Two of the nation's biggest home-loan companies are preparing their investors for the worst.
Countrywide Financial Corp. and Washington Mutual Inc. warned Thursday that turbulent mortgage market conditions are likely to hurt operations in the near term. The news, which came at the close of Wall Street's worst trading day since February, sent shares of both companies lower in after-hours trading.
Countrywide, the No. 1 mortgage lender, said the "unprecedented disruptions'' in the credit markets could adversely affect its earnings and financial condition. Already, the Calabasas, Calif.-based lender said, in a regulatory filing, that the market turmoil has forced it to hang on to more mortgage loans than it would like, rather than selling them to investors.
While the company said it believes it has "adequate liquidity'' to roll with the mortgage market turbulence, Countrywide cautioned that "the situation is rapidly evolving and the potential impact on the company is unknown.''
Washington Mutual, the third-largest U.S. mortgage lender, offered much the same admonition in its own filing. The Seattle-based bank said the trouble in the subprime secondary mortgage market in the first half of the year has "spread'' into markets for other, better-quality loans, making it difficult to predict how its loan business would fare.
"The company cannot predict with any degree of certainty how long these market conditions may continue or whether liquidity ... will improve,'' Washington Mutual said.
Investors, watching the nation's housing market deteriorate as overextended borrowers fall into foreclosure at near-record numbers, have recoiled from buying less-than-prime mortgages -- and the securities that back them -- on the secondary market. As a result, lenders have fewer channels to sell the loans they have made to customers.
The rapid shriveling of the mortgage market is ensnaring lenders by the day. Roughly 70 lenders have ceased doing business in the past six months.
In its filing, Countrywide said that during the first half of the year it decided to retain, rather than sell, $1 billion more of so-called non-prime mortgages than it had intended, while marking down the value of those loans 20 percent. And it decided to hold as investments $700 million of prime home-equity loans, marking them down to $600 million.
In July, the lender posted a 33 percent decline in second-quarter profit and slashed its full-year earnings outlook. It said delinquencies had risen, especially among borrowers with little or no money for a down payment who took out home-equity loans to afford a house.
Countrywide said payments were at least 30 days late on 20 percent of non-prime loans it serviced, up from 17 percent three months earlier and 14 percent a year earlier. The late payment rate on prime home-equity loans rose to 3.7 percent from 1.5 percent the year before. For all loans, the rate was 5 percent, up from 3.9 percent.
At the time of the earnings announcement, Countrywide chairman and chief executive Angelo Mozilo, when asked whether he had any inkling the mortgage market would turn down with such ferocity, said: "Nobody saw it coming.''