What if Countrywide Went Under Tomorrow?

Countrywide made sure to let all of its business partner know today that everything was A-OK with the beleaguered lender with an email earlier today. Here it is in its entirety:

Dear Business Partner:

Yesterday, rumors circulated about Countrywide’s financial condition that caused concern among our Business Partners and employees. While our policy is that we typically do not comment on rumors, yesterday’s unique circumstances led to Countrywide issuing the below statement that I wanted to share with you right away:

“There is no substance to the rumor that Countrywide is planning to file for bankruptcy, and we are not aware of any basis for the rumor that any of the major rating agencies are contemplating negative action relative to the Company.”

In addition, the Company will host a live management discussion of the results for the 2007 fourth quarter and full year on Tuesday, January 29, at 12:00 p.m. (EST).

On behalf of the entire Countrywide^®, America’s Wholesale Lender^® team, I want to extend our appreciation for your ongoing support during these challenging market conditions. As always, thank you for your business.

Todd A. Dal Porto
Senior Managing Director and President
Countrywide, America’s Wholesale Lender

But let’s make a wild assumption that the company is not OK. What does a Countrywide implosion mean to the mortgage community? Let’s take a look at some numbers and make some basic guesses. Please note that I am not a corporate bankruptcy attorney and do not know how or if any of these things would transpire in a Countrywide bankruptcy; I am simply looking at some of the ripple effects of such a shutdown.

Ripple through the mortgage industry?

In their 2006 annual report (PDF, pg. 28) Countrywide reported $178 billion in closed-loan purchases through their Correspondent Lending channel. Their description of that channel from their annual report is:

Our Correspondent Lending Channel (”CLD”) purchases mortgage loans from other lenders, which include mortgage bankers, commercial banks, savings and loan associations, home builders and credit unions. As of December 31, 2006, this Channel had correspondent relationships with approximately 2,100 lenders, who are subject to initial and ongoing credit evaluation and monitoring. CLD operates in all 50 states.

For 2006, Countrywide was ranked by Inside Mortgage Finance as the largest correspondent lender, in terms of volume, among residential correspondent mortgage lenders nationwide.

If we assume for a moment that a Countrywide bankruptcy would put a temporary freeze on loan fundings through their channels such as Wholesale and Correspondent Lending that would mean at least 2,100 mortgage banking institutions would lose access to their funding capacity for an indeterminate period of time. I would assume that the freeze would be until a reorganization was approved in one form or another. Who knows how long that would be?

We’re not talking mortgage brokers - we’re talking banks

I’m not talking about wholesale mortgage broker loans being put on hold - I’m talking about very large institutions that rely on lines of credit from Countrywide suddenly being without all (or a large chunk) of their ability to fund loans. To understand how mortgage banking works see my overview on warehouse lending.

These banks come in all shapes and sizes and have lines of credit from a few million to much larger amounts. If over 2,100 “banking” institutions have their financing disrupted this could be a major lock-up in the mortgage system. Millions of home loans would be impacted until the effects of the bankruptcy were clear.

Even if there is no freeze fundings could be impacted

Even if a bankruptcy doesn’t technically freeze the access to credit that those 2,100 institutions have it could still severely gum up the works. Banks that have Countrywide lines of credit may be extremely reluctant to fund loans with that credit. The reason is that the funding bank doesn’t want to get stuck with the loan should Countrywide stop buying loans or have any material change in their loan purchasing guidelines or timeliness. Cautious banks may choose to delay funding or look to switch the loans to other facilities (if they have them).

These delays could have substantial impact on purchase transactions in particular.

We haven’t even begun to talk about brokers

Obviously this huge gum-up would trickle down to the broker originations as wholesale lending through either Countrywide directly or through another bank relying on Countrywide funds as part of its wholesale funding strategy would evaporate or suddenly fall in to limbo. The wholesale channel is huge.

The meteor that killed the dinasours

If Countrywide goes thousands of lending institutions and broker will immediately face reduced funding capabilities. In this instance the brokers will actually be in better shape than the banks; as brokers who have multiple funding options can move their loans to banks whose funding is not in question. The biggest losers will be the regional and medium-sized banks who rely on Countrywide as their primary source of financing for loan originations. They will either be in limbo or without funding capacity until they can establish additional credit lines through other large lenders (if they can).

Countrywide is a huge pillar in the lending pyramid. If they go down expect chaos in the funding world until funding, credit and other concerns are addressed. Until there is certainty about funding capacity thousands of banks and brokers will be in limbo - and worse, the customers who are anticipating funding may have to wait to see if their loans will be closed and funded.

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