Mortgage Stocks Tumble on Fresh Reminders of Liquidity Constraints

Countrywide Financial led shares of U.S. mortgage companies lower on Friday as investors received fresh reminders that a shortage of liquidity might crimp profits.

Shares of Countrywide fell as much as 13.7 percent after the largest U.S. mortgage lender said in a regulatory filing that it was facing "unprecedented disruptions" in the market to buy and sell home loans, and that the ultimate impact was unknown.

Washington Mutual , the largest U.S. savings and loan, said in a separate filing that market liquidity had "diminished significantly," and that it would be "adversely affected" while this persisted. Its shares fell as much as 5.6 percent.

Decliners included MGIC Investment , which fell as much as 19.8 percent after a JPMorgan Chase analyst downgraded the mortgage insurer to "underweight" from "overweight."

Two mortgage investors also suffered large declines. Anworth Mortgage Asset slid as much as 25.1 percent after a unit received a default notice, and Thornburg Mortgage , which also makes loans, fell as much as 18.5 percent after two credit agencies downgraded its ratings deeper into "junk" status."

Countrywide's decline followed recent comments by several company executives, including Chief Executive Angelo Mozilo, acknowledging the tough market but assuring investors that the lender had sufficient liquidity to ride it out and thrive.

As evidence grows that defaults are spreading beyond riskier "subprime" borrowers to people once considered good credit risks, investors have refused to buy many loans rated below "prime," forcing Countrywide and rivals to keep more loans themselves.

"There wasn't much new that the market didn't already know" in Countrywide's filing, said Ryan Lentell, an equity analyst at Morningstar Inc. in Chicago. "It's scary for a lot of people to see it in writing for the first time."

Liquidity Injections

Concerns about the mortgage industry grew Thursday and Friday as central banks worldwide injected more than $300 billion into the financial system to help stave off potential liquidity shortfalls.

Mortgage lenders, meanwhile, have tightened their standards, ending some of the riskier or exotic mortgages that contributed to rising defaults. At Countrywide and Washington Mutual, for example, the adjustable-rate mortgage whose rate jumps up after two years is no longer available to subprime borrowers.

Countrywide and Washington Mutual did not immediately respond to requests for comment.

In afternoon trading, Countrywide shares were down $1.49, or 5.2 percent, to $27.37 after earlier falling to $24.73. Washington Mutual dropped 87 cents, or 2.4 percent, to $35.89 after falling to $34.70. MGIC slid $5.65, or 13.5 percent, to $36.14 after falling to $33.50.

Broad-Based, Not Universal

Lenders have not been universally punished in the mortgage market downturn.

Purer-play lenders with real or perceived liquidity shortages, such as NovaStar Financial and the now bankrupt American Home Mortgage Investment, have been among the hardest hit.

HomeBanc , an Atlanta lender that sold assets to Countrywide this week, filed for bankruptcy protection late Thursday.

Next come better-diversified companies such as Countrywide and Washington Mutual that have other businesses to offset temporary weakness in mortgages -- though even Countrywide generates more than half of its revenue from mortgages.

And then there is Wells Fargo & Co, the second-largest mortgage lender, which never made many of the riskier loans, and offers some 80 other products. Shares of the fifth-largest U.S. bank have moved little in recent weeks.

"Countrywide trades around book value, while Wells is trading at around twice book value, which shows the risk the market puts on being a purer mortgage market participant," Lentell said.

Several analysts expect Countrywide to weather the turmoil.

"Countrywide is likely to emerge from the current housing downturn with enhanced market share (and) improved economics," wrote Howard Shapiro, a Fox-Pitt, Kelton analyst who began coverage of Countrywide with an "outperform" rating. "It will be a tough slog until then."

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