Angelo Mozilo

The CEO of the nation’s largest lender, Angelo Mozillo, says, “We expect difficult housing and mortgage market conditions to persist.” That as Countrywide Financial

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[CFC  Loading...      ()   ] disappoints the street and lowers its forecast for the rest of the year, the second time it’s done that in as many quarters.

“Credit quality in the bank deteriorated sharply,” Morgan Stanley analyst Kenneth Posner writes in his note on Countrywide today. There’s an understatement. To me, what got a little lost in all the headlines, is that Countrywide actually set aside almost $293 million in anticipation of missed mortgage payments in the company’s portfolio. That’s not good news.

According to the Mortgage Bankers Association, more than one million homes will enter foreclosure this year, that’s 2.3% of the nation’s 44 million home loans. If things are getting worse, then you can expect that number to push even higher, as we’ve seen in the month-to-month data from other sources, like RealtyTrac, which has foreclosure activity up 87% from June of last year to this June.

I spoke to Nishu Sood, an analyst over at Deutsche Bank today, and he makes an interesting point. The big home builders have lowered their prices in the hot markets, like Las Vegas, down 25%, but the existing home owners have not dropped as far. He expects to see existing home owners start to drop prices more dramatically in the second half of this year. If prices really start to hit the skids in these big markets--which are where all those speculator investors lived and breathed--then you can expect all those adjustable rate mortgages they used to really kick into high gear default.

Countrywide may be the poster child for issues in the subprime market, but CEO Mozillo did say the company “incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans.”

Rising foreclosures only mean more homes forced onto an already glutted market. Inventories of new homes are at a 7-month supply now, and cancellation rates are well above historical norms. Bad credit and high inventories are nothing short of a toxic mix. Will it all wash out? Of course. We’ve seen larger housing corrections in the past, but that mix I’m talking about makes this one clearly unique.

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