Though Countrywide Financial Corp. took a beating last week on Wall Street, some investors believe a downturn is short-lived and that the company has diversified enough over the past five years to weather a slowdown in the housing market.


The problem for many Wall Street analysts is that Countrywide's chief executive Angelo Mozilo has been outspoken lately about a "hard landing," spooking investors.


For years, Mozilo has been telling Wall Street that Countrywide was immune to a downturn. The company has expanded rapidly into banking and brokerage services precisely to avoid the type of sell-off that occurred last week after the company announced a 19 percent drop in loan production.


The stock, which closed Tuesday at $37.34, dropped more than 9 percent by Thursday, when it closed at $33.90. Countrywide's shares have fallen 20 percent from a high of $42.85 in May.


Robert Lacoursiere, an analyst at Banc of America Securities in New York, set a $30 target price on shares, indicating that more carnage is still to come.


In many ways, Countrywide has been a victim of its own success practically goading competitors to up the ante on pricing competition.


Even as Countrywide expects to announce layoffs this year in its traditional mortgage business, the firm is rapidly expanding its banking and brokerage operations in New York, where it plans to open as many as 30 offices in the next three years. As a result, many traditional investment banks have rushed to buy up mortgage operations in an effort to compete.


The Calabasas-based company's non-mortgage businesses Countrywide Bank and Countrywide Capital Markets are supposed to pick up the slack when mortgage originations dry up. These businesses contributed 41 percent to the company's total pretax profits in 2005, up from 20 percent in 2000.


Jim Wiess, managing director and chief investment officer at Putnam Investments US Core portfolio, takes the contrarian view. He thinks Wall Street doesn't give Countrywide enough credit for the stable earnings of its non-mortgage businesses.


"Right now almost half of Countrywide's earnings come from areas other than mortgage originations," said Wiess, who thinks Countrywide is a bargain at current prices. "Investors are taking the stock down because they are focused on the short-term."


Countrywide Bank, which has been in operation for five years, has seen its assets skyrocket to $84.3 billion, catapulting the bank into the ranks of the top 20 U.S. banks, as measured by assets.


Countrywide's capital markets division primarily underwrites mortgage-related debt securities, encroaching on the turf of traditional brokerage firms.


Wiess thinks a slowdown in the mortgage industry ultimately will benefit Countrywide.


Housing downturns often are followed by a shake-out and consolidation. He thinks small mortgage companies will be forced to sell themselves, and Countrywide will grow market share through acquisitions.


Default risk
The question now is whether Countrywide can bounce back from a sell-off even if the housing market faces a hard landing.


The biggest problem that has bank regulators sounding alarms comes from the risk of defaults in certain mortgage products that have been heavily promoted by the industry, including Countrywide.


Analysts now are jumping on the bandwagon, talking up the inherent risks associated with pay-option adjustable rate mortgages, also known as option ARMs, which account for 45 percent of the loans held in Countrywide's banking division.


When interest rates rise, option ARMs typically have sharp increases in monthly mortgage payments. The increases can lead defaults.


On a conference call with analysts last month, Mozilo said he had no idea how borrowers would respond when their loans are reset by rising rates.


"I'm not sure exactly what will happen then," he said.


The number of defaults on mortgage payments in California rose to a three-year high in the second quarter, a 67 percent jump from a year earlier, according to DataQuick, a compiler of real estate data.


Countrywide took Wall Street by surprise by backpedaling from its aggressive forecast to grow market share.


The company originally had set a target of capturing 30 percent market share by 2010, but recently talked down those expectations because of pricing pressure from competitors, namely Wells Fargo & Co.


The less-aggressive stance prompted Kenneth Bruce, a Merrill Lynch analyst, to write that Countrywide's "recent change of heart does give us some pause."


As the top mortgage originator in the United States, Countrywide's market share has jumped dramatically in the past five years to 15.7 percent in 2005, when it overtook Wells Fargo as the biggest home lender, up from 5.9 percent in 2000. The company provided $485 billion in home loans last year.


In May, when Countrywide shares hit a peak, insiders sold $36 million in stock and options, the largest amount of insider sales at the company in the trailing 12-month period, according to Thomson Financial.


Sales have continued. Stanford Kurland, Countrywide's chief financial officer, has sold 64,000 shares worth $2.4 million in the past month.


David Sambol, executive managing director of Countrywide's business segment operations and president and chief operating officer of its main subsidiary, Countrywide Home Loans Inc., sold 56,000 shares worth $2.1 million. Sambol plans to sell a total of 182,000 shares worth $7 million, according to Thomson.


Mike McMahon, an analyst at Sandler O'Neil in San Francisco, said Countrywide's latest data could ultimately prove that the long predicted decline in the housing market has finally arrived.


"The mortgage market is slowing more than previously thought," he wrote in a recent report.

For reprint and licensing requests for this article, CLICK HERE.