Countrywide has long road back to stability

updated 6:41 p.m. ET Sept. 14, 2007

LOS ANGELES - Countrywide Financial Corp. grew from a two-man startup in 1969 to become the nation's leading mortgage lender by deftly riding out housing boom-and-bust cycles.

This time around, however, the ride has been a lot rougher, leaving the company in a scramble to regain its footing as the housing market has turned from boom to bust.

To survive, it's been forced to borrow billions of dollars, announce thousands of job cuts and dramatically restructure its lending practices to nearly eliminate risky subprime loans to borrowers with shaky credit that have led to massive foreclosures and defaults wracking the housing market.

"In an absolute level sense, this is the biggest challenge" Countrywide has ever faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.

Several analysts believe Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.

But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.

"At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo," Cannon said.

Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders move to focus on prime loans, a sector once dominated by Countrywide.

"It's going to take time, and I think their cutbacks are going to be greater than perhaps we anticipate," Ross said.

Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.

The company didn't lead the charge to make those loans, "but as an industry leader, they were right there," said Robert Napoli, an analyst with Piper Jaffray.

"They have an effect on the market. They have to, being the biggest," he said.

The Calabasas, Calif.-based company's loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.

Countrywide and the rest of the mortgage industry also got caught up in the frenzy to make nontraditional loans then resell the mortgages for hefty profits to Wall Street banks.

Fortunes dove when demand for those loan packages plummeted amid rising defaults. The resulting credit crunch that tore through the markets has left Countrywide and others holding loans they couldn't sell and hurting for cash to keep funding new ones.

"The market changed very quickly on them ... they just underestimated how rapidly the market changed," Napoli added.

A report in The New York Times cited unnamed former Countrywide employees saying the company used financial incentives to encourage employees to steer borrowers into subprime loans to boost profits.

The allegations prompted North Carolina Treasurer Richard Moore to send a letter dated Tuesday to Countrywide asking for an explanation. Moore is the trustee of a pension fund that holds more than $11 million in Countrywide shares.

"Countrywide has sacrificed long-term sustainability for short-term profits," Moore wrote. "As an investor, I expect assurances that these practices have ceased and that the company is returning to a business model that both respects consumers and protects shareholder value."

Countrywide has strongly refuted the report, noting its business processes are designed to prohibit pushing customers who qualify for prime loans into subprime loans, and that its loan officers do not receive higher commissions for selling subprime loans.

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