Countrywide - Will Angelo Ever Sell?

As Mortgage Servicing News went to press this month, tongues were wagging about the favorite rumor in mortgageland: Is Countrywide Financial Corp., the golden child of industry veteran Angelo Mozilo, in play? Answer: No, it's not in play but journalists worldwide have never let the facts get in the way of a good story.

Of course, the company itself doesn't help dissuade the rumor mill by doling out the standard PR line of "We don't comment on market rumors" which means if a hedge fund from Mars was conducting due diligence it still wouldn't comment.

How do I know the company isn't for sale? Actually, I don't know, but after covering Mr. Mozilo and Countrywide for two decades I think I can safely pass on this piece of knowledge: this chairman and CEO will not sell out until the offer price is so good it makes him faint. (He doesn't strike me as being an easy fainter.) He will not sell out until he dies (no offense, Mr. Mozilo) and even then there's still no guarantee that he won't be pulling the strings from the grave. He's that type of guy.

But one thing is for certain: Countrywide (as well as the entire mortgage industry) is at a crossroads. Born in the year the "Miracle" Mets won the World Series (1969), it has defied all odds. Of all the top 10 non-depository mortgage bankers that were once operating in the early 1990s, Countrywide is the last man standing. Everyone else has either sold out or merged. Prudential Home Mortgage - remember them? Gone (sold to Norwest/Wells). G.E. Capital Mortgage? Bad business plan. They're gone, too. Lomas & Nettleton? Don't get me started.

Countrywide has survived by being adept, smart, cunning, ruthless and keeping its eye on the ball. It has survived - and thrived - by converting to a depository. There is no doubt in my that if Countrywide had not acquired a bank it would be owned by someone else today - not because it liked the offer but because Mr. Mozilo and his team of grizzled veterans would be forced to sell because of liquidity reasons.

Among the top 10 funders and servicers today, there is not one "pure" non-depository. Keep in mind that GMAC has a bank as does just about every investment banking firm out there. The key to this business - in case you don't know - is managing the spread between the cost of funds and the interest rate on the loan. It's simple math. And what's the cheapest cost of funds out there? Answer: Federally insured deposits.

If you don't have a bank attached to your franchise (somewhere, anywhere) you will not have a long life in this business. Just take a look at what's occurring in the subprime market today. Non-depositories that have delinquency problems are facing a liquidity crisis the likes that haven't been seen since the late 1990s. Not one depository that is also a subprime lender has failed during this crisis. Meanwhile about 50 non-depositories have folded their tents.

Back to Countrywide. In all his recent comments to equity analysts as well as the press, Mr. Mozilo has made it clear that his No. 1 job is to make the shareholders happy. Lately Countrywide's stock has been trading at $40 compared to a 52-week high of $45 and a low of $32. It has a price-to-earnings ratio of just over 10. Shareholders can't be too unhappy, though it's safe to say the recent run-up in price is attributable to all the takeover talk - even though there is no such takeover in the works.

So, will Mr. Mozilo ever sell out? Don't bet on it. The only way I see a deal going down is if the acquiring bank leaves Mr. Mozilo and his crew in full control of the mortgage operation. And I do mean "full control." Maybe a U.S. bank (Bank of America? Citigroup?) might grant such a waiver. But I will bet a good amount of money that any such waiver will be thrown out the window when the mortgage unit misses its numbers. Banks don't like surprises and these days the mortgage business has more than its fair share. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com