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Countrywide Financial, the largest US mortgage lender, said yesterday it drew down an entire US$11.5 billion ($16.3 billion) bank credit line as a global credit shortage limits its access to short-term cash.
The drawdown, which should help the lender conduct daily operations, shows how liquidity strains have spread
beyond sub-prime lenders to companies that mainly offer higher-quality loans. At least two analysts have raised the spectre of a bankruptcy filing for California-based Countrywide.
"The fact Countrywide did this shows how disrupted capital markets have become," said Christopher Wolfe of Fitch Ratings, which downgraded Countrywide's debt ratings.
"It may force Countrywide to reduce lending and migrate towards safer loans, and affect earnings from originations."
Shares of Countrywide fell US$3.21, or 15.1 per cent, to US$18.08 in late morning trading in New York. They began the year at US$42.45.
Several Countrywide representatives did not immediately return requests for comment.
Countrywide said it had tightened its lending standards so most new home loans would qualify for purchase and guarantee by mortgage companies Fannie Mae and Freddie Mac. These are considered among home loans least likely to default.
"When you're in a pit, the first thing to do is to stop digging," said James Ellman, a portfolio manager at Seacliff Capital, a San Francisco hedge fund.
The lender also plans to originate nearly all home loans in its Countrywide Bank unit by September 30. This will let it tap new sources of financing such as deposits and federal home loan banks to finance operations, and rely less on capital markets.
Countrywide said it could keep the US$11.5 billion for at least a year, and 70 per cent of it for more than four years, before having to pay it back.
The credit facility from 40 banks was originally intended to back up other debt. Countrywide reported US$186.5 billion of liquidity at June 30.
Earlier this week, Countrywide said mortgage delinquencies had reached their highest level in more than five years.
Dozens of smaller mortgage lenders have quit the industry this year, and many have gone bankrupt.
"The big question is, can Countrywide survive," wrote Paul Miller, of Friedman, Billings, Ramsey & Co.
He said if liquidity problems lasted more than a month, "Countrywide might be forced to sell assets at a deep discount, putting tremendous pressure on its book value and stock price".
"There is a scenario in which the current liquidity crises lasts for longer than three months and Countrywide is forced into bankruptcy; it will be ugly, but it can happen!"
- Reuters