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Countrywide, the mortgage mess and YOU!

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Countrywide, the mortgage mess and YOU!


It has been a difficult year for mortgage lenders.

The subprime market went into a tailspin in February and March. A classic credit squeeze developed in late July, brought on by fears that jumbo and nontraditional mortgages might end up having higher-than-expected delinquency rates. Investors in mortgage-backed securities suddenly realized they didn't know exactly how much their investments were worth -- but they suspected that they had overpaid.

The nation's biggest mortgage lender, Countrywide Financial (CFC, news, msgs), was caught up in the uncertainty. An analyst for Merrill Lynch (MER, news, msgs) on Aug. 15 wrote that Countrywide might face so much financial pressure that it might lead to "an effective insolvency."

(On Monday, the Wall Street Journal reported that Countrywide had begun laying off staff, citing an internal e-mail sent Friday to employees of a Countrywide division that handles many Alt-A customers, who typically cannot qualify for a traditional prime-rate loan. The company employs 61,000 people.)

"If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt," wrote Merrill Lynch analyst Kenneth Bruce.

When the words "Countrywide" and "bankrupt" appear in the same sentence -- even as a hypothetical -- people take notice. (Countrywide didn't respond to a request for comment.)

Here are some common questions consumers have, and some answers.

Why should I care about Countrywide's fate?

Countrywide is the nation's biggest mortgage lender. It funded $39 billion in mortgage loans in July.

It's also the largest or next-largest loan servicer. The servicer is the company you send your monthly mortgage payment to. It then distributes the money to pay the principal, interest, taxes and insurance.

Americans owe about $13 trillion in mortgages, and Countrywide services about $1.4 trillion of that. So a significant percentage of mortgage-paying homeowners send a check to Countrywide every month.

Wells Fargo (WFC, news, msgs) services about $1.4 trillion in mortgages, too. Wells Fargo isn't in any financial trouble.

What sort of problems does Countrywide have?

For the most part, Countrywide doesn't keep the mortgages it underwrites to borrowers. The lender sells the mortgages to investors who form the loans into pools, then issue bonds called mortgage-backed securities. When Countrywide sells closed mortgages, it gets the cash it needs to lend to additional borrowers. That's how it can pump out $39 billion or more in loans every month -- by selling its loans and keeping the money flowing in. The flow of money is called liquidity.

In the last few weeks, investors have pretty much stopped buying loans from Countrywide because investors lost confidence in their own ability to figure out how much the loans are worth. Defaults and foreclosures are rising, making it difficult to price loan pools correctly.

"The entire issue here is there's total uncertainty about the value of mortgage-backed securities (MBS)," says **bleep** Lepre, senior loan consultant for Residential Pacific Mortgage in San Francisco. "Nobody knows the value of MBS. Period. Nobody."

With no one buying Countrywide's loans, the flow of money is cut off. Liquidity dries up. Creditors have raised the interest rates that Countrywide has to pay on short-term debt. The Merrill Lynch note floating the possibility Countrywide could end up in bankruptcy put added pressure on the company, which says it has ample liquidity.

I'm supposed to close on a Countrywide mortgage in just a few days or weeks. Should I worry?

The answer to this question depends upon whom you ask, how soon you plan to close the loan and what type of mortgage you're getting.

If in the next couple of days you're getting a plain-vanilla, fixed-rate, conforming ($417,000 or less) mortgage and you're fully documenting your income, you almost surely don't have to worry about Countrywide's problems causing a delay or cancellation of your closing.

What if you're a week and a half or more from your closing date with a Countrywide loan? Most experts say that you shouldn't worry at all if you're getting a plain-vanilla, conforming loan. Christopher Cruise, a loan officer trainer and industry observer, reluctantly disagrees. "If it was two days, maybe," he says. "But the way this is accelerating . . . it's moving so fast, that if it's not closing with Countrywide in the next couple of days, I'd ask the broker to shift it to Bank of America (BAC, news, msgs) or Wells Fargo. I only say this because Countrywide says the liquidity is just not there."

Lepre says: "It behooves everybody out there who's getting a loan to get funding from a lender who will close the loan. How do you do that? I guess my first take would be to say you want to do business with a lender that isn't depending on selling this mortgage to somebody else in the present environment."

And that means it's safer to get a mortgage from a bank that accepts deposits and thus has another source of liquidity. Lepre doesn't name names, but Cruise mentioned two of them: Bank of America and Wells Fargo. Washington Mutual (WM, news, msgs) is another, and there are dozens of regional banks, such as National City (NCC, news, msgs) and SunTrust Banks (STI, news, msgs), that underwrite mortgages.

If you're getting a mortgage (from Countrywide or another lender) that's for more than the $417,000 conforming limit, or has a complexity such as stated income, you'd better act fast, Cruise says.

"Hold your breath and see if you can move the closing up," he advises. "Provide whatever documents. Take a quarter-point hit in the rate. Do whatever you can to get it closed before the window closes. Deal with what clearly is an overreaction here, but just get that sucker closed."

Dan Green, mortgage planner with Mobium Mortgage in Chicago, says: "If you're worried that the money won't be at your closing because the lender closed its doors, put in a phone call to somebody that can give you a strong referral to a loan officer who can help you."

You want a referral to someone who has been in the business for several years, Green says, because inexperienced brokers and loan officers aren't familiar with the wide array of available loan products. "For a very long time, you only needed your primary colors," he says. "But now you need to use all 64 colors in your crayon box. There are still plenty of products out there -- plenty of people buying homes, still being approved. It just requires more knowledge from the loan officer to make it happen."

Countrywide services my mortgage. Should I worry?

"I don't think anybody should worry about where they're sending their check," Lepre says. "Worrying about who you send your payments to -- that's meaningless."

An economist for a large mortgage-industry player agrees. "Customers shouldn't really encounter any major issues," he says.

Countrywide's servicing rights are worth a lot of money. If Countrywide were to seek bankruptcy protection, it's possible that creditors would insist that it sell some or all of its mortgage-servicing rights. If the entire portfolio of servicing rights were sold, it could turn into a logistical nightmare. Buyers of servicing rights would receive tractor-trailers packed with paper and reel-to-reel tapes. They would have to match Countrywide's data on the tapes to their own databases.

"This is uncharted territory," Cruise says. "This is Columbus leaving the coast of Spain, headed for India -- and America comes up."

Countrywide says it services 8.8 million mortgages. If all of those mortgage-servicing rights were transferred, and just 1% ended up having problems, it would inconvenience 88,000 customers.

"I'd watch the escrow account like a hawk," Cruise says. "Just make sure the money is going into the insurance and the tax authority -- where it's supposed to go."

This all sounds alarming. Should I be alarmed?

Don't be fearful. Be watchful. Countrywide has been well managed over the years, or else it wouldn't have grown into the biggest mortgage lender. Even if it were to declare bankruptcy -- a big if -- that doesn't mean it would shut its doors. It probably would continue to operate while it got its affairs in order.

This article was reported and written by Holden Lewis for

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