Home Financing low loan rates © Corbis

Extra8/17/2007 12:22 PM ET

Countrywide, the mortgage mess and you

As questions swirl around the nation's largest provider of home loans, we answer common questions that consumers have about the lending crisis.

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By Bankrate.com

It has been a difficult year for mortgage lenders.

The subprime market went into a tailspin in February and March. A classic credit squeeze developed in late July, brought on by fears that jumbo and nontraditional mortgages might end up having higher-than-expected delinquency rates. Investors in mortgage-backed securities suddenly realized they didn't know exactly how much their investments were worth -- but they suspected that they had overpaid.

The nation's biggest mortgage lender, Countrywide Financial (CFC, news, msgs), was caught up in the uncertainty. An analyst for Merrill Lynch (MER, news, msgs) on Aug. 15 wrote that Countrywide might face so much financial pressure that it might lead to "an effective insolvency."

(On Monday, the Wall Street Journal reported that Countrywide had begun laying off staff, citing an internal e-mail sent Friday to employees of a Countrywide division that handles many Alt-A customers, who typically cannot qualify for a traditional prime-rate loan. The company employs 61,000 people.)

"If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt," wrote Merrill Lynch analyst Kenneth Bruce.

When the words "Countrywide" and "bankrupt" appear in the same sentence -- even as a hypothetical -- people take notice. (Countrywide didn't respond to a request for comment.)

Here are some common questions consumers have, and some answers.

Why should I care about Countrywide's fate?

Countrywide is the nation's biggest mortgage lender. It funded $39 billion in mortgage loans in July.

It's also the largest or next-largest loan servicer. The servicer is the company you send your monthly mortgage payment to. It then distributes the money to pay the principal, interest, taxes and insurance.

Americans owe about $13 trillion in mortgages, and Countrywide services about $1.4 trillion of that. So a significant percentage of mortgage-paying homeowners send a check to Countrywide every month.

Wells Fargo (WFC, news, msgs) services about $1.4 trillion in mortgages, too. Wells Fargo isn't in any financial trouble.

What sort of problems does Countrywide have?

For the most part, Countrywide doesn't keep the mortgages it underwrites to borrowers. The lender sells the mortgages to investors who form the loans into pools, then issue bonds called mortgage-backed securities. When Countrywide sells closed mortgages, it gets the cash it needs to lend to additional borrowers. That's how it can pump out $39 billion or more in loans every month -- by selling its loans and keeping the money flowing in. The flow of money is called liquidity.

In the last few weeks, investors have pretty much stopped buying loans from Countrywide because investors lost confidence in their own ability to figure out how much the loans are worth. Defaults and foreclosures are rising, making it difficult to price loan pools correctly.

Video on MSN Money

Bear market for mortgage-backed securities © Corbis
Countrywide gets a downgrade
The Wall Street Journal's James Hagerty parses a note from Merrill Lynch that said bankruptcy can't be ruled out for the nation's biggest mortgage lender.
"The entire issue here is there's total uncertainty about the value of mortgage-backed securities (MBS)," says Dick Lepre, senior loan consultant for Residential Pacific Mortgage in San Francisco. "Nobody knows the value of MBS. Period. Nobody."

With no one buying Countrywide's loans, the flow of money is cut off. Liquidity dries up. Creditors have raised the interest rates that Countrywide has to pay on short-term debt. The Merrill Lynch note floating the possibility Countrywide could end up in bankruptcy put added pressure on the company, which says it has ample liquidity.

Continued: I'm supposed to close

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