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"Crisis" is one of the most overused words in the financial media, especially when it comes to the mortgage market.
The latest example came July 24 after one of the nation's largest lenders, Countrywide Financial (CFC, news, msgs), missed Wall Street's earnings estimates by a mile and predicted at least 18 more months of problems in the mortgage business. Countrywide cited losses in its home-equity lines of credit, stoking fears that lending woes are spreading from the subprime to the prime market.
But was the report really further evidence of a credit crisis? Or was it just hype? The facts suggest the latter.
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The U.S. mortgage market totals about $10 trillion, of which we may face losses of around $50 billion to $100 billion, according to Federal Reserve Chief Ben Bernanke. Those are big losses, but they represent no more than 1% of the overall total -- hardly the definition of a crisis.
Even Countrywide isn't in crisis mode. Yes, earnings are going to be much weaker than overly optimistic analysts had predicted. I've been arguing for months that the downturn in the housing market was going to be much deeper than the pundits wanted us to believe. Unfortunately, I can't say that my analysis was based on some complex proprietary model -- more like simple common sense.
In my area I've seen for-sale signs sitting for months, if not years. There's been no movement on existing sales, while new homes have been built at a pace near that of 18 months ago, when the outlook for the industry was brighter.
Meanwhile, mortgage rates have gone up, loan restrictions have grown tighter, and more people have fallen short on their loans. Naturally, more foreclosures means more houses on the market.
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A weak market isn't a crisis
It's true that the housing and mortgage markets stink. But a lousy market doesn't equal a crisis. A credit crisis exists when even well-qualified buyers can't get a loan or when these same buyers are defaulting at record levels. That's not happening, and there's nothing on the horizon to suggest it will.Of course, just because problems in the credit market are being exaggerated doesn't mean that the stocks in the lending industry are good buys -- at least not now. Note that the market has taken down Countrywide by 33% over the past several months, with the stock trading at its lowest level since late 2005.
Interestingly, Countrywide still sees loan origination for 2007 of $420 billion to $500 billion, which is below last year's record pace but comparable to that of 2005, a time when most experts perceived the business to be booming.
That means that Countrywide has done a good job of capturing share over the past few years (although it's paying for those aggressive actions now). With so many lenders in trouble, look for Countrywide to acquire more share. The company's CEO has noted that he expects the top 10 lending companies to consolidate into five. That should leave Countrywide in a great position once the market finally levels off.
Management also deserves credit for diversifying Countrywide's assets, so that the current downturn merely hurts rather than cripples the business. Forecasts will come down and keep pressure on the stock over the next month or so. But long-term investors should use any weakness to start nibbling at the stock for the inevitable turnaround.
Downside risk exists in the short term to the $27 area, or about 10% below the July 24 close. From there the stock should start building a base from which it will see a major rally once the investment community realizes that a "crisis" was averted.
At the time of publication, Robert Walberg did not own or control shares of any company mentioned in this article.
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