Countrywide forced to turn to banks for help

NEW YORK (CNNMoney.com) -- Embattled Countrywide Financial, the nation's No. 1 mortgage lender, was forced to tap an $11.5 billion line of credit Thursday to run its business during the credit crunch, and said it's toughening underwriting standards on home loans.

At the same time, SEC filings show the company's chairman has made a $13 million profit in the past month selling Countrywide stock on the decline.

The unusual step taken by Countrywide (Charts, Fortune 500) aggravated fears about the problems facing the key lender.

Shares of Countrywide plunged in afternoon trading, and were down 24 percent at one point before closing down 11 percent. The announcement fanned investor worries about a crisis in credit markets, leading to another rough ride in the stock market. The Dow industrials sank about 300 points before recovering at the close.

The consortium of 40 large banks that will be loaning Countrywide money will likely charge higher rates than the mortgage lender usually pays to fund its operations.

Countrywide's decision to severely limit the types of home loans it makes going forward could be a sign that many home buyers will have a much more difficult time getting financing, which can only further batter the already struggling real estate market as well as the U.S. economy as a whole.

A government report Thursday showed that housing starts and building permits are now at their lowest level in more than a decade, and a report from the National Association of Realtors Wednesday showed home values fell for the fourth straight quarter this spring. The problems at Countrywide can only feed into both those trends.

The mortgage lender has seen much of the demand for its mortgage-backed securities dry up in recent weeks in the face of rising delinquencies and defaults for its loans.

Countrywide said its decision to tap the line of credit should help it weather the current credit market crisis.

"In response to widely reported market conditions, Countrywide has elected to draw upon this entire (line of credit) to supplement its funding liquidity position," it said in its statement. "Countrywide has taken decisive steps which we believe will address the challenges arising in this environment and enable the company to meet its funding needs and continue growing its franchise."

As far as lending goes, Countrywide is tightening standards for many types of mortgages, including subprime loans to people with less than top credit; those to people who could not provide full documentation of income, known as Atl-A loans, and also for loans of more than $417,000, known as jumbo loans.

Those three types of loans cannot be packaged and sold to two government-sponsored companies, Fannie Mae (Charts) and Freddie Mac (Charts, Fortune 500), and therefore are less attractive to investors who have been scared out of buying securities backed by anything other than the safest of mortgage loans.

Even the market for jumbo prime loans - made to people with good credit and incomes that can support large mortgage payments - has taken a hit in recent weeks due to concerns over falling home values.

According to trade publication Inside Mortgage Finance, Countrywide was the nation's No. 3 subprime mortgage lender in 2006, making $40.6 billion of those loans, and the No. 2 Alt-A lender with $68 billion.

Countrywide's statement said that as a result of the drying up of demand for mortgage securities that cannot be sold through Fannie or Freddie, it "has materially tightened its underwriting standards for such loans, and, we now expect that 90 percent of the loans we originate will be (Fannie or Freddie)-eligible or will meet our bank's investment criteria."

Art Hogan, chief market analyst at Jefferies & Co., said Countrywide's announcement may calm fears about a possible bankruptcy, but raise fears about its earnings going forward. "We'll see if that will be enough to stem the tide, or is going to be perceived as a last gasp effort," he said.

One analyst wrote in a note Thursday that there was still a chance that Countrywide, which gets nearly all its business from home loans, could be forced into bankruptcy by the current credit crunch.

"We do believe there is a scenario in which the current liquidity crises last for longer than three months and Countrywide is forced into bankruptcy," wrote Friedman, Billings & Ramsey analyst Paul Miller. "It will be ugly, but it can happen! The one major advantage Countrywide has over most monoline mortgage banking companies is its great franchise, which we believe would add value to a more diversified financial institution. Even though we view this as a possibility, we can only speculate on the price someone would be willing to acquire (it) for in its weaken position."

Miller cut his price target on Countrywide to $17, although he admitted "this price target really does not mean anything given the amount of unknowns in the market at this point."

With Thursday's declines, shares of Countrywide have now lost more than half their value since mid-July, before it announced results for June that included growing defaults, delinquencies and problems with selling securities in the secondary market.

Since that announcement, filings with the Securities and Exchange Commission show that Countrywide Chairman and CEO Angelo Mozilo has exercised options and then sold 672,000 shares of the company's stock, netting a profit of just less than $13 million in the transactions.

Mozilo, who still had 497,297 shares of Countrywide stock he owned directly and another 853,205 shares in trust or his 401(k), according to his filings, received an average of $31.09 a share for the stock he sold, while his average stock option exercise price was $11.77 a share.

President David Sambol also had stock sales - although far more modest -during the same period.

Company officials could not be reached for comment on Mozilo and Sambol's sales, or about rumors about a possible bankruptcy.