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Shares of the Calabasas-based mortgage lender plunged another 6.6 percent. The stock closed at $25, which is as low as it's been in three years. Other mortgage lenders, such as Pasadena-based IndyMac, also took big hits. Here's the problem: defaults are starting to spread beyond the subprime mortgage arena. That has everyone scared that the credit crunch can no longer be contained in one corner of the market. When mortgage companies like Countrywide lend money, they rely on Wall Street to repackage those loans into securities that investors would typically snap up - and which the mortgage company would then use to finance the loan. Except that it's not happening because everybody is so nervous. Without Wall Street money, mortgage lenders are caught in a liquidity bind.
"People just don't want the credit risk for mortgages right now,' KBW Inc. analyst Bose George told Bloomberg. That's why IndyMac CEO Michael Perry said that the market for mortgage bonds has become "very panicked and illiquid." (LABO) Not helping Countrywide's situation were rumblings on Thursday that the lender might be in trouble over subprime mortgages (even though two of the three major rating agencies signed off on the company's credit). To give you some idea of how freaked out investors have become, Countrywide had to issue a statement saying that its financial condition "remains strong." What really upended the market on Friday were the ongoing worries about investment house Bear Stearns, which has gotten battered in the mortgage market. Standard and Poor's changed the outlook on the company to "negative" from "stable," which led to more rumors about BS's financial stability. "There are just a lot of unknowns, so the nervousness is spread through the market," said Andrew Brooks, head trader at T. Rowe Price Group. (Bloomberg, WSJ)
Mark Lacter created the LA Biz Observed blog in 2006. He posted
until the day before his death on Nov. 13, 2013.