Weiss' conclusion: "With the mortgage market and economy continuing to slide, it's likely Countrywide will suffer intolerable losses. Thus, in the absence of extraordinary intervention, we believe it could be difficult for Countrywide to avoid failure, with a potentially severe impact on consumers." Larson delineates the following four areas in which consumers would be affected in the event of a failure, and to a large extent, even if a failure is avoided:
Impact 1. Consumers would find it more difficult to get new mortgages or refinance their existing loans.
Many other lenders that specialize in higher-risk lending have already gone bankrupt, including New Century Financial, NovaStar Financial, Decision One (part of HSBC), Option One Mortgage (owned by H&R Block), and Delta Financial. These failures have significantly reduced the availability of mortgages to consumers.
However, Countrywide Financial is far larger. Therefore, the impact of a failure would likely be greater. Countrywide Financial funded $408.2 billion in residential mortgages in 2007, the most in the industry. It is also the second-largest subprime originator, the second-largest Alt-A lender, and the third-largest jumbo mortgage lender. Should Countrywide be forced to file for bankruptcy, the loss of tens of billions of dollars of mortgage lending capacity will likely make mortgage credit far scarcer.
Impact 2. Surviving mortgage lenders will further tighten standards and cut back more on mortgage lending.
More than 55% of lenders polled in a recent Federal Reserve survey are tightening standards on subprime mortgages. Six in 10 were making it tougher for borrowers to get "nontraditional mortgages" - including Alt-A and interest-only financing - and more than four in 10 were raising the bar for prime borrowers. That is the highest since the Fed's survey began in 1990.
If Countrywide files for bankruptcy, this trend will accelerate. Credit score requirements will rise. Borrowers will be forced to put up larger down payments. Investor loans and stated income financing will get much harder to find. So-called "80-20" mortgage schemes, where a borrower gets an 80% first mortgage and a 20% second loan to avoid private mortgage insurance, will also become much harder to arrange. Second-lien lenders that fund the "20" piece of those deals are already getting hammered with losses.
Impact 3. With mortgage financing increasingly scarce, home sales will fall further.
We have just learned that pending home sales fell 19.2% from a year earlier in November. They are down 31% from their April 2005 peak, with new home sales down an even sharper 53% from their July 2005 peak. Looking ahead, Larson forecasts sales could slump by as much as another 10% in 2008 as lenders like Countrywide rein in their loan operations, the unemployment rate rises, and the economy slips into recession.
Impact 4. Home prices will continue to sink.
The decline in nationwide home prices from a year earlier is currently measured at 3.3% by the National Association of Realtors and 6.1% by S&P/Case-Shiller. Larson expects they will fall another 5% to 10% in 2008, with sharper declines in markets that have the largest supply overhang, the most overextended speculators, and the worst affordability due to the most stretched home price-to-income ratios. These include California, Florida, Nevada, Arizona, and other select markets in the Northeast.
