The mortgage broker cited continuing softness in the housing market and growing delinquencies for another steep drop in profits
The grim housing market is haunting Countrywide Financial (CFC). Shares of the large mortgage broker sank to a new 52-week low July 24 after it reported a drop in second-quarter profits and cut its outlook for the year.
Countrywide said second-quarter net income fell to $485.1 million, or 81 cents per share, from $722.2 million, or $1.15, a year ago. Revenue dropped 15%, to $2.55 billion.
Falling Sales, Rising Delinquencies
"Countrywide's results for the second quarter of 2007 reflected strength in our core loan production business, but were adversely impacted by continued weakness in the housing market," Chairman and Chief Executive Angelo Mozilo said in a press release. "During the quarter, softening home prices continued to affect many areas of the country and delinquencies and defaults continued to rise across all mortgage product categories as a result. Due to these adverse conditions, the company incurred increased credit-related costs in the quarter, primarily related to its investments in prime home equity loans."
Credit-related costs in the second quarter included impairment charges of $417 million on the company's investments in credit-sensitive retained interests. This included $388 million, or about 40 cents per share, of impairment on residual securities collateralized by prime home equity loans. The company said "the impairment charges on these residuals were attributable to accelerated increases in delinquency levels and increases in the estimates of future defaults and loss severities on the underlying loans." The other credit-related cost was $293 million in losses in Countrywide's "held for investment" (HFI) portfolio.
Countrywide lowered its 2007 earnings-per-share forecast from a range of $3.50 to $4.30 to a range of $2.70 to $3.30. "Looking to the second half of 2007, we expect difficult housing and mortgage market conditions to persist," Mozilo said. This was the second time Countrywide cut its profit outlook for 2007.
The stock dropped 10.5%, to $30.50, after touching a new 52-week low of $29.50, on volume of more than 51 million shares. (Average volume has been 9 million shares.)
Analysts Fear Widening Crisis
Some analysts expressed concern about Countrywide's shortfall. "After CFC's Q2 conference call, we are wary of further credit deterioration, as softening housing prices and higher interest rates should make it difficult to refinance," said Standard & Poor's equity analyst Stuart Plesser in a note. (S&P, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP).) "We are concerned about the 24-basis-points drop in net interest margin due to the holding of less risky securities."
Plesser, who kept a hold opinion on the stock, added that he expects loan loss provisions to rise for the rest of the year—they roughly doubled sequentially in the second quarter—given the ongoing weakness in the housing market. He slashed his 2007 EPS estimate by $1.05, to $2.82, and his price target for the stock by $8, to $32, which amounts to 11.3 times his 2007 EPS estimate, in line with the historical average.
Indeed, the markets are very sensitive to any news related to the subprime and credit markets. On July 24, bond guru Bill Gross of PIMCO Bonds warned of a "sudden liquidity crisis in the high-yield debt markets" in his latest monthly commentary. Thanks to problems with subprime and other mortgage debt, lenders also seem to have lost their appetite for risky corporate debt, Gross said. That threatens the billions of dollars in leveraged buyouts and stock buybacks in the stock market. "No longer," Gross wrote, "will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks."