Add Countrywide Financial Corp. to the list of banks and mortgage lenders who have seen their debt ratings lowered by Fitch Ratings over new concerns about the poor performance of home-equity loans.

Fitch announced Wednesday that it was cutting Countrywide Financial’s long-term issuer default rating two notches, to "BBB-" — the lowest investment-grade category. Fitch took the same action for the company’s subsidiaries, Countrywide Bank and Countrywide Home Loans Inc.

The rationale for the moves — "deterioration within home-equity portfolios and continued pressure on home prices" — was the same given March 7, when Fitch cut the debt ratings of some big name banks, including Washington Mutual, Wells Fargo and National City (see Inman News story).

Fitch analysts said they believe that Bank of America’s decision to purchase Countrywide — a $4 billion deal announced in January — remains on track. If the deal goes through, Countrywide would see its issuer default rating bumped up to Bank of America’s higher "AA" rating, analysts said — although Bank of America’s rating is also on "Rating Watch Negative" for possible downgrade.

Lower credit ratings can mean higher borrowing costs for companies — costs that are passed on to their customers.

Before Bank of America announced its plan to acquire Countrywide, the company warned investors that its future could depend on keeping its investment-grade ratings.

"To retain access to the public debt markets it is critical for us to maintain investment-grade credit ratings," Countrywide officials said in a regulatory filing. "While we retain our investment-grade ratings, all three rating agencies have placed our ratings on some form of negative outlook."

Under Fitch’s rating system, "AAA" reflects the highest credit quality, "assigned only in case of exceptionally strong capacity for payment of financial commitments" and which is "highly unlikely to be adversely affected by foreseeable events."

The next-highest rating, "AA," denotes "very high credit quality" that is "not significantly vulnerable to foreseeable events."

While an "A" rating signifies "high credit quality," it indicates a company’s capacity to meet its debt obligations may "be more vulnerable to changes in circumstances or in economic conditions" than more highly rated companies.

The lowest investment-grade rating, "BBB," reflects "good credit quality" in which capacity for repayment is considered "adequate" but more likely to be impaired by unexpected events.

Fitch analysts said factors in their downgrade of Countrywide’s debt rating to "BBB-" include continued pressure on home prices, especially in California and Florida, and rising loan-to-value ratios.

Also cause for concern to Fitch is growth in delinquencies among pay-option adjustable-rate mortgages (ARMs), which accounted for 29 percent of the company’s loan portfolio at the end of December. The percentage of pay-option ARM loans more than 90 days past due has grown from 0.63 percent at the end of 2006 to 5.36 percent at the end of last year.


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