Countrywide Financial Corp. warned that secondary market conditions have become so volatile it has to hold more home equity and nonprime loans on its books -- leading to hundreds of millions of dollars in charges.
Countrywide, which reports $190.3 billion in available short-term sources of liquidity, "of which we consider $46.2 billion highly reliable and available," made the disclosure in an 10-Q filing with the Securities and Exchange Commission after the U.S. markets closed yesterday.
Explaining that conditions in the mortgage market during the second quarter were hurt by rising rates, weakening housing demand and worsening loan performance, the mortgage banker said it, as well as other lenders, tightened underwriting. And until market conditions improve, it plans to hold more loans in its portfolio that would have otherwise been held for sale or securitization.
"Near the end of the second quarter and shortly thereafter, market demand for the securities that we create in our loan securitization activities was negatively affected by investor concern about credit quality and demand for higher yields" Countrywide said. "We have contingency planning protocols that were designed to encompass a wide variety of conditions, including recent secondary market volatility."
The Calabasas, Calif.-based lender saw the prime home equity loans it held for sale jump from $1.8 billion at the end of last year to $5.1 billion on June 30, though its nonprime loans fell more than $1.0 billion to $3.8 billion.
In the loans-held-for-investment category, prime home equity holdings went from $20.2 billion on Dec. 31, 2006, to $22.8 billion at the end of the second quarter, while nonprime holdings shot up from $0.1 billion to $1.3 billion.
"Our strategy of retaining a larger portion of loans or securities may impact our gain-on-sale margins in the short-term," the filing said.
Countrywide said it recognized a $417 million impairment loss on credit-sensitive retained interests, including a $388 million loss on subordinated interests collateralized by prime home equity loans. It also boosted its provision for loan losses to $231 million, including an increase of $183 million for prime home equity loans.
Revenues reportedly dropped to $2.5 billion from $3.0 billion during the second quarter of last year, while earnings fell to $485 million from $722 million a year earlier. Loans servicing earnings, in particular, fell from a profit of $279.3 million to a loss of $147.4 million.
"The secondary market and funding liquidity situation is rapidly evolving and the potential impact on the company is unknown," Countrywide warned. "Continuation of these conditions or further deterioration could result in further reductions in the company's funding volume."