While the Fed Waits Out the Credit Bubble, Countrywide Pounces

By Dr. Duru written for One-Twenty

August 8, 2007


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It's been a long time since we had a Fed meeting that meant anything. It has also been a while since I felt compelled to write about one of my favorite missive topics. Well, Tuesday, we finally got high drama on the currency printing presses that was worth writing about. The Federal Reserve left interest rates alone, acknowledged that "...economic growth was moderate during the first half of the year. Financial markets have been volatile in recent weeks, credit conditions have become tighter for some households and businesses, and the housing correction is ongoing," but remained steadfast in its anti-inflation vigilence: "Although the downside risks to growth have increased somewhat, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected."

It seems to me that the Fed is content for now in allowing the shake-out in the credit markets to continue to run its course. In fact, it will probably be relieved if the deflation of the credit bubble causes some deflation in over-leveraged assets and applies some brakes to "the high level of resource utilization" in the economy. The Fed has been in a precarious position ever since it first encouraged the growth in the housing bubble and the accompanying credit bubble with artificially low interest rates. These rates were driven so low to shallow out the last recession. But if you have any doubt that the Fed will tolerate more pain in the deflating housing market, just remember that Greenspan already acknowledged the likelihood of the coming day of reckoning in August, 2005. Three months before that he assured us that "only" the people coming late to the party would be hurt much: "Even if there are declines in prices, the significant run-up to date has so increased equity in homes that only those who have purchased very recently, purchased just before prices actually literally go down, are going to have problems." So, we hop from bubble to bubble and one must wonder what new bubble awaits us after the credit markets finish correcting. Perhaps we will get a rest from bubbles for the time-being. It should be hard to drive prices of any asset to astronomical levels without the free-flowing and easy credit that allows individuals and companies to spend beyond their means.

As the "mortgage madness" plays out, mortgage-lender Countrywide Financial (CFC) is joining a small group of vulture investors who are swooping in to take advantage of the growing crisis of confidence in the debt markets. Backed up by a strong balance sheet, CFC has hinted that they look forward to standing tall in the credit fall-out. Robert Walburg's article on CFC called "No Crisis for Mortgage Lenders" is particularly revealing:

"...Countrywide has done a good job of capturing share over the past few years (although it's paying for those aggressive actions now). With so many lenders in trouble, look for Countrywide to acquire more share. The company's CEO has noted that he expects the top 10 lending companies to consolidate into five. That should leave Countrywide in a great position once the market finally levels off."

Indeed, Countrywide Executive Managing Director & Chief Investment Officer, Kevin Bartlett, told analysts in CFC's latest earnings conference call (July 24, 2007) that "...the current market forces are more likely to force the weaker mortgage companies to either reduce their activities or align with stronger players." And just yesterday, we got to see CFC in action as it snapped up assets from effectively bankrupt lender HomeBanc. CFC included the following in their press release:

"'Countrywide is continuing to leverage the opportunities that are arising from the consolidating market,' said David Sambol, President and Chief Operating Officer of Countrywide Financial Corporation. 'This agreement illustrates the low-cost, low-risk transaction strategy we are undertaking in this environment to strengthen our retail franchise. HomeBanc's focus on prime retail purchase originations fits well with Countrywide's long-term strategy of growing our market share in the retail channel and maintaining our position as the nation's leading mortgage loan originator and servicer.'"

So, while the Fed waits out the credit crunch, CFC salivates at opportunity. This storm too shall pass, and when you look back on it, I hope you will see confirmation that those who attend to their finances, do not over-extend themselves, and eschew (shun) heavy debt loads, are the folks who stand in the best position to seize on the deals of a lifetime...the kinds of deals that only come around once every so often, once another crazy bubble has burst.

Proverbs 22:7: "Just as the rich rule the poor, so the borrower is servant to the lender."


Be careful out there!

DR. DURU®, 2007