Realty Check

First Magnus -- Could Countrywide Really Go Under?

A few hours after that sad alert went up on First Magnus Financial's home page, I received a note from a mortgage broker crony of mine. He forwarded me a note from a local First Magnus contact of his:

"The news of this turn of events came to us suddenly and without any warning. We have seen this as typical chain of events for the scores of lenders that have closed before us."

It then went on to say that if anyone needed good employees, they've got plenty in need of jobs. The worst part of the note is that the woman had good things to say about First Magnus, much like many of the workers at American Home Mortgage , which went belly up two weeks ago. One of our producers camped out there, and found workers saying really positive things about American Home and its president.

So now there is all this talk about Countrywide , which is saving itself today at least by borrowing about 11 and a half billion dollars from no fewer than forty banks, going bankrupt. The NY Times says it would "rank among the largest corporate bankruptcies ever," because the company reported total liabilities of $202 billion as of June 30, 2007. The Times writer, Andrew Ross Sorkin, says for bankruptcy lawyers would see it like rain after a long, long draught.

It all started when the Merrill Lynch analyst, Kenneth Bruce said bankruptcy for Countrywide was possible. Then another analyst at Friedman, Billings, Ramsey asked, "Can Countrywide survive?"

This all had me talking on the phone with Guy Cecala, editor of Inside Mortgage Finance, who lives and breathes this stuff even more pathetically than I do. He said in no uncertain terms, "Countrywide is too large to fail."

The company does have 1/5 of the nation's mortgages and accounts for ¼ of Fannie's outstanding business and 1/3 of its new business, he said. He also says Countrywide is no worse off than the mortgage industry overall (which I'd have to add is pretty bad), and that its trouble has nothing to do with the performance of its loans, but on the capital markets.

"80% of Countrywide's subprimes are aaa rated, nobody's lost a dime," he says. It's all about panic in the market, he says. Investors are terrified of anything that says mortgage, and companies are being penalized because they can't sell the loans.

I don't know if I buy it all, because panic is a very powerful thing. Ok, so maybe Countrywide is being penalized by Wall Street, which fuelled this whole housing boom in the first place, and is now dumping mortgage lenders like my high school boyfriend dumped me as soon as he realized I wouldn't put out.

Panic over credit is a dangerous thing. Just think back exactly a hundred years ago, when panic in the credit markets caused a run on banks and in turn created the FDIC.

Questions?  Comments?