In response to the announcement from the nation’s largest mortgage lender, ratings agency Moody's Investors Service downgraded Countrywide's debt to its lowest investment-grade rating, Baa3 -- a notch above junk -- and warned all of the company's ratings remained under review for further downgrades should its available liquidity come under further stress. According to Moody’s, Countrywide’s tap into its entire credit line "reflects significant diminution in the company's liquidity and debt market access due to the stresses being experienced in a wide array of single-family mortgage markets."
The blow to Countrywide kicked off a day of dramatic ups and downs on Wall Street, where investors have already been skittish due to the sort of fears that Countrywide’s announcement made real – that the crisis in the high-risk subprime mortgage sector would spread, affecting not only the U.S. financial system overall but the global economy as well.
Industry analyst Patrick O’Hare observed, "While Countrywide's intention is to use the credit facility to manage its way through this challenging time, the recognition that Countrywide felt compelled to tap the entirety of its credit line is fueling concerns about the lack of liquidity for mortgage lenders and the possibility of a subsequent credit crunch that has broader economic consequences.”
David Sambol, Countrywide’s president and chief operating officer, said "Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise."
"As we have previously discussed, secondary market demand for non-agency mortgage-backed securities has been disrupted in recent weeks," he said. "Along with reduced liquidity in the secondary market, funding liquidity for the mortgage industry has also become constrained."
In a failed attempt to reassure stock market investors about the diversity of its financing options, Sambol explained that "for many years, Countrywide's liquidity management framework has focused on maintaining a diverse, multi-layered assortment of financing alternatives." Nevertheless, the lender announced it is speeding up plans to transfer mortgage production operations into its banking unit, Countrywide Bank. It said that more than 70 percent of its mortgage production volumes already originate in the bank, which has a more solid financial footing as well as access to cheaper funding through the Federal Home Loan Bank System. Beginning immediately, Countrywide said 90 percent of new loans will meet standards that qualify them for purchase by the government-sponsored agencies Fannie Mae and Freddie Mac or they will be held by the company's bank. These ``conforming'' loans are less profitable than the mortgages that last year accounted for 68 percent of the company's lending.
Meanwhile, the line of credit it has accessed comes with restrictions, says Countrywide. The lender will be required to maintain a minimum net worth of $7.68 billion and is barred from certain mergers and asset sales. Should Countrywide go into default on the loans, it could be forced to stop paying dividends. Countrywide has at least a year before it has to start repayment on the loan, and about two-thirds of it doesn't come due for four years or more.
Some Wall Street analysts speculate that right now, “the market has a real fear that Countrywide's funding walls are falling down, putting it at inc