BIG LENDER BORROWS BIG COUNTRYWIDE FIGHTING OFF BANKRUPTCY.

Byline: GREGORY J. WILCOX

Staff Writer

CALABASAS -- Countrywide Financial Corp.'s financial trouble deepened Thursday, forcing the nation's biggest mortgage lender to tap an $11.5 billion credit line to fund operations.

Company officials issued reassurances that they were dealing with the credit crunch, and that homeowners with Countrywide mortgages would not be affected.

Still, the move sent the company's stock -- and worldwide financial markets -- on a roller-coaster ride that saw the Dow Jones Industrial Average plunge more than 340 points before finishing down just 15.

"Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise," David Sambol, the company's president and chief operating officer, said in a statement.

Sambol also said the company is continuing to tighten credit standards and is accelerating plans to move its mortgage operations into Countrywide Bank FSB, a subsidiary.

"Our objective is to navigate the difficult conditions in today's market as we complete the transition of our Bank business and funding strategy. With these changes, we believe we are well-positioned to leverage opportunities presented by a consolidating industry."

Paul J. Miller, an analyst at Friedman, Billings, Ramsey & Co., said in a research report that Countrywide's survival depends on how long the mortgage crisis lasts.

"We do believe there is a scenario in which the current liquidity crises last for longer than three months and CFC is forced into bankruptcy," he wrote. "It will be ugly, but it can happen!"

'Great franchise'

Miller also predicted that if the crisis passes within a month, the company will be able to resume normal origination functions and its stock price will jump back into the $30 range.

If it persists for more than a month, he said, Countrywide might be forced to sell assets at a deep discount, putting "tremendous pressure" on its stock.

He also said that the company's biggest advantage is its "great franchise," which would be attractive to a potential suitor.

Guy Cecala, publisher of Inside Mortgage Finance Publications, was reassured that Countrywide's financing came from 40 of the world's biggest banks through a series of previous agreements, some dating back to last year.

"I think they've moved away from bankruptcy with the announcement that they have more funds at their disposal," he said.

Conforming loans 

Countrywide also plans to narrow its focus and issue only loans that can be purchased by mortgage giants Fannie Mae and Freddie Mac. That would allow the company to bypass what are known as secondary markets as a source of funds to make loans.

Funding dried up as subprime loan portfolios unraveled when defaults and foreclosures increased, in part because holders of these products saw their monthly payments soar and could no longer afford them.

Investors then became skittish about investing in loans that could not be bought by Fannie or Freddie.

These companies buy what are known as conforming loans because they have an upper limit, which this year is $417,000.

Countrywide's statement said that now 90 percent of its loans will be this type or will meet its own bank's credit standards.

This also means that the company will not be making riskier kinds of loans that were available in the past, including subprime products given to borrowers with spotty credit histories.

Nevertheless, Cecala said he was "totally" shocked by Countrywide's quick descent into trouble.

"There is no question that we've never seen this kind of panic going on. The panic has cleared out all sources of financing."

He also believes that Countrywide is too big to fail, noting that it was servicing $1.5 trillion in mortgages at the end of June. During the first half of the year, it accounted for one of every five home loans made.

"Countrywide is literally the face of the U.S. mortgage industry. To have them fail would have a huge impact on the U.S. economy and send huge repercussions around the world," he said.

Countrywide's stock was bashed after Moody's Investors Service downgraded the company's senior debt rating to "Baa3" from "A3" because of the funding problems. This would make it more expensive for Countrywide to borrow money. Moody's also said that another downgrade might happen.

Shares dipped into the low $15 range during the morning, bounced back above $20 and settled at $18.95, down $2.34 or 10.99 percent on heavy trading of 196.2 million shares. It was up $1.06 to $20.01 in the after-hours session.

greg.wilcox(at)dailynews.com

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