News Analysis: Top Servicer's Reign Could Be Ending Soon

Make no mistake about it - Countrywide's days as the top banana of mortgage servicing are numbered.

Over the past six weeks Countrywide Financial Corp. has seen its loan applications dwindle, its access to commercial paper dry up and its stock price get hammered.

Here's the kicker: as loan production drops that means it will be harder for the company to replace "run-off" in its gargantuan $1.415 trillion servicing portfolio. It even may be forced to sell some of its servicing rights to raise cash.

CFC's problems started in earnest late this summer when an equities analyst at Merrill Lynch named Kenneth Bruce wrote a research report, calling the publicly traded CFC a "sell," suggesting if the industry's liquidity crisis got bad enough the almost-40-year-old company might have to seek the refuge of the bankruptcy courts. (Interestingly enough, Mr. Bruce used to work at CFC.)

Even though CFC founder, chairman and CEO Angelo Mozilo dismissed Mr. Bruce's comments, the damage was done. CFC's stock swooned and the company's ability to borrow from a network of bank lenders was severely damaged.

One investment banker close to the company told Mortgage Servicing News, "Angelo's fatal mistake was relying too heavily on banks for its loans."

Even though CFC is a holding company that sits atop a depository insured by the federal government, sources told Mortgage Servicing News that the company was indeed having serious liquidity problems this past summer - thanks, in part, to Mr. Bruce's comments.

But a few days after Mr. Bruce wrote his research report, in stepped Bank of America to CFC's rescue. BoA, which had been banking CFC since the late 1960s, invested $2 billion in the nation's largest mortgage lender and servicer, while taking a 15% stake in the company.

In an interview with MSN Mr. Mozilo stressed that "this is not a merger," adding that the company could have survived without BoA's investment. (Up until the third quarter, the company has been profitable but has seen its bank lines reduced in reaction to the nation's subprime crisis.)

He noted that the investment from the BoA - one of the nation's largest depositories - "should take away any doubts that Countrywide is a solid company."

That said- and even with BoA's investment - CFC is in for tough sledding ahead.

In the wake of the industry's subprime crisis, the company has exited the A- to D niche, a business where it ranked first among both originators and servicers. (At midyear, CFC serviced $125 billion in subprime loans, giving it a 10.4% market share, according to the Quarterly Data Report.)

Currently, CFC is concentrating its production efforts mostly on conventional loans that can be sold to Fannie Mae, Freddie Mac, or insured by the Government National Mortgage Association. Subprime and other nonprime loans are, for now, off the CFC loan menu.

It's too early to say how far its loan production will fall but in a recent research note Credit Suisse took a stab at the issue. Citing the industry's current liquidity crisis (the nonprime secondary market, that is), CS predicted that loan production at CFC will fall by 30% in the third quarter and even more in the fourth. (Specifically, CS analyst Moshe Orenbuch is forecasting $96 billion in originations by CFC in the third quarter and $72 billion in the fourth quarter. In the first and second quarters of this year, CFC originated $114 billion and $130 billion, respectively, according to the QDR.)

Loan production is a key tool in growing a firm's servicing portfolio. But with production dropping it's only a matter of time before CFC's sees its servicing shrink. The question now becomes just how much will it shrink?

As this publication went to press, the lender/servicer was on the verge of cutting as many as 12,000 thousand jobs. After all, with loan volumes on the wane it makes no sense to carry excess overhead - employees, that is. Stay tuned. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com/

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