Thursday, August 9, 2007

Countrywide Punished Over Quarterly SEC Filing Disclosures

Countrywide Financial Corp. (NYSE:CFC) has filed its 10-Q quarterly report with the SEC, and the stock has gotten hammered in after-hours trading with a drop of more than 10%. Investors should understand that many of these comments may have been included in prior filings and may have already been telegraphed by the company. But right now in our credit crunch and liquidity squeeze Wall Street is just shooting first. It isn't even that they will ask questions later, because right now it's just a status of shooting and walking away.

Many of the pre-packaged quarterly disclosure statements and possible scenarios outlined herein sound ghastly as well, but these are frequently covered as risk factors in every filing. After a huge down day like today, it's no wonder that after-hours trading is being so hard on Countrywide. After this reaction to a quarterly filing, you can bet that Countrywide's CEO Angelo Mozilo will be on CNBC and elsewhere in media outlets Friday trying to bring about at least some calm and to state that many of these disclosures are routine (or at least somewhat) in the sector.

The company has also said that it believes the changes may hurt near-term but will ultimately help it in the long-run. (If this was truly believed on the surface, then the shares wouldn't be down over 10% in after-hours.)

Page 94 OFF BALANCE SHEET TRANSACTIONS ....We do not believe that any of our off-balance sheet arrangements have had, or are reasonably likely to have, a current or future material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources. Our material contractual obligations were summarized and included in our 2006 Annual Report. There have been no material changes outside the ordinary course of our business in the contractual obligations as summarized in our 2006 Annual Report during the six months ended June 30, 2007.

Here are some of the comments on the next page out of the end of the SEC filing that are hitting the stock:

We believe the current environment of rapidly changing and evolving markets will provide increasing challenges for the financial services sector, including Countrywide. Specifically, in the near term, we may experience: · Continued pressure on housing values and mortgage origination volumes · Increasing delinquencies and foreclosures · Continued disruptions in the secondary mortgage and debt capital markets and · More restrictive legislative and regulatory environments. As a result of these conditions, Countrywide and other lenders may be experiencing, among other things, the following: · Lower loan production volumes · Lower margins on loans produced · Higher credit losses on delinquent loans and subordinated interests · Reduced access to secondary mortgage and debt capital markets and · Increased cost of debt. In response to the current environment, Countrywide is making changes to tighten the underwriting guidelines for loan products offered and adjusting loan pricing to reflect market conditions. Further reductions in the Company’s funding volume could result. Additionally, we expect to retain more loans in our portfolio of loans held for investment or to hold additional loan or security inventory until market conditions improve. In an effort to ensure the adequacy of our funding liquidity, we continue to transition to more reliable funding sources, which may be more costly. We are also optimizing our organizational structure through, among other things, the planned integration of Countrywide Bank and Countrywide Home Loans. While we expect these conditions may impact our earnings in the near term, we believe that the challenges facing the industry should ultimately benefit Countrywide as the mortgage lending industry continues to consolidate.

P. 96 Housing Values Housing values affect us in several ways...... Recently, we have seen housing price declines, including recent declines in housing values in many metropolitan statistical areas in the United States. We expect housing values to remain stagnant or decrease during the near term which will affect our credit loss experience and may affect our willingness to offer certain mortgage loan products, both of which could impact our earnings, particularly in the short term. Over the long term, we expect that housing appreciation will be positively correlated with both consumer price inflation and growth in personal income.

P.96-97 Secondary Mortgage Market Investor Demand Changes in investor demand for mortgage loans can have a significant impact on our ability to access the secondary mortgage market as a competitive outlet. In 2007, we have seen an increase in investor required yields, first for nonprime loans or securities followed by prime home equity loans and then nonconforming loans, together with a lessening in the liquidity of such loans and securities caused by reduced investor demand. In addition, certain credit rating agencies have announced that changes are pending to their securitization ratings protocol. These factors have reduced our ability and willingness to sell such loans or securities into the secondary mortgage market and the availability and pricing of such loans to consumers. Our gain on sale margin may be impacted in the short term .

P. 97 Impact of Declines in Credit Performance
With the current contraction in the U.S. housing market and the resulting slowdown in price appreciation (or price depreciation in many markets), along with worsening economic conditions, we may experience increased credit losses in the near term. In 2007, we have observed a marked decline in credit performance (as adjusted for age) for recent vintages, especially those loans with higher risk characteristics, including reduced documentation, higher loan-to-value ratios or weak credit scores. Deterioration in the credit performance of these loans has resulted in increased credit losses and impairment of our related credit-subordinated interests and higher claims under our representations and warranties. Credit markets are rapidly changing and evolving and we expect these changes to impact the housing market, demand for our mortgage-backed securities, our future credit losses and the availability of credit enhancements for the loans and securities we sell and invest in, which may impact future earnings.

P. 97 Funding Liquidity In the third quarter through the filing date of this Form 10-Q, funding liquidity in the financial services sector was constrained primarily due to changes in secondary mortgage market investor demand. Various mortgage lenders have experienced operating difficulties and have extended asset-backed commercial paper facilities or filed for bankruptcy protection. These events have further constrained funding liquidity in the sector. We have maintained access to our traditional, highly reliable short-term liquidity sources. In view of current unprecedented market conditions, we are accessing other pre-existing funding liquidity sources, procuring new sources and accelerating the integration of our mortgage company with the Bank. As a result of this accelerated integration, a significantly higher percentage of our mortgage banking fundings will occur in the Bank sooner than originally planned. The Bank has significant liquidity sources available to fund our mortgage banking operations. While we believe we have adequate funding liquidity, the situation is rapidly evolving and the impact on the Company is unknown.

Right now opinion on this won't matter. A drop of this magnitude is hard to ignore, and this puts the stock back within striking distance of a 52-week low.

Five Stars Mortgage is continuing to offer Orlando Bad Credit Mortgages to Florida. 100% Financing company is still servicing a damaged market.