Countrywide tumbles on downgrade, rumors

NEW YORK (CNNMoney.com) -- Countrywide Financial Corp. shares tumbled Wednesday after being downgraded by a Merrill Lynch analyst and on rumors that the mortgage lender was not able to raise money in the commercial paper market.

Merrill Lynch analyst Kenneth Bruce, who downgraded the largest U.S. mortgage lender to "sell" from "buy", said Countrywide could face bankruptcy if liquidity worsened, Reuters reported. The downgrade highlighted ongoing anxieties about the U.S. credit market.

"If enough financial pressure is placed on Countrywide or if the market loses confidence in its ability to function properly, then the model can break, leading to an effective insolvency," Bruce wrote, according to Reuters. "If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt."

Countrywide spokesman Rick Simon declined to discuss Bruce's report, but said: "Management is completely focused on running the business in a changing environment," Reuters reported.

Other traders attributed the drop in the stock to financing rumors about Countrywide, the news agency said.

"People are buying Countrywide puts very aggressively on Wednesday off of rumors that the commercial paper market could be closed to them," William Lefkowitz, options strategist at brokerage firm vFinance Investments, told Reuters.

Puts are options that allow an investor to sell a stock at a preset price by a certain date. The commercial paper market is where corporations borrow from one other by issuing short-term IOUs.

Shares of Countrywide (Charts, Fortune 500), the nation's largest home lender in terms of loan volume, sank as much as 19.2 percent during the session to $19.25, their lowest level since September 2003, though they struggled back a bit to close down about 14 percent.

Like many rivals, Countrywide has struggled with weakened credit quality and investor resistance to buying loans it makes. Rising default rates have crimped even routine mortgage lending at many companies.

Last week, Countrywide said it faced "unprecedented disruptions" in the market to buy and sell home loans, and that the ultimate impact was unknown. On Tuesday, the company said that foreclosures and delinquencies rose in July to their highest level in several years.

Meanwhile, shares of Thornburg Mortgage Inc. rebounded on Wednesday from the previous day's dramatic sell-off. Thornburg (up $2.95 to $10.56, Charts), which specializes in large prime home loans, gained as much as 40 percent Wednesday, after plunging 47 percent Tuesday.

The recovery followed efforts by Thornburg Operating Chief Larry Goldstone to tamp down investor nerves Tuesday, when he assured markets that the Santa Fe., N.M., company has no plans to file for Chapter 11 bankruptcy protection. In Chapter 11, a company is protected from creditors while it tries to reorganize and pay its debts.

Goldstone also said the mortgage lender has had some success in obtaining funding and was getting into a position where it would be able to fund itself on a day-to-day basis, he said in an interview with CNBC television.

-- from staff and wire reports