Where Countrywide Chief
Is Finding a Life Preserver

When Countrywide Financial Corp. Chief Executive Angelo Mozilo needs cash to fund home loans these days, he doesn't look to investment banks in New York or London.

He relies mainly on the quasigovernmental Federal Home Loan Bank in Atlanta.

The nation's 12 home loan banks, though privately owned, were chartered by Congress to finance housing and benefit from a widespread belief the government would bail them out in a crisis.

They are playing an important behind-the-scenes role in the credit crisis shaking financial markets, providing funding where other creditors won't go.

The Atlanta home loan bank has helped to keep Countrywide in business since mid-August, when investors' fears over default risk shut off mortgage lenders' ability to raise money through commercial paper or other short-term borrowings. Countrywide has replaced that funding mainly by tapping the Atlanta bank, where its borrowings totaled $51.1 billion as of Sept. 30, up 77% from three months earlier.

Countrywide's stock has dropped more than 75% so far this year, and its bonds trade at junk levels. Richard Dorfman, the Atlanta home loan bank's chief executive, said his institution has remained prudent in its lending even as its loans to Countrywide have surged.

'We Did It Safely'

By funneling money to Countrywide and other mortgage lenders when the credit markets froze up,

Countrywide Financial's Angelo Mozilo

Countrywide's borrowings from the Atlanta bank are mostly secured by mortgages -- an asset many investors are shunning as defaults soar. Some politicians for years have raised questions about risks taken by Fannie Mae and Freddie Mac, the government-sponsored mortgage investors. Stuart Plesser, an equity analyst at Standard & Poor's in New York, said that politicians should similarly scrutinize the home loan banks. One vital question, he says, is "how good is the collateral?"

The home loan banks' regulator, the Federal Housing Finance Board, monitors their lending practices and collateral, a spokesman for the board said.

Despite anxiety among investors about mortgages, the home loan banks have increased their own bond-market borrowings as others have turned to them in recent months for funding. The home loan bank system's debt outstanding rose to $1.134 trillion as of Sept. 30, up 21% from nine months earlier. Although they operate independently, the 12 home loan banks are jointly liable for one another's debts.

Demanding Yield

Investors are demanding a bit more yield from the home loan banks lately. On Friday, their two-year notes were trading at about 0.74 percentage point above the equivalent U.S. Treasury issue, up from 0.16 point a year ago, said Jim Vogel, an analyst at FTN Financial Capital Markets, Memphis, Tenn. He said investors have become slightly less comfortable with debt from quasigovernment bodies like the home loan banks.

Congress created the home loan banks in 1932 during the Great Depression to prop up local banks. The home loan banks are cooperatives, owned by more than 8,000 "members," mainly commercial banks, thrifts and credit unions. The main business of the home loan banks is making secured loans, known as "advances," to their members, or owners.

Countrywide, based in Calabasas, Calif., deals with the Atlanta home loan bank because Countrywide owns a savings bank based in Alexandria, Va., part of the Atlanta bank's territory.

Countrywide's borrowings of $51.1 billion from the Atlanta bank as of Sept. 30 accounted for more than a quarter of the home loan bank's total assets of $190.72 billion. Countrywide has put up about $62.4 billion of mortgages as collateral for those advances. Home loan banks accept a variety of collateral, including individual loans and mortgage-backed securities.

Advances and Collateral

Each $1 of advances must be backed by collateral valued at more than that. To determine how much they can support in advances, mortgages and related securities typically are marked down by 10% to 50%, depending on judgments about risk, officials of the Atlanta bank say.

There is no limit on the percentage of the Atlanta bank's total lending that can go to any one institution, Mr. Dorfman said. But the home loan bank does limit any member's total advances to 50% of that member's assets. Countrywide's savings bank had assets of $106 billion at the end of October, which suggests that its advances are near that ceiling.

Mr. Dorfman said the Atlanta bank's lending policies are well-designed and "validated with very intensive modeling under various scenarios." The bank doesn't accept delinquent mortgages as collateral and is under no obligation to make advances if it thinks they are too risky.

Countrywide isn't the biggest user of home loan bank advances. Citigroup Inc. and Washington Mutual Inc., which borrow from other regional home loan banks, both have more advances. Countrywide is by far the fastest-growing user of advances among the biggest mortgage lenders. A Countrywide spokesman noted the company is opening more kiosks at its lending offices to solicit certificates of deposit and money-market accounts, providing another source for funds.

--Rick Brooks in Atlanta contributed to this article

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