I now vote for Unprecedented Disruptions.
Last week, the mortgage industry was jolted by the American Home Mortgage shutdown. AHM, who was not a subprime lender, but specialized in interest-only subprime products was risk-priced out of business as investor refused to buy their paper. This week, we have Countrywide, the largest mortgage lender, who had already made an announcement about the weak housing market a few weeks ago when the mortgage meltdown jumped to the front page and shook the stock market, made another one yesterday evening:
Shares of Countrywide Financial Corp. plunged in premarket trading Friday after the nation’s biggest mortgage lender issued a bleak assessment of the home lending industry.
The Calabasas, Calif.-based lender in a filing with the Securities and Exchange Commission Thursday cited “unprecedented disruption” in the trading markets where mortgage lenders raise money.
- Investors who buy their bonds from packaged loan pools packages aren’t buying.
- Rather than dump them for low prices, Countrywide is keeping them in portfolio.
- Consumer credit quality of prime borrowers is deterioating rapidly.
- They are unclear how this will impact the viability of their company, even though they have a large cash reserve.
In other words, they can’t issue as many mortgages because investor demand has dropped considerably. This will drive up mortgage rates, at least in the short run.
I find it interesting that the announcement was made late on Thursday with Friday being a weak news day.
Here’s the SEC filing that was made in tandem with the announcement. Do a text search on the word “constrained.”
The Federal Reserve, in a statement that underscores the deepening severity of developments in credit markets, said it is “providing liquidity to facilitate the orderly functioning of financial markets,” and will pump enough money into credit markets to keep the Fed’s target for the federal funds interest rate at 5.25%. U.S. federal-funds futures early Friday priced in about a 100% chance that the Federal Reserve will reduce its key lending rate by a half-percentage point to 4.75% by the next policy meeting on Sept. 18.