrywide has gone far enough in marking down assets and providing for future loan losses.
Mr. Miller has a "market perform" rating on the stock with a price target of $15. He says that he doesn't own stock in Countrywide and that his firm hasn't done any work for the mortgage lender recently.
About three-quarters of the $79.5 billion of loans held as long-term investments by Countrywide Bank are either option adjustable-rate mortgages, known as option ARMs, or home-equity loans.
Option ARMs are considered risky because they let borrowers make very low payments in the early years, allowing their loan balances to grow, and face sharp increases later.
Countrywide said last week that under its new, more-conservative lending policies, 89% of the option ARM loans it made last year would no longer pass muster. Home-equity loans also are risky because they usually are second in line to a first-lien loan if a homeowner defaults.
Home prices are falling and foreclosures soaring in much of the country, cutting the value of mortgage collateral. Some economists say prices are unlikely to start recovering before 2009 or 2010. Given the murky outlook, "it is hard for us to believe that anyone can accurately predict credit losses for any mortgage-related company," Mr. Miller said.
But Moshe Orenbuch, an analyst at Credit Suisse, raised his estimate for Countrywide earnings in 2008 to $2 a share from $1.60, compared with a projected loss of 28 cents a share for all of 2007.
He expects Countrywide to have solid profits from loan servicing, which includes collecting payments and handling other administrative tasks, such as foreclosures. Credit Suisse has done investment-banking work for Countrywide in the past year. Mr. Orenbuch has an "outperform" rating on the stock with a target price of $28. He says he doesn't own any Countrywide shares.
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