Is Countrywide Cash Poor and Headed For Bankruptcy?

Implications: Countrywide is denying rumors that it may be filing bankruptcy in face of a sharp decline in share price of as much as 79% in 2007, a credit crunch, record level defaults and a doubling in foreclosures and current economic conditions in the U.S. Investors are jittery about Countrywide and mortgage related companies in recent months as a surge in defaults on high risk sub-prime home loans has drove down the value of houses and mortgage related securities. Countrywide was forced to tap into emergency credit lines of $11.5 billion last summer to replenish its liquidity, coupled with a $19 billion market value loss, has fueled concerns that Countrywide may be close to bankruptcy as it faces the worst housing slump in 16 years. Countrywide reported its first loss in 25 years in 3Q07 with a loss of $1.2 billion, however, Countrywide argues it has adequate cash to run its operations and this week may determine if Countrywide's assertions rings true when they report December 07's numbers.

Analysis: Let us count the ways why Countrywide has dropped in market valuation,  share price and lost the confidence of investors; Countrywide's CEO faces an SEC investigation for alleged share price manipulation, its under scrutiny by IL and CA's Attorney Generals based on its loan origination practices, foreclosures have doubled with Countrywide's high risk sub-prime borrowers, defaults are at record highs, its share price has taken a nose dive, Countrywide had to tap into its emergency slush fund to replenish liquidity and investors have shunned mortgaged back debt and lastly, the latest mortgage data indicates the mortgage market may not see a reversal of its slide until 2009 or 2010.

1. Changes in the mortgage market over the summer of 2007, were unprecedented as ARMs readjusted on sub-prime mortgages and over the next two years approximately two million homeowners could lose their homes, despite the Bush Administration's bailout plan for home owners facing default and/or foreclosure. Foreclosure filings have also skyrocketed and Countrywide is feeling the effects because the amount of money Countrywide set aside to cover losses from risky loans went through the ceiling

2.  Bankruptcy rumors began when it was reported that Countrywide faces allegations of fabricating documents related to a bankruptcy case and this latest news may raise questions about Countrywide's business practices    

Takeaway:  Since August 2007, banks, thrifts and brokerage firms around the world has written down the value of mortgage related assets by more than $94 billion and as a result the industry is currently undercapitalized. As the largest mortgage lender in the U.S., Countrywide may need another cash infusion to stay afloat. Countrywide did offer its sub-prime borrowers a $16 billion bailout under pressure from Washington and Countrywide may need its own "bailout" offer in the not so distant future.