by Tanta on 9/13/2007 09:17:00 AM
Thursday, September 13, 2007
A lot of this we've already seen in various news reports, but since it always comes up for discussion, I thought it might be helpful to look at the various moving parts of CFC's operational changes:
Addressing liquidity and funding needs by accelerating our plans to migrate the funding of our mortgage originations to Countrywide Bank, and our borrowing of $11.5 billion under our lines of credit. Additionally, the Company recently arranged for $12 billion in additional secured borrowing capacity through new or existing credit facilitiesI did an UberNerd post the other day on "origination channels," one purpose of which was to explain the difference between a mortgage banker and a bank. What CFC is doing is (attempting to) transform itself from primarily a mortgage banker (with a small bank) to a big bank. Instead of borrowing money to make mortages with in the capital markets, and selling them immediately, as a mortgage banker does, CFC is "migrating" to depository banking, using deposits and the kind of borrowing that is available to banks (interbank loans, for instance) to fund mortgages.
Materially tightening product and underwriting guidelines such that all loans the Company now originates are eligible for Fannie Mae, Freddie Mac or Ginnie Mae securitization programs, or otherwise meet Countrywide Bank's investment criteria.This is more of the implications of moving from mortgage banking to banking: CFC will still sell loans, but only to the GSEs/Government-insured market. The "nonagency" loans will have to be "portfolio" quality (even if they do not always remain in the investment portfolio). What this excludes is, precisely, the kind of loans that you would be willing to sell but not to hold, or a big chunk of what got made in the last 5 years or so under the private-issue Alt-A/subprime rubric. That's one of the costs of being a bank. Of course, since the bottom fell out of the Alt-A/subprime market, it's not much of a "cost" today. Except that:
Taking advantage of reduced primary market competition to adjust pricing, which is expected to have a favorable impact on mortgage banking gain-on-sale margins and result in greater returns on the high-quality loans originated for our Bank's investment portfolio.Profit margins for good old-fashioned GSE swap/portfolio hold depositories have never been quite as rich as the profit margins for high-rollin' Alt/Subprime mortgage bankers. What you are being told here is that CFC plans on being "the last man standing," and therefore to use the "pricing power" this provides to be a bank that makes money like a mortgage banker. However, that still requires something like a bank's expense load:
Announcing plans to reduce expenses in response to lower expectations for mortgage origination market volume. These plans include workforce reductions of up to 20 percent.So. Welcome to Main Street, Countrywide. Lay off the high-flying sales force, hire tellers to take deposits, make Your Dad's Mortgage Loans, and start calculating your gain on sale and net interest margin in nickels and dimes. Just like the old fogie bankers on Elm and Maple you've been stomping all over for years. Hope it works for you. Can I get a free calendar?
Posted by Tanta on 9/13/2007 09:17:00 AM