Lender stung by fears on finances

Countrywide Financial Corp. denied Tuesday that it was considering filing for bankruptcy protection, but its stock price collapsed on widespread rumors, falling to an 11-year low.

The Calabasas-based company, which cut more than 11,000 jobs last year, was pummeled by the bankruptcy speculation and Wall Street gossip that its debt would be downgraded by one of the major bond-rating firms.

Countrywide’s shares fell $2.17, or 28.4%, to $5.47 -- down 87% from a year ago. The stock market value has sunk to $3.2 billion from $27 billion.

The dominant mortgage lender during the housing boom, Countrywide has said that it has enough money to stay in business and predicted in October that it would turn a profit this year.

But it has been struggling under the weight of soaring defaults on sub-prime loans and an array of legal woes.

Its lending practices are under investigation by California Atty. Gen. Jerry Brown and the Illinois attorney general’s office, and the Securities and Exchange Commission is looking into potentially improper trading by insiders, most notably Chief Executive Angelo Mozilo, who sold more than $140 million of stock before the price began tanking. In addition, the U.S. trustee’s office is probing allegations that the company levied inappropriate charges on mortgage holders going through bankruptcy.

The New York Times reported Tuesday that court records showed that Countrywide fabricated documents related to the bankruptcy case of a homeowner in Pennsylvania who was targeted for foreclosure, apparently bolstering concerns that the lender acted improperly.

The New York Stock Exchange briefly halted trading in the stock early Tuesday after it declined to $5.76. The company issued a statement and the price rebounded briefly before tumbling again.

“There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the company,” the Countrywide statement said.

Analysts said they were troubled by a lack of information coming out of Calabasas.

“The last time their stock price dropped like this, the company reiterated that they had ample liquidity and capital. It’s interesting that they have not made that statement today,” said Frederick Cannon, analyst with Keefe, Bruyette & Woods Inc. in San Francisco.

Countrywide’s delinquencies have climbed to 6.52% of unpaid principal balances from 5.94% a month ago and 4.15% a year ago, Cannon noted. Foreclosures have doubled over the last 12 months.

Delinquent loans create huge liquidity problems for loan servicers like Countrywide because the servicer becomes a middleman between the borrowers and the people who bought their loans.

When the borrower misses payments, as a record number of Countrywide’s borrowers are doing now, these contracts require that the company advance those missed payments to investors until it’s clear that the amounts won’t be recovered.

With Countrywide having a $1.5-trillion servicing portfolio, that puts tremendous strain on its cash flow, Cannon said.

When the banking system credit crunch deepened in late summer, Countrywide began to find it difficult to borrow on Wall Street because lenders feared that it might sink under the weight of troubled mortgages.

The company drew on an $11.5-billion backup line of credit in early August before securing a major investment from Bank of America Corp. on Aug. 22. Bank of America paid $2 billion for preferred stock that could be converted to a 16% stake in Countrywide’s common stock at a conversion price of $18 a share.

As the housing market has deteriorated, Countrywide’s common shares have plunged far below the $18-a-share conversion price. Last week, market rumors suggested that Bank of America might buy the company to protect its investment. No buyout offer has materialized and Bank of America would not comment about whether the company would invest more in the lender or whether it was taking any steps to protect its substantial investment.

In the Pennsylvania case, Countrywide was accused in Bankruptcy Court of creating a record after the fact to make it appear as if the company had sent letters to a homeowner and her lawyer telling them of $4,700 she supposedly owed on her mortgage.

According to court records, U.S. Bankruptcy Judge Thomas Agresti told a lawyer for Countrywide that he was “having trouble with these re-created letters that purport to be sent to a number of parties at a prior date well into the past and created at a subsequent date to show or represent, at least at first blush, the state of a record which didn’t really exist as such.”

The judge called the letters “a smoking gun that something is not right in Denmark.” The bankruptcy trustee in the case is seeking loan histories for 293 other cases involving Countrywide, according to court records.

Countrywide said in a statement that the judge’s comments were “impromptu and exploratory in nature, and not conclusive in any way.” In addition, the company said there was no “assertion or demonstration that these letters had been sent previously.”

In another case in Florida, a bankruptcy judge told Countrywide to turn over internal documents relating to how the company calculates its claims to the U.S. trustee, a Justice Department official who monitors bankruptcies.

Countrywide has until later this month to provide the documents and in February must submit to questioning under oath by the trustee.

Countrywide is appealing that order.

--

[email protected]

Bloomberg News was used in compiling this report.

--

(BEGIN TEXT OF INFOBOX)

Chronology

Key recent events involving

Countrywide:

Aug. 14, 2007: Amid a crash in

the sub-prime lending market,

Countrywide Financial Corp. re-

ports that its foreclosures and

delinquencies jumped in July to

the highest levels in more than

five years.

Aug. 16: Anxious customers

jam the phone lines and website

of Countrywide Bank and crowd

its branch offices to pull out their savings because of concerns about the financial problems of Countrywide Financial, which owns the bank.

Aug. 22: Bank of America

Corp. invests $2 billion in

Countrywide.

Sept. 7: Countrywide announces it will slash as many as

12,000 jobs, or nearly 20% of its workforce, saying the downturn in the housing market and the credit crunch related to sub-prime loans have created the worst conditions ever seen by the modern mortgage industry.

Sept. 13: The company lines

up $12 billion in new financing.

October: Securities and Ex-

change Commission regulators

begin looking into $145 million in

stock sales by Chief Executive Angelo Mozilo, who ramped up his sales in the months before the company’s shares declined sharply.

Oct. 26: The company reports

its first loss in 25 years -- $1.2 billion.

November: The U.S. trustee’s

office begins looking at whether

Countrywide has levied unjus-

tified fees on consumers going

through bankruptcy.

Dec. 13: The company says it is

being investigated by the California and Illinois attorneys gen-

eral.

Tuesday: Shares plunge to their lowest level in more than a decade amid new rumors that the company would file for bankruptcy protection or see its debt downgraded.

--

Times research by Scott J. Wilson