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Rumor Mill Takes Its Toll on Countrywide's Stock

The mortgage lender strongly defends its accounting practices, financial statements.

June 20, 2003|E. Scott Reckard | Times Staff Writer

Countrywide Financial Corp. shares slid almost 5% on Thursday as investors fretted over the mortgage lender's business outlook and rumors of accounting issues like those plaguing Freddie Mac, the giant home loan financier.

Calabasas-based Countrywide, the nation's No. 3 mortgage originator, issued a statement saying there was "no basis whatsoever" to the accounting rumors, first posted on Internet sites devoted to stocks.

But some analysts who are bearish on Countrywide said the company has grown too rapidly for its own good as a result of the booming housing and mortgage-finance businesses, which are bound to slow when interest rates eventually head higher.

"Do you want to buy stock in a company that potentially will be doing only half as much business a year from now?" said Chris Ecclestone, an equity strategist at Polyconomics Inc., a research firm in Parsippany, N.J.

On Thursday, Countrywide's shares dropped $3.65, or 4.9%, to $70.81, and trading volume was five times the average for the last six months.

The stock, which traded in the $50 range for much of last year, took off in March and closed as high as $78.21 on Monday. It has fallen almost 10% in the last three days.

Analysts said the sell-off was triggered in part by fears that Countrywide could be forced to restate earnings in a possible replay of the problems swirling around Freddie Mac, a government-chartered company based in McLean, Va., that provides funds to lenders to make home loans and packages mortgages into securities that trade like corporate bonds.

Three of Freddie Mac's top officers abruptly departed two weeks ago amid a probe into its accounting, and the company has said it expects to report a "material" increase in past years' net income and an equivalent decline in its projected earnings.

The Wall Street Journal reported Thursday that the restatement amount could be as large as $3 billion.

Freddie Mac and Countrywide, like others in the mortgage business, purchase derivative securities contracts to hedge against market interest rate swings such as the plunging rates that have caused homeowners to refinance mortgages repeatedly in recent years.

Without such hedging, the earlier-than-expected refinancing of higher-interest loans would play havoc with the value of Freddie Mac's pools of mortgages and with the income Countrywide gets from servicing mortgages.

In a strategy designed to make its earnings less volatile, Freddie Mac spread huge gains on derivatives over several years. Its auditors now say that generally accepted accounting practices don't permit that accounting treatment for the gains on certain of the derivatives.

As the rumors swirled Thursday that Countrywide's accounting practices might have to be revised, the company said it "stands firmly behind the integrity of its accounting practices and financial statements."

Lehman Bros. analyst Bruce W. Harting said the sell-off in Countrywide shares resulted not only from the speculation, but from the uptick this week in the yield on 10-year Treasury notes, which hit a 45-year low of 3.11% on June 13. The yield was 3.34% at the end of the day Thursday.

If Treasury yields continue to rebound, they would be expected to pull up mortgage rates as well.

Harting, who rates Countrywide a "buy," told investors that the sell-off presented a good buying opportunity, adding that Countrywide had assured him it had no accounting irregularities.

While the home-finance business is indeed likely to slow, Harting said, Lehman already assumes Countrywide's mortgage originations will decline by 51% next year. A combination of increased income from mortgage servicing, banking and insurance should help offset the decline, he said.

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