"Countrywide" Mortgage Delinquencies

Yesterday, both the Wall Street Journal (piece 1 and piece 2)  and the New York Times had prominent stories about a 33% drop in second quarter net income at Countrywide Financial. The company reported not only a jump in late payments on subprime mortgages (from 15.33% to 23.71% over the same period in 2006), but also escalating delinquencies among prime borrowers. Countrywide officials said that piggyback loans to prime borrowers were a main source of its earnings drop and noted that many consumers who put little or no money down when they purchased a home have no equity to tap because of falling or stagnant housing prices. Countrywide's CEO, Angelo Mozilo, has years of industry experience, and Countrywide restricted its subprime and alternative lending well ahead of some of its competitors. If Countrywide is facing this level of delinquencies, other lenders may fare much worse.

By the way, Credit Slips readers who followed the extended comments on my post entitled Blunt Talk about Borrowing Standards may be interested in the op-ed in yesterday's NYT that criticizes the reaction of all three credit rating agencies (including Standard & Poors) to the subprime lending crisis. I thought this passage was particularly interesting:  "And the ratings agencies are far from passive arbitrators in the markets. In structured finance, the rating agency can be an active part of the construction of a deal. In fact, the original models used to rate collateralized debt obligations were created in close cooperation with the investment banks that designed the securities. Fitch, Moody's and S.&P. actively advise issuers of these securities on how to achieve their desired ratings. They appear to be helping investment banks, hedge funds and fund companies, all of which have a fiduciary obligation to investors, to develop the worst possible product that would still achieve a certain rating." The op-ed goes far beyond the original point in my post, which was that S&P's profits are partially driven by the quantity and size of credit transactions, which grew as subprime lending standards relaxed.

Comments

[MT57]

The statement "... investment banks, hedge funds and fund companies, all of which have a fiduciary obligation to investors... " is legal nonsense both in general and especially in the context of CLO's, which are sold to very sophisticated institutional investors (including the very "investment banks, hedge funds ..." cited, among others). None of the categories of market participants mentioned occupy the kind of relationship to CLO investors that is needed to create a fiduciary duty.

I also note the focus of this latest post attacking rating agencies - i.e., investors - is completely different from the prior day's focus, i.e., that it was wrong in some unexplained way for rating agencies to charge fees to evaluate securitizations if there was ever a default on a mortgage in the securitization.

You ought to educate yourself why CLO's exist and how they are put together if you plan to continue posting on the subject. The principal reason they were created is to satisfy the need for yield among pension funds who have to satisfy the ever increasing pension burden of an aging population. Treasuries won't cut it and corporate credit quality has declined too much. CLO's were developed so that, by diversification, pension funds could buy a silk's purse of higher quality interest bearing paper out of the sow's ear of dimished credit quality in the US.

For a basic introduction to how a CLO rating is put together, go to standardandpoors.com, type "CLO criteria" into the search field and take it from there. The first link should be the basic overview.

Perhaps when you are done reading it, you'll have a view on whether the agencies try to do the worst deal possible as alleged in your post.

[MARK SCHUTZMAN]

Countrywide should not have any delinquincies whatsoever because in their 2006 annual report they stated that the average FICO score of their $70 billion + loan balance is 726.