Countrywide dismisses subprime naysayers

NEW YORK (Reuters) - Countrywide Financial Corp. CFC.N Chief Executive Angelo Mozilo is expending considerable effort answering a simple question: As other mortgage lenders struggle, why shouldn't his?

Shares of the top U.S. mortgage lender have fallen by about one-fifth since setting a record on February 2, when speculation was rife about a possible link-up with Bank of America Corp. (BAC.N)

Specialists in riskier "subprime" loans such as New Century Financial Corp. NEWC.PK, Accredited Home Lenders Holding Co. LEND.O and Fremont General Corp. FMT.N have suffered far steeper drops.

Yet people who in January didn't know what a subprime loan was now talk as if mortgage Armageddon looms for the lenders that extend more than $2 trillion of loans annually.

"This is now becoming a liquidity crisis, an unnecessary one," Mozilo told CNBC television on Tuesday. "There's been a rush to judgment, an overreaction, a baby out with the bathwater. There's no question about it."

Countrywide did not make Mozilo available for an interview.

On Monday, the company cut 108 subprime jobs, and said that foreclosures rose to a five-year high and that subprime turmoil may hurt earnings. Borrowers are making payments late on 19 percent of subprime loans it services.

Subprime lenders are flailing from rising delinquencies and defaults after offering easy terms to borrowers on the financial edge, or pushing people with good credit to extend themselves too far. Greed supplanted good business sense.

BUTCHER'S SON

Mozilo is a Bronx, New York-raised butcher's son who entered financial services at age 14 as a messenger. He co-founded Countrywide in 1969.

Now a well-tanned 68, Mozilo says investors are tarring his Calabasas, California, company for others' poor judgment. Once the bad apples fall away, he says, things will look "great" for Countrywide, itself the fourth-largest subprime lender.

"I absolutely agree that if you look out 18, 24, 36 months, things look much brighter," said Christopher Bingaman, who helps invest $4 billion at Diamond Hill Capital Management Inc. in Columbus, Ohio. "(Lending) capacity is going away every day."

Bingaman recently owned Countrywide preferred stock but not common stock, saying he gets subprime exposure through Wells Fargo & Co. (WFC.N) and Washington Mutual Inc. (WM.N).

Critics of Mozilo say he's overpaid. The Los Angeles Times estimated his 2005 compensation at $160 million, and said if he left the company he would walk away with another $246.8 million.

Last week, defending $140 million of stock sales over 14 months, Mozilo told The Wall Street Journal he was "running out of time" and needed "balance" in his life.

He's under contract until he turns 71, and Mozilo told CNBC the mortgage sector's travails will "get uglier" before then.

Of 18 analysts surveyed by Reuters Estimates, nine rate Countrywide "buy," eight "hold" and one "sell." The latter came from Banc of America Securities LLC's Robert Lacoursiere.

"Countrywide has chosen to pursue increased leverage and origination market share gains to hold up earnings," Lacoursiere wrote on Monday. "It is more susceptible to cyclicality and the associated credit risk in a declining competitive market."

Since Monday, analysts have lowered their average first-quarter profit forecast to 88 cents per share from 98 cents. Countrywide trades around 8.5 times 2007 earnings, below Washington Mutual's 10.5 times and Wells Fargo's 12.5 times.

LOWERING RISK

One in five U.S. mortgage loans in 2005 and 2006 was subprime, Standard & Poor's said. And one in five U.S. subprime loans in those years will end in foreclosure, the Center for Responsible Lending said.

Countrywide has stopped making subprime loans that require no money down to borrowers without proof of income. Just 7 percent of its mortgage loans were subprime in February.

For Countrywide, "the issue is weaker earnings, not balance sheet destruction," said Mark Patterson, who helps invest $35.6 billion at NWQ Investment Management Co. in Los Angeles, which owns Countrywide shares.

Last year, Countrywide generated 52 percent of pretax profit outside mortgage banking, specifically from Countrywide Bank and capital markets -- which both have some mortgage exposure -- and insurance. The bank ranks in the top 20 nationally by assets.

Countrywide is betting the mortgage malaise doesn't spread to prime and near-prime loans.

Fears about contagion "are warranted," but mostly reflected in Countrywide's stock price, "leaving only relatively modest downside risk," wrote Merrill Lynch & Co. analyst Kenneth Bruce. He rates Countrywide "buy."

A tie-up with Bank of America, which built itself through big mergers into the No. 2 U.S. bank, could help Countrywide stock.

Yet Bank of America Chief Executive Kenneth Lewis in January downplayed such talk, saying the bank "unequivocally" plans to expand in mortgages on its own.

Still, many see Mozilo as a survivor.

"Whether you like Countrywide or not," NWQ's Patterson said, "most would agree a company that doesn't face similar credit or liquidity issues should be a beneficiary from the problems others face."