Countrywide And Why We Should Have Seen Crisis Coming

Countrywide just sent a co-worker a letter pitching a 40-year mortgage. Which had me thinking. If my co-worker had bought a 40-year mortgage 40 years ago, he would have been buying it one year before a young Angelo Mozilo opened up shop.

That mortgage would finally be paid off now, as Countrywide is about to be swallowed up. Can you imagine paying a mortgage for 40 years? But then, the way so many people refinanced over and over, maybe that was the plan.

Meantime, Countrywide reports CEO Mozilo is now entitled to a $10 million stock award in April under his employment contract, even as he earlier agreed to forego $37.5 million in severance upon leaving the company.

What is Countrywide worth? A huge new hedge fund investor in the company has upped its share of Countrywide stock. SRM Global Fund has purchased an extra million plus shares since first buying in a month ago, boosting its total ownership of Countrywide to 5.48 percent. Obviously, it thinks the company is worth something. In fact, it believes Countrywide is worth more than what Bank of America is willing to pay. SRM believes the book value of Countrywide is $20 a share, well below the approximately $8 BofA has offered. In a press release, SRM quotes from a article in Fortune by Shawn Tully on a January meeting with Bank of America CEO Ken Lewis:

"Last Tuesday, I met with Lewis at Bank of America's New York headquarters on West 57th Street, in a conference room boasting spectacular views over Central Park. During our talk, Lewis revealed his projections on the Countrywide transaction. As I suspected, they're extremely conservative, and even so, Lewis expects to recoup his investment so fast that, if he succeeds [in closing the deal], the deal will be a steal."

Legg Mason has also boosted its stake in Countrywide. It will be interesting to watch how these investments pan out.

SHOULD WE HAVE SEEN THIS COMING?
Look at the chart below that I received from Rich Gordon, fixed income strategist at Wachovia (Brian Fabbri, chief U.S. economist for North America at BNP Paribas also showed me the same chart). It shows when subprime ARM mortgages start to go 60 days delinquent. The chart tracks this back to 2002. Suddenly, in 2006, the delinquencies spike very early in the age of the mortgage. Four payments in and people are already two payments behind! As Gordon said, "Those are people who have no intention of paying their mortgages." It's even more dramatic for 2007. But by mid-2006, clearly something new, and very bad, was starting to happen. Should we have seen the crisis of the summer of 2007 back in the fall of 2006?

As someone who has been through a housing downturn before--the home I purchased in 1992 lost a third of its value by 1996--I learned some hard lessons. We decided in the late '90s to just pay off the mortgage. I grumbled as we missed out on the tech boom (and sighed with relief when we missed out on the tech bust). I grumbled when we could have been putting money into investment real estate (and I'm sighing with relief again now).

Of course, my financial advisors said it wasn't the brightest move financially--but I can sleep at night, while they will be paying "rent" to the bank probably for the rest of their lives. I do wish, though, that the IRS didn't punish people who pay off their housing debt. I do miss that interest deduction.

Still, back in 2004, even I wondered if this last housing boom was "different." Check out a video report I did in December of that year, the first in an occasional series called "Oops!"

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