Here are breif exerpts of today’s Wall Street Journal article on page C 1…Angelo R. Mozilo, CEO of Countrywide (CW) financial, the US’s largest home-mortgage lender. In the business for more than 50 years, he has a sobering message for investors: Buckle your seat belts. “I’ve never seen a soft landing in 53 years.” The article explains his cautious stance as “tapping on the breaks” as the housing market cools and competition amoung lenders intensifies, Wells Fargo shows no sign of slowing and may regain the #1 lender status. CW’s fans take Mr. Mozilo’s warning as a comforting sign that he won’t chase growth at the expense of profit. Bears counter that the less-aggressive stance confirms that investors should be wary as CW struggles to slash costs in a slowing market. Mr. Mozilo’s bucket of cold water should serve as a warning that the housing market could take more than just a few months to rebound. “housing prices are leveling off in many areas and edging down in some. How low are they going to go? It’s hard to tell, but the trend is down.” That means fewer home loans and more defaults. CW lost market share because it reduced purchases of loans made by smaller lenders, but is still gaining market share in direct lending. The risk of rising losses on defaults is another worry, Robert Lacoursiere, an analyst at B of A NY, has had a “sell” on CW for the past year, partly because he worries that a rise in “dud” loans will hurt earnings. One reason for concern: CW’s promotion of Pay-option adjustable-rate mortgages, or option ARM’s. If borrowers choose the lowest option, their loans grown. Eventually a big leap in the monthly payments are due. OPTION ARMS ACCOUNT FOR 45% OF LOANS HELD AS INVESTMENTS BY CW’S BANKING DIVISION (ouch!). CW says it has been careful to give these loans only to borrowers with relativly strong finances, still the test of these loans will come when borrowers face “resets” to higher payments. “I’m not sure exactly what will happen then.”
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