The flight of investors away from securities backed by mortgage loans is affecting major lenders like Countrywide Financial and Washington Mutual, and sending shocks through financial markets despite efforts by central banks to ease the liquidity crunch by making billions in short-term loans available.

An announcement by the French bank BNP Paribas on Thursday that it was suspending three funds invested in securities backed by U.S. subprime loans sparked a stock sell-off and flight to safe investments like Treasurys.

In an effort to calm investors and prevent a liquidity crisis, the European Central Bank made $130 billion in overnight loans available to banks Thursday, followed by an $83 billion cash infusion Friday. Central banks in Japan, Hong Kong, Australia and Canada made similar moves.

In the U.S., the Federal Reserve provided $24 billion in temporary reserves Thursday and $35 billion Friday at the 5.25 percent federal funds rate. Market forces had reportedly pushed the rate to 6 percent overnight.

“In current circumstances, depository institutions may experience unusual funding needs because of dislocations in money and credit markets,” the Fed said in a statement. “As always, the discount window is available as a source of funding.”

But turmoil in the markets persisted Friday, fueled in part by Securities and Exchange filings by Countrywide and WaMu warning that the lack of liquidity is making it harder to sell loans in the secondary markets, and that losses on loans already on the books are mounting.

In its latest quarterly report, Countrywide said secondary mortgage markets are “experiencing unprecedented disruptions” because of reduced investor demand for mortgage loans and mortgage-backed securities (MBS). Investors still willing to buy securities backed by the loans Countrywide originates are demanding higher yields.

That could force Countrywide to hold more of the loans it originates on its books, restricting the number of new loans it’s able to make.

Countrywide said it had $190.3 billion in short-term liquidity available at the end of June, and should be able to continue adding additional loans and MBS to its books until investor demand improves.

But Countrywide said it is more reliant on the secondary mortgage market than other industry leaders, which could place the company at a competitive disadvantage if the situation does not improve. In the first six months of the year, Countrywide sold 97 percent of its mortgage banking division’s loan production on the secondary market, or $226.2 billion in loans.

The Calabasas, Calif.-based lender’s capacity to retain mortgage loans and MBS “is not unlimited,” the company warned. “As a result, a prolonged period of secondary market illiquidity may reduce our loan production volumes and could have an adverse impact on our future earnings and financial condition,” the company said.

WaMu made similar warnings in its latest quarterly report, saying disruptions in the subprime secondary mortgage market during the first half of 2007 have continued into the third quarter and “spread into markets for all other nonconforming residential mortgages.”

Since late July, “liquidity in the secondary market for nonconforming residential mortgage loans and securities backed by such loans has diminished significantly,” WaMu said.

Countrywide’s pretax earnings in mortgage banking for the quarter were down 49.3 percent compared to the same quarter last year, to $319.6 million. Although earnings from loan production were up 35.2 percent to $438.7 million, the lender posted a $147.4 million loss in loan servicing, compared with $279.3 million in earnings in the same quarter last year.

Countrywide has recorded $217.8 million in write-downs during the first six months of the year on the sale of nonprime mortgage loans, most of which was attributed to the transfer of $906.9 million in nonprime loans held for sale to loans held for investment during the first quarter. The loans declined in value because of the higher yields demanded by secondary market investors, and increased loss assumptions. The write-down was partially offset by a $97 million gain in credit default swaps, which are used to hedge against the risk of wider credit spreads.

The delinquency rate on subprime loans in Countrywide’s $1.4 trillion owned servicing portfolio shot up to 20.15 percent, compared with 14.4 percent at the same time last year. Subprime loans accounted for 8.8 percent of the servicing portfolio, compared with 9.6 percent last year.

Although Countrywide has reduced the proportion of subprime loans in its own servicing portfolio, it has also seen delinquency rates rise on conventional and home equity loans. The delinquency rate on conventional loans stood at 2.64 percent at the end of the quarter, up from 2.11 percent at the same time a year ago. Delinquencies on prime home equity loans more than doubled to 3.7 percent, up from 1.51 percent a year ago.

The delinquency rate on all loans in the servicing portfolio stood at 4.98 percent, compared with 3.92 percent a year ago.

The percentage of loans pending foreclosure in the servicing portfolio stood at 0.74 percent, up from 0.47 percent a year ago. Subprime loans pending foreclosure totaled 3.96 percent at the end of the quarter, up from 2.51 percent last year. The pending foreclosure rate on conventional loans was up slightly, to 0.39 percent, compared with 0.21 percent at the end of the second quarter 2006.

Countrywide boosted the allowance for credit losses to $531.1 million, almost double the amount set aside at the same time last year.

WaMu, in its quarterly report, said net income in the second quarter was up 8 percent from the same quarter a year ago, to $830 million.

But WaMu said it lost $202 million in the first six months of the year on sales of subprime mortgages and adjustments that reflected changes in the fair value of loans held for sale.

“Secondary market conditions for subprime mortgage loans rapidly deteriorated during the first half of 2007 in response to the weakening housing market,” WaMu officials said. “As investor concerns related to rising subprime borrower defaults increased, higher credit-risk premiums were priced into subprime mortgage bonds delivered into the secondary market channels, which adversely affected the valuations of the company’s subprime mortgage loans.”

Loans held for sale at the end of June totaled $19.33 billion, down from $44.97 billion at the end of 2006, thanks in part to the sale of $17.5 billion in adjustable-rate (ARM) mortgages in the first quarter.

Of the $106.1 billion in mortgage loans WaMu retained in its portfolio, more than 80 percent were ARM loans, and 16.6 percent were subprime. WaMu boosted provisions for loan and lease losses by 66 percent from a year ago, to $372 million, as the ratio of nonperforming assets rose from 0.62 percent last year to 1.29 percent as of June 30.

The Seattle-based bank said it reduced its workforce by 9.4 percent from a year ago, to 28,178.

Countrywide, however, has gone on a hiring binge, saying it hopes to pick up market share from competitors during the downturn in the housing market. The company employed 33,796 workers in loan originations at the end of June, up about 4 percent from a year ago.

Atlanta-based HomeBanc Corp., which has filed for bankruptcy protection, announced earlier this week that Countrywide would assume the leases on five of its branch offices in Georgia, Florida and North Carolina, and hire most of the originators employed in the branches.

Countrywide said the company continues to see the challenges facing the industry as ultimately benefiting the company as the industry continues to consolidate.

The top five mortgage loan originators — Countrywide, Wells Fargo, CitiMortgage, Chase Home Finance, WaMu and Bank of America — accounted for 51 percent of all lending in the first six months of the year, up from 48 percent in 2006, Countrywide said, citing Inside Mortgage Finance.

“We believe the consolidation trend in the mortgage industry will continue, as … market forces will continue to drive out weak competitors,” company officials said. “We believe Countrywide will benefit from consolidation over the long term through increased market share and enhanced ability to recruit talented personnel.”

Show Comments Hide Comments


Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Thank you for subscribing to Morning Headlines.
Back to top
Inman Connect Las Vegas is back and there are only a few presale tickets left! Register today before they're gone.REGISTER×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription