country wide paying 5.75% on cds

[want a good deal]

What do you all make of this since it is clearly over the market. Also interesting that a lot of the condo developers in downtown San Diego have them as the preferred lender. Does anyone have any feedback on how their operations are going.

[NeetaT]

I think they recently had a run on their CD accounts or should I say CD accounts held by numerous clients who were afraid of being affected by sub prime. The 5.75 APY is not great considering there has to be a winner when it comes to offering competitive rates. I receive 5.25% APY in a brokerage account with no fees and no time limit. The money is lent by the firm at 9.5% to people who leverage the commodity and have to sale the commodity if they cannot make the margin calls which brings my risk to a very low level if any at all.

[TheBreeze]

Actually, it looks like they are only paying 5.65%:

http://my.countrywide.com/

I would say they desperately need money if they are paying that high of a rate. Over at bankrate.com, the average rate is 4.85% for a 12-year CD. Interestingly, the next highest rate after Countrywide is 5.44% from Bank of Internet out of San Diego.

http://www.bankrate.com/brm/rate/high_ratehome.asp?params=US,416&product=15

According to bankrate.com, the Federal Discount Rate is 5.75%

http://www.bankrate.com/brm/ratewatch/leading-rates.asp

So Countrywide is willing to lock itself into a 5.65% rate for 12 months when they can get about the same rate from the Fed Discount Window. Plus, most everyone is expecting a rate decrease sometime next month. Countrywide must be in dire straits if they can’t even wait the couple of weeks or so before the Fed cuts rates.

Here’s my amateur financial analyst/economist view of what I think is happening to Countrywide:

Per federal regulations, banks must maintain a certain capital to loan ratio. If a bank goes below that ratio, I believe the Federal Reserve comes in and takes over. It is likely that Countrywide is perilously close to crossing that threshold. By paying such a high rate on CDs, Countrywide is saying they desperately need capital. My guess is that the commercial credit market and maybe even the Fed Discount window is closed to Countrywide. Their only hope of continuing as a going concern is to get in more deposits.

Countrywide also has the option of selling off their REOs. However, the REOs are likely “marked to market” at a value way above what they will sell for. If Countrywide begins to sell these homes, the remaining homes will get marked to market based on these fire sales and Countrywide’s balance sheet goes to hell.

http://www.countrywide.com/purchase/f_reo.asp

Basically, it looks like Countrywide is caught between a rock and a hard place.

[want a good deal]

They had an ad in todays UT. Thats where I got the 5.75 from. Maybe its only here in SD they are offering it. My other question is if they are the ones writing a lot of the loans for the downtown condo market and the buildings are almost done are they going to still write the loans or are the buyers going to have to go get other financing. Does anyone know what they are charging for jumbo condo loans. It seems the more they pay for money the more the profit gets squeezed.

[TheBreeze]

Here’s a good overview of the capital requirement and the reserve requirement for banks:

http://en.wikipedia.org/wiki/Capital_requirement

http://en.wikipedia.org/wiki/Reserve_requirement

It’s my belief that if Countrwide were to sell all its REOs, that it would fall below these requirements and this is one reason that many banks refuse to lower prices on their REOs. However, if one of these banks fails completely, the Federal Government could come in and liquidate everything quickly. This could have a cascading effect in that all REOs on all bank balance sheets would have to be marked to the new market prices. If that happens … LOOK OUT BELOWWWWW!

Right now, REO prices are stable in the same way that two tectonic plates pushing against one another are stable. Eventually there’s going to be an earthquake though.

[want a good deal]

How many REOs do they have? I thought some bank gave them a huge cash infusion.

[TheBreeze]

2700 in California alone:

http://www.countrywide.com/purchase/f_reo.asp

I believe Bank of America did some kind of convertible deal with Countrywide. However, read this piece to see why the convertible deal may have put Countrywide on a path to bankruptcy:

http://www.thestreet.com/comment/rewrite/985564.html?puc=_tscs

[want a good deal]

Wow, that is an amazing article. It is truly amazing how they figure out all these intricate ways to make money. I take it this is what you think may be happening in this case. Do you know if they are actively making loans.

[bsrsharma]

which brings my risk to a very low level if any at all.

Don't ever compare a leveraged commodity money market with FDIC insured bank deposits! You can lose that all in a heartbeat. Just happened recently with a Chicago fund. FDIC insured CD is as good as cash (subject to limits).

[BuyerWillEPB]

FNBO Direct has been giving 6.00% on there regular completely liquid online savings account. Granted that 6% will end on 9/28, and then go back to their regular 5.25%. Even the 5.25% is still pretty good for a regular savings account.

Time to look for the next 6% offer. It was HSBC online at 6.00% in the beginning of 2007, then FNBO online 6.00%, who’s next?

[davelj]

TheBreeze, want a good deal, et al…

BAC’s convertible deal with CFC is NOT – I repeat NOT – a “floorless convertible” like the deal Jim Cramer describes in the piece TheBreeze posted. So, while CFC may still go to zero it will be in spite of, not because of, the BAC convertible deal. I’m a bear on real estate and CFC, but fer christ’s sake let’s not make stuff up and/or purposely mislead folks where the pertinent issues are concerned. The BAC/CFC convertible deal is a very straightforward deal – nothing AT ALL like the convertible Jim Cramer describes in the column referenced above. Let’s try to stick to facts; they’re bad enough as they are. There’s no need to overstate one’s case.

[capeman]

To address many points here since I’m heavily invested in CFC on the short side:

1) Convertible deal with BofA- That was $2B of preferred stock at pretty much any given price at or below $18. If the stock drops to $6 that is then a “certain event” that will give BofA 3X the preferred shares at liquidation plus the ~7% interest on the convertible. BofA is has shown great interest in Countryslide’s servicing unit and with preferred shares should be able to pick that clean from the carcass. Meanwhile the theory is that BofA was also headging by shorting CFC at the post news pop to $26 a share down. Thereby likely getting back 25% of the money in the process.

2) Access to the Fed disount window- CFC does not have direct access to the window due to lack of acceptable collateral… meaning their paper is not worth a loan.

3) CD at 5.75% industry leading- that means they are seriously looking for money to keep solvent. They are paying out for it with the high rate. Meanwhile if insolvency rears up and kicks CFC back the CD customers may have to get their money back from the FDIC instead.

4) How the operations are going- well they drew down their entire credit line, took a desperation convertible placement with BofA and they are now trying to draw from assets in CFC Bank… meanwhile they cannot place their MBS paper and likely are getting “called” on quite a bit of paper once sold and coming back with the REOs… I would say operations are not too smooth at the moment which is why I chose to short them.

[want a good deal]

I take it they must still be making loans or they wouldnt be still around, is this correct?
They did not have rates in the paper just phone numbers beside the different kind of loans.
I am just trying to figure if they go under how it will impact all the people and the property who are in the loan process with them.

[TheBreeze]

davelj,

Thanks for the correction. I wasn’t trying to mislead anyone. In my post I said ‘may’ lead them to bankruptcy, not ‘will’.

[bsrsharma]

capeman – since you have researched CFC so much, can you clarify this for me:

How do you rationalize these two statements:

• CFC does not have direct access to the window due to lack of acceptable collateral
• if insolvency rears up and kicks CFC back the CD customers may have to get their money back from the FDIC instead.

If their paper is not good enough for FED, how are the regulators allowing it as collateral for FDIC insured funds? It is like FED is more risk averse than FDIC (well OTS really)

[Author]

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