Countrywide has been very smart about figuring out ways to make money from every part of the mortgage process.
Here's an example pointed out to me. Countrywide reinsures some of its mortgages. When a homebuyer puts down only 10%, he or she usually has to buy mortgage insurance from a third party (I thought mortgage insurance was dead in the age of 80-20 loans, but apparently not).
Countrywide then reinsures the insurance through a company it owns called Balboa. Usually what happens is called a 4-10-40 deal: the primary mortgage insurer covers the first 4% of the loan going bad, then the resinsurer (Countrywide) steps in for the next 10%, then the primary mortgage insurer covers the rest. In exchange, the reinsurer (Countrywide) gets 40% of the insurance premium! Not bad! At least, until loans start going bad.
So in its quarterly filing with the SEC (its 10q), Countrywide says it reinsures a whopping $110 billion in mortgages, BUT its exposure is only $1 billion, or less than 1%. How can that be? One analyst said, "It should be more like 10%, or $10 billion."
So I asked Countrywide, and over the holiday weekend, the company responded: "Balboa re-reinsures approximately $100 billion of loans on which there is an average of 25% mortgage insurance coverage. This approximately $25 billion is considered gross risk. Balboa re-reinsures losses generally when they reach 4% of gross risk up to 14%, for a total of 10%, which exposes Balboa Reinsurance Company to a risk exposure of approximately $2.5 billion.
However, all of the reinsurance contracts limit losses to the amount of assets held in trust, i.e. premiums received, capital and investment income. As stated in the 10Q, that was $1 billion."
So I guess the contract limits Countrywide's exposure to the premiums it gets (so the fewer the premiums, the less it's on the hook), investment income (made off the premiums?), and "capital" -- I've written back asking what kind of capital they're talking about. Hope to hear back.
I still haven't heard back regarding the list of questions Sen. Schumer sent the company which I posted on Wednesday.
On a Lighter Writer Note
The striking writers of "Late Show with David Letterman" are spending their time creating a hilarious blog, www.lateshowwritersonstrike.com, which spoofs how CBS is filling the empty late-night slot with re-runs. For example:
"With the strike still in effect, the 'Late Show' will once again air repeats this week. The episodes are as follows:
Monday: OJ Simpson, Kid Dry Cleaners, performance by the cast of the Broadway musical 'Kucinich!'
Tuesday: Michael Jackson, cooking demo with Ruth Bader Ginsburg, singer Ryan Seacrest.
Wednesday: Ayman al-Zawahiri, Identity Theft demonstration, standup comedian Barry Bonds.
Thursday: Stupid Senior Citizen Tricks, impressionist Kathie Lee Gifford, animal expert Mickey Rooney.
Friday: Pope Benedict XVI, Piedmont Tree Callers, magician Karl Rove."
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