Countrywide Financial Corp. has a lot of work to do this week in terms of demonstrating it is taking the necessary steps to ensure it recovers from the mortgage market crisis.
The Calabasas, Calif., company's third-quarter earnings report, expected Friday, is unlikely to offer much solace to investors. Most analysts expect a net loss for the period; the only major differences in the forecasts are over the size of the loss. But the outlook that its management team provides will be more important to many observers than the results.
Countrywide also faces lingering doubts and criticism about the pace of loan workouts and the composition of the executive ranks — specifically Angelo Mozilo, its chairman and chief executive.
The company took a notable step in addressing the workout issue Tuesday when it announced a plan to refinance or modify $16 billion of adjustable-rate mortgages facing resets through the end of next year. The plan won accolades from an advocacy group that had been one of Countrywide's harshest critics lately.
Still, lawmakers who have been critical of its practices remained so, underscoring that as Countrywide faces scrutiny on all sides by different constituencies, its issues are not likely to be resolved easily.
Eric Wasserstrom, an analyst at UBS Securities LLC, said that the mortgage market will not turn around until origination volumes stabilize and credit losses peak, most likely late next year or early 2009.
By suspending buybacks, issuing equity, and moving its mortgage operations to its thrift, Countrywide is doing "what they can do" to weather the storm, Mr. Wasserstrom said, but "they're not immune to gravity."
Countrywide did not return several phone calls and e-mails seeking comment.
Kenneth Posner, an analyst at Morgan Stanley, wrote in a report issued last month that Countrywide needs to "step back from long-standing ambitions for market share" in light of a projected 25% decline in its production volume.
Its market share is likely to shrink to 16% next year, from 19% this year, but could go even lower, he wrote.
"One the one hand, Countrywide will mathematically gain market share at the expense of a growing list of lenders that have shuttered operations, gone out of business, or severely cut back," Mr. Posner wrote. "On the other hand, Countrywide will operate with a cost of capital and funding disadvantage compared to the mortgage arms of major commercial banks."
In a worst-case scenario, Countrywide could have to cut production to conserve cash, and its share could drop to 12% next year, he wrote.
At the same time, Bank of America Corp., Wells Fargo & Co., and JPMorgan Chase & Co. "seem eager to wrest market share from competitors," Mr. Posner wrote. "The magnitude of production cuts will call into question" Countrywide's "ability to sustain its operating cost advantage."
Christopher Brendler, an analyst at Stifel, Nicolaus & Co. Inc. in Baltimore, said, "I think the big question for Countrywide is what does future profitability look like?"
Mr. Brendler noted that the company recently announced it would cut 10,000 to 12,000 staff positions, or 20% of its work force.
"We don't know if their cost structure is moving to where it needs to move," he said.
Because Countrywide eliminated most higher-margin products, he said, analysts will be paying close attention to any forward-looking estimates, as well as credit quality and the thrift portfolio.
Last week CtW Investment Group, a pension fund advisory firm affiliated with seven labor unions, sent Countrywide's board a letter calling for Mr. Mozilo to step down, and the pension plans for the American Federation of State, County, and Municipal Employees asked the board to name an independent chairman and make changes in corporate governance.
However, these shareholders control only a sliver — less than 1% — of Countrywide's outstanding shares.
Several of its largest institutional shareholders, including AllianceBernstein LP, Fidelity Investments, T. Rowe Price Group Inc., and Wellington Management Co. LLP, would not discuss Countrywide's situation.
It is worth noting that Mr. Mozilo had once been expected to step down as CEO at the end of last year but negotiated extensions to his contract to remain CEO through 2010 and the chairman through 2011. In September of last year Stanford L. Kurland said he would step down as the president and chief operating officer. David Sambol succeeded Mr. Kurland.
Since then Mr. Sambol, who operated largely behind the scenes for years at Countrywide, has taken a higher profile.
"Unprecedented times call for unprecedented remedies," he said Tuesday in a press release announcing the plan to refinance $14 billion of ARMs and modify another $2.2 billion.
Those remedies won the approval of the Neighborhood Assistance Corp. of America, which said that it has signed an "historic" agreement with Countrywide to restructure loans to reflect what struggling borrowers can afford to pay. Bruce Marks, the chief executive of the Boston nonprofit housing advocacy group, said in an interview Tuesday that the agreement "will become a national standard of how servicers and lenders deal with foreclosure prevention."
Countrywide borrowers can qualify for restructuring by submitting their financial information to the group, attending a workshop, and meeting with a credit counselor.
The NACA then will reunderwrite the loan with a specific monthly payment based on what a homeowner can afford to pay, Mr. Marks said.
"The key piece is that if you have an unaffordable mortgage payment, it can be restructured to what the homeowner can afford," he said.
After negotiating with the borrower, the group will send the financial documentation to Countrywide, which will create a prerestructuring agreement focused on the new monthly payment, rather than the home's debt ratio or loan-to-value ratio, Mr. Marks said.
The borrower will be required to make payments for six months before the agreement is finalized.
Mr. Marks said that his group, which has 33 offices and 250 employees, will not dictate the interest rate or even how much the lender needs to shave off a principal balance. "We just ask them to get to that lower monthly payment."
In August the NACA held a news conference in Washington asking for U.S. regulators to force Countrywide to change the terms of high-cost loans.
"I think they were looking for a solution, and they want to be out there aggressively on this," Mr. Marks said Tuesday.
Senate Banking Committee Chairman Chris Dodd was more guarded in his assessment. Countrywide's plan is "a welcome, if late, decision," he said in a press release. "However, this problem reaches far beyond the 82,000 borrowers they have agreed to assist."
Sen. Charles Schumer, D-N.Y., a member of the committee, was even more dubious.
"Given Countrywide's track record, a lot of questions must be answered," he said. "What are the fees they will be charging borrowers to refinance or restructure their loans? Who will qualify for help? And are they putting these borrowers into safe, affordable products or another unsuitable loan?"
