Standard & Poor's recently affirmed its credit ratings of Countrywide Credit Industries and its main unit because of the company's strong long-term performance. At the same time, it reduced its outlook to stable from positive. The text of the S&P announcement follows.
S&P affirms its A rating on the senior debt of Countrywide Credit Industries and its mortgage bank subsidiary, Countrywide Funding Corp. Senior debt affected totals $1.22 billion, principally mediumterm notes.
S&P also affirms it ratings on Countrywide as follows:
A-minus on its $200 million subordinated debt issue, due 2002, and A-1 on its $2.5 billion commercial paper program.
S&P revises its ratings outlook on Countrywide to stable from positive.
The ratings reflect the continuation of the long-term trend of the Countrywide organization in posting outstanding operating results while becoming the nation's largest mortgage banking organization.
The outlook revision results from the challenges Countrywide and its competitors face in repositioning themselves to cope with a new operating environment in which income from originations and marketing have dropped sharply due to the vanishing of refinancings caused by rising interest rates.
While Countrywide will benefit strongly in this period from increased stability of its huge servicing portfolio -- the nation's largest -- S&P believes that this benefit will be more than offset over the next several years by the negative factors cited above.
Founded in California in 1969 by current top management, Countrywide has grown steadily after a reorientation of its strategy in 1974 and dramatically over the past four years. Today, in addition to boasting the largest servicing portfolio of any mortgage servicer of any kind, it has also been for some years the most prolific originator of residential mortgages.
Production capabilities are balanced, with retail, wholesale, correspondent, and consumer-direct sources all contributing significantly to operations. Management has been purdent in avoiding interest rate risk in day-to-day operations and has departed from the practice of most of the industry in hedging its servicing portfolio, a decision that saved the company substantially in the great 1992-94 interest rate rally.
The company has consistently been in the forefront of innovation in the industry in marketing, underwriting, and systems. All of these achievements have been accomplished while maintaining prudent capital, liquidity, and financial flexibility.
Partially offsetting these positive characteristics are two factors: The first is the volatility of the industry. Mortgage banks must contend with boom and bust cycles in which what is an effective strategy one year is a disastrous one the next. This circumstance calls for a combination of great operational flexibility and the ability to manage over the long run. Countrywide management has demonstrated this trait over an extended period.
The second is the company's geographical concentration in California in servicing and production. While the company sells its mortgages without recourse except for those that are VA-insured, concentration renders it susceptible to heavier-than-normal potential problems in an economic downturn, such as additional contractual servicing expenses in managing delinquent loans, depressed origination income, and additional runoff due to defaults.
A second concentration is in jumbo mortgages not conforming to the size requirements of Fannie Mae and Freddie Mac, which can expose its servicing portfolio to prepayment risk that may be somewhat in excess of that faced by competitors. The servicing hedge, however, more than mitigated the extra runoff that did, indeed, materialize when interest rates declined.
After enjoying a record-breaking year in 1994 (fiscal year ended Feb. 28), the company has seen earnings decline substantially due to a rise in interest rates, which put an end to a refinancing boom that it was very well positioned to take advantage of.
However, most of the company's competitors have fared relatively worse than Countrywide, and management has been able to adapt quickly to changing industry conditions. Even during this period, the company has been able to significantly grow its servicing portfolio -- a core strategy -- while maintaining a return on equity of 11.7% annualized for the six months ended Aug. 31, 1994.
Two Sides of Countryside
S&P has affirmed its debt ratings of Countrywide Credit because:
* The company has had outstanding operating results over the long term
* The outlook is for stability in its huge servicing portfolio
But it sees some negatives in:
* The industry's volatility
* Countrywide's concentration in California
* The company's heavy involvement in jumbo loans