August 17, 2007 / 10:21 PM / 12 years ago

Proud Countrywide may have to bow to Wall St banks

NEW YORK (Reuters) - Countrywide Financial Corp CFC.N Chief Executive Angelo Mozilo usually takes advantage of dark days in the U.S. mortgage industry to bolster his company’s leading market share.

Angelo R. Mozilo, Chairman and CEO of Countrywide Financial Corporation, answers questions from a reporter during a session at the MBA's National Secondary Market Conference and Expo in New York May 21, 2007. REUTERS/Lucas Jackson

But now he’s grappling with Countrywide’s gravest crisis since he founded the company in 1969, one which will likely force him to unload assets and slash staff. In a further blow to Mozilo’s pride, he may even lose market share to competitors whose mortgage acumen he has denigrated in the past.

The No. 1 U.S. mortgage lender tapped an entire $11.5 billion credit line this week after a global credit squeeze prevented it from borrowing from the markets on normal terms.

“Tapping ... bank lines, has historically been seen as a sign of vulnerability rather than of strength,” GimmeCredit analyst Kathleen Shanley said, adding that its failure to communicate with fixed income investors is “reinforcing the impression that the company is scrambling to react to the seismic shift in the markets.”

Ned Riley, president of Riley Asset Management, said there was no question Countrywide would have to cut staff and unload the best-rated mortgages in its portfolio at steep discounts.

“They’re going to have to take some cost-cutting measures without question,” Riley said. “Continuous funding will have to come from liquidation of the portfolio.”

Countrywide was not available for comment.

A cut in the Federal Reserve’s lending rate to banks on Friday lifted Countrywide’s shares by 13 percent. But the stock is still down about 50 percent this year amid a U.S. mortgage industry crisis, from which it had once hoped to profit.

Even as rivals shut or filed for bankruptcy protection, Countrywide added staff. At the end of July, the Calabasas, California-based company had 61,586 employees, a 13 percent gain since the end of December.

Less than two weeks ago, Countrywide pounced when lender HomeBanc Corp closed operations, taking over five of its retail branches without paying any premium.

STABLE BUT SMALLER?

Analysts say the company’s subprime lending unit, Full Spectrum, could be hardest hit as demand for securities backed by risky mortgages dries up. In July, Countrywide funded $1.8 billion in subprime loans, 46 percent down from a year ago.

Riley said Countrywide would have to focus on lending to people with the best credit, meaning earnings will be stable, but smaller. Lenders charge more for subprime loans and get better returns because of the higher risk involved.

Analysts at CreditSights Inc., an independent research firm, said they still believe Countrywide is a takeover target for a larger U.S. bank. In the past, Mozilo has expressed a dim view of Wall Street’s mortgage-lending prowess.

“One, they have a lot of things on their plate and they tend to place a lot of emphasis on the other parts of their business and not on the mortgage business,” Mozilo said in a January 30 conference call with analysts. “So they treat it as a side business ... And I don’t see any change in that going forward.”

A few days after that call, Mozilo’s pre-arranged plan for selling Countrywide shares was amended, less than two months after its adoption on December 12. His stock sales accelerated after that, according to U.S. regulatory filings.

Mozilo’s stock sales are governed by a so-called 10b5-1 trading plan, which allows company insiders to sell shares at all times under a predetermined formula. These plans protect executives from charges of insider trading.

In the month before the February 2 change, Mozilo sold 465,000 Countrywide shares, according to filings with the U.S. Securities and Exchange Commission.

After the change, he sold 580,000 shares on option exercises in February, or 25 percent more than in January, SEC filings show. The pattern of sales has continued since then.

Even as Countrywide struggles, any blow to Mozilo’s compensation — which has drawn flack from some shareholders in the past — could be cushioned.

Late last year, as Countrywide’s subprime lending business soured, the board eliminated a formula that calculated Mozilo’s incentive award by using earnings-per-share growth. Now, it is possible for Mozilo to pocket up to $10 million this year even if profits fall, based on a return-on-equity target well below Countrywide’s performance in previous years.

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