Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Thursday, August 16, 2007

A different kind of CFC problem

Stock in Countrywide Financial Corporation has lost half its value since January, and the they have now drawn down an $11.5 billion line of credit to shore up liquidity problems. Moody's Investors Service has reduced Countrywide's credit rating to what the Wall Street Journal describes as, "the lowest investment-grade level, Baa3." A Merrill Lynch analyst openly speculated today on the possibility that Countrywide might go bankrupt. Presumably that event is still considered quite unlikely... but what would it mean for those of us who have mortgages through Countrywide?


The Law Talking Guy said...

Probably nothing.

Dr. Strangelove said...

I like your second word, but it's the first that bothers me. Is there a chance that, under some bankruptcy settlement or what have you, CFC's creditors could demand repayment of my mortgage obligation in full, immediately?

The Law Talking Guy said...

In a word, no. Bankrtupcy allows the debtor (the one filing bankruptcy) to alter or cancel its obligations to others. In this case, your promise to repay is an asset to be sold, not an obligation to be canceled. The "probably" referred to inconvenience and the possibility that bankruptcy will likely hinder Countrywide's ability to make new loans. That would be a massive credit crunch in the housing market, eliminating something like 20% of normal capital available for such loans. The result: soaring interest rates or, at least, a form of temporary financial chaos. Also, expect refinancing to jump anyway (adding to the credit crunch) as people try to avoid countrywide out of fear. The only real concern is that any flexible or adjustable facet of a mortgage might move unexpectedly if the market lurches.

And, of course, higher interest rates would mean lower property values, hurting the already ailing market. Natually, the fed is expected to lower interest rates sooner or later to combat this possibility.

The Law Talking Guy said...

Indeed, Fed began lowering interest rates (not the benchmark mortgage-related rate yet) today.

Dr. Strangelove said...

Thank you, LTG.

And thank you, Mr. Bernanke. On August 1st I wrote that I feared the sudden dive in the stock markets might be the leading edge of a worldwide slump. The amused Citizens dubbed me "chicken little" and told me it was not an issue.

It was just an (un)lucky guess, but unfortunately the threat seems to be growing. The Fed now states that, "Financial market conditions have deteriorated," and they will act, "to mitigate the adverse effects on the economy arising from the disruptions in financial markets."

I hope the Fed's action helps stabilize things. They did note also that the economy has still continued to expand at a moderate pace, which is hopeful. Still, I wonder if this could change the political landscape entirely for the 2008 races.

The Law Talking Guy said...

The dive in stock markets, however, is the effect, not the cause of the credit crunch. And the "dive" is still worth viewing in light of the fact that the Dow Industrials are still up 2000 points (about 18%) over last year at this time.

Dead Parrot said...

I enjoy this economics talk. More of it please!

Let's keep in mind the definition of a recession - two or more consecutive quarters of negative growth (I believe as defined by GNP). Given this, what might cause a recession? The main driver of economic growth in this country has been consumer spending. We have enjoyed five consecutive years of steady growth because people keep spending money. So if consumers stop spending money, we could fall into a recession.

Why would consumers cut back significantly on their spending? I can see two main forces - 1) economic uncertainty; 2) lack of access to credit. If people are unsure about their jobs or about rapidly rising prices, they won't buy things like houses, cars, washers and dryers or GI Joe with the kung fu grip. They will conserve cash. Similarly, people won't spend money on these items if they cannot borrow money either directly through financial institutions or via their credit cards.

The credit crunch and its repercussions in the housing market has definitely affected one of the main sources of cash that has fueled growth - people refinancing their homes to spend the growth in equity. Can't do that much now. But there are other sources of cash for people to access. They'll just keep running up other kinds of debt rather than mortgage debt.

My advice is pay more attention to basic leading indicators rather than the stock market. Look at unemployment percentage, the number of first time filers for unemployment benefits, the percentage of people filing for personal bankruptcy. If those numbers start to trend negatively, then it won't be chicken little to foresee a recession. It will be almost a foregone conclusion.

USWest said...

I posted this earlier, but I see it didn't take. LTG mentioned the up Stock market and Dead Parrot also mentioned it. I agree with Dead Parrot. We should watch lender indicators.

The Dow Jones is blue chip stock, good old fashioned industrial products. It is good to keep that in mind becausee Dow Jones trades in stocks that are based on a concrete set of products. The housing market investment instraments were based on more abstract financial notions, like hedge funds and securities. Risk was bought and sold rather than a product.

Dead Parrot said...

To me the biggest negative indicator and potential harbinger of more bad news is that Wal Mart (a Dow 30 stock) lowered its earnings estimates for the year. They are forecasting that people will not spend as much money at their stores as they had previously thought. Watch the retailer numbers - more of them may report declines in sales and lower their forecasts. If so, look for the Fed to lower interest rates again to try to "prime the pump" and try to avoid a recession.

Anonymous said...

This is mostly in response to Dr. Strangelove's early question. While a mortgage obligation would be basically unaffected by bankruptcy, it would almost certainly be sold and serviced by a different lender if CFC went under.

Mortgage companies generally keep fairly shoddy records, so it's probably a good idea to keep somewhat archaic (i.e., paper) records for a while in case some joker decides there's a missing payment.

-Seventh Sister

Raised By Republicans said...

What I've been hearing from financial analysts is that the Bush polieis have so bifurcated our economy that there are two nearly distinct economies now. One for the upper classes and one for the lower classes. People who are well off enough to not have sub-prime mortgages are doine OK. But those among us who have sub-prime mortgages (and shop at Wal Mart) are doing poorly.

This may explain why Countrywide (a major sub-prime lender) and Wal Mart are doing rotten while the DOW is flirting with records.

The Law Talking Guy said...

I want to echo what Seventh Sister said about recordkeeping. I believe both she and I have solid intel that mortgages are frequently sold without decent bookkeeping attached, in part because the average life of a mortgage is five years or so - most are refinanced. Anyone who keeps a mortgage without refi for more than 8-10 years will likely find that the bank's bookkeeping is so bad that it has simply disregarded payments by the dozen, and later "audits" can retroactively try to impose late fees and eliminate the equity you have worked so hard to build up. Get and keep a mortgage statement every year. Thanks to the New Deal, residential borrowers have more rights than most borrowers, by far.

Another mortgage note, little known. In California, at least, a single missed payment cannot cascade into a default easily. In some states, if you miss January's payment, but pay all the rest, each month's payment is considered a "late" payment of the previous month. By law, in CA, this is not the case. Most borrowers AND BANKS do not know this, particularly out-of-state lenders who buy your loan. So if you miss a payment by accident or tragic circumstance, do not let the Bank keep saddling you with new late fees every month!

Dr. Strangelove said...

Thank you, LTG and 7th Sister, for your advice re recordkeeping! It's shocking that bank records are so poor... almost sounds deliberate. Also the note about missed payments is very important also.