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Sector Earnings Sink, Countrywide Faces Junk Rating

Sector Earnings Sink, Countrywide Faces Junk Rating

Recent mergers, acquisitions and other corporate activity

November 12, 2007


photo of Coco Salazar
As as billions of dollars in write downs on nonconforming mortgage securities continued at a host of companies, Countrywide Financial Corp. warned its debt ratings could be cut to junk status — which would impair its access to capital. And while earnings also deteriorated at Fannie Mae, the company is now current with required securities filings.

But first, the Federal Reserve Board on Thursday announced the chairmen appointed for the 12 Federal Reserve Banks for 2008. Stephen Friedman was appointed for the bank in New York, William F. Hecht for Philadelphia, John A. Canning Jr. in Chicago, James J. Hynes for Minneapolis and Lu M. Cordova for Kansas City. Those who will serve another year in the position are Lisa M. Lynch at the Boston bank, Tanny B. Crane in Cleveland, Thomas J. Mackell Jr. for Richmond, V. Larkin Martin in Atlanta, Irl F. Engelhardt for St. Louis, James T. Hackett in Dallas and David K.Y. Tang for San Francisco.

Moody’s Investor’s Service downgraded the long-term debt ratings of Washington Mutual Inc. to A3 from A2 and placed a negative outlook on its ratings because it believes challenges for the company can increase if economic and credit market conditions further deteriorate. Specifically, the downgrades occurred because Moody’s views provisions will elevate in WaMu’s residential mortgage through 2008 due to home price declines likely lasting longer than anticipated; increased credit costs; increased concern that WaMu’s capital ratios could deteriorate; unknown impact resulting from the New York attorney general’s investigation on appraisal practices.

E*TRADE FINANCIAL Corp. announced that the fair value of its $3.0 billion asset-backed securities portfolio, predominantly within ABS collateralized debt obligation and second-lien securities, has declined consistently with the series of downgrades ratings agencies made on securities since Sept. 30. E*TRADE ‘s exposure to ABS CDO and second-lien securities was approximately $450 million in amortized cost at the third quarter’s end, including approximately $50 million of “AAA” rated asset-backed CDOs that were downgraded to below investment grade. E*TRADE expects declines in fair value to result in further securities write downs in the fourth quarter. Write downs will likely exceed previous expectations, thus the company does not believe it will achieve the previously disclosed 2007 earnings guidance of $0.75 to $0.90 per share.

Wachovia said it lost $1.1 billion as the value of its ASB CDOs linked to subprime exposures sunk to around $680 million at Oct. 31 from about $1.8 billion as of Sept. 31, according to a slide presentation for its conference Friday. The lender also said it expects fourth quarter provision expense to be $500 million to $600 million higher than charge-offs as a result of modest credit quality deterioration and recent “dramatic declines” in housing values.

Capital One Financial Corp. raised its forecast for credit losses in 2008 to the range of $4.9 billion to $5.5 billion due in part to its view that the economy will continue to perform similarly to how it is performing today and to allow room for significant continued degradation in the housing market, according to a slide presentation prepared for its fall investor conference Tuesday. The charge-offs include expectations for continued sharp degradation in its Alt-A, Greenpoint home equity book. The company had projected credit losses of up to $4.9 billion on Oct. 18.

But Capital One noted its home loan volume has grown. Originations for the nine months ending Sept. 30 were at $3.1 billion, compared to $3.0 billion and $2.5 billion in all of 2006 and 2005, respectively, according to a separate slide presentation.

Fannie Mae reported Friday a net loss of $1.4 billion for the third quarter, more than double the net loss of $629 million a year earlier. The secondary lender blamed its results on deteriorating mortgage and housing market conditions that worsened since the end of 2006. Fannie expects housing weakness to continue through 2008, thus it anticipates a significant increase in credit-related expenses and credit losses for 2007 and 2008 and continued volatility in its net income.

On a positive note, however, the reported results for the first three quarters of the year in Forms 10-Q filed with the Securities and Exchange Commission make Fannie current on its financial reporting, the secondary lender noted. The timely filings may help clear a path to the White House, which had been resistant to expanded portfolio limits at the government sponsored enterprise and its secondary cousin — Freddie Mac, in part, due to delinquent SEC filings.

Security National Financial Corp. announced today that Countrywide Warehouse Lending renewed its $250 million warehouse line in addition to a $200 million facility renewed by UBS earlier this year. October originations at the Salt Lake City-based lender were reported at $300 million.

Countrywide Financial Corp. warned Friday that another downgrade to its current investment-grade debt ratings — which have been placed on some form of negative outlook by all three rating agencies — could severely limit its access to the public corporate debt markets. The ratings were already downgraded after secondary market liquidity evaporated and commercial paper financing disappeared in the third quarter.

Countrywide’s lowest rating currently is BBB-, the lowest debt can be rated and still be investment grade.

“To retain access to the public debt markets it is critical for us to maintain investment-grade credit ratings,” an SEC filing stated. “Maintenance of our current investment-grade ratings requires that we have high levels of liquidity, including access to alternative sources of funding such as deposits and committed lines of credit provided by highly rated banks.”

Countrywide said it responded to the cash crunch by speeding up the migration of mortgage banking activities into its bank subsidiary — where capital access is more reliable. It also focused only on conforming business, drew on $11.5 billion in revolving facilities and sold $2 billion in convertible cumulative preferred stock.

A cut in Countrywide’s ratings would likely require the “renegotiation or replacement of our existing financing arrangements beyond their current maturity dates will involve more restrictive terms and higher relative rates than those presently in place.”

Lockridge Grindal Nauen P.L.L.P announced it filed a class action against Countrywide Capital V, Countrywide Financial Corp. and certain company executives to seek recovery of losses for purchasers of CCV preferred stock in connection with a Nov. 1, 2006, initial public offering through Aug. 9, 2007. The law firm alleges the lender misled investors through materially false statements of its business and financial condition. Kaplan Fox & Kilsheimer LLP is another firm that is also suing on behalf of CCV investors.

A class action against Citigroup Inc. has commenced on behalf of common stock purchasers between April 17, 2006, and Nov. 2, 2007, Stull, Stull & Brody announced. Citigroup is also being accused of making materially false and misleading statements on its financials. Specifically, the suit alleges that Citigroup had a portfolio of collateralized debt obligations contained billions of dollars worth of impaired and risky securities, many backed by subprime mortgages, and failed to properly account for highly leveraged loans and record impairment of debt securities they knew or disregarded were impaired.

The Fed gave China Merchants Bank Co. Ltd., Shenzhen, People’s Republic of China, permission to establish a branch in New York, N.Y. China Merchants, with assets of approximately $146 billion, is the sixth largest bank in China and is indirectly owned by that country’s government through a number of wholly owned subsidiaries. The branch will engage in wholesale deposit-taking, lending, trade finance, and other banking services, according to the Fed’s approval order.

Missouri-based Midwest Regional Bancorp Inc. received Fed approval to become a bank holding company and acquire all the voting shares of Kansas-based Federated Bancshares Inc. The acquisition, which includes Federated subsidiary The Bank of Otterville, must be consummated by Feb. 8, the Fed reported.

M&T Bank Corp. got a green light from the Fed to acquire Partners Trust Financial Group Inc. The deal must be consummated no later than Feb. 7, according to the Fed’s approval order.

Coco Salazar is an associate editor and staff writer for

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