As foreclosures surge, lenders might be forced to acknowledge that far more of the mortgages they sold to investors were never written properly in the first place.
That's one analyst's conclusion from the latest earnings disaster at Countrywide Financial Corp., the nation's biggest mortgage lender.
Taking more than $3 billion in charges for write-downs and bad loans, Countrywide swung to a first-quarter loss of $893 million on Tuesday, more than even the most pessimistic analysts had projected.
The loss raised the red ink to $2.5 billion over the last three quarters. The Calabasas lender is being acquired by Bank of America Corp. for $4 billion.
Countrywide said that about 1 in 11 borrowers had fallen behind on home loan payments, nearly twice as many as a year earlier. It also said that more than 1 in 3 sub-prime borrowers, those with poor or little credit, was delinquent.
Enormous losses at Countrywide no longer seem to surprise Wall Street: Shares rose 2 cents Tuesday to $5.85.
One item that caught the eye of Keefe, Bruyette & Woods Inc. analyst Frederick Cannon was a $456-million provision to buy back flawed loans from the pools of home loans that backed mortgage-based securities.
Most of the sub-prime and other higher-risk loans that helped stoke the housing boom were put in those pools.
Now, as defaults are rising, Countrywide said, more investors are complaining that the mortgages they bought were misrepresented, such as by overstated borrower incomes and jacked-up appraisals. As of March 31, the company had set aside $1 billion to buy back such botched loans, up from $430 million a year earlier.
"These are issues all large mortgage servicers will face this year as delinquencies and losses rise," Cannon said. Those at similar risk, he said, include Wells Fargo & Co., JPMorgan Chase & Co., Bank of America and Washington Mutual Inc.
Robert Simpson, chief executive of Investors Mortgage Asset Recovery Co. in Irvine, said investors and loan insurers increasingly were enlisting his services to investigate soured loans as a prelude to trying to recover mortgage losses.
"I think it is natural when money is lost and money is having to be set aside to this extent," Simpson said.
He added that having $1 billion set aside for repurchasing flawed mortgages was not a huge amount for Countrywide.
At the peak of the housing boom, the company was lending $30 billion to $50 billion a month in new mortgages -- many of them, like those throughout the industry, based on misstated earnings of borrowers.
"So when they set aside $1 billion that's a day's worth of funding," he said. "I'm not sure that addresses what the real problem may be."
Countrywide's first-quarter loss, equivalent to $1.60 a share, contrasted with a profit of $434 million, or 72 cents a share, for the year-earlier period. Analysts' projections had varied widely, from a loss of 88 cents a share to a profit of 80 cents a share, according to Thompson Financial. The average estimate had been a profit of 2 cents a share.
Total net revenue, after interest and loan servicing expenses and loan loss provisions, fell 72% for the quarter to $679 million.