Monday, July 21, 2008

BofA Conference Call: HELOCs and Countrywide

by Bill McBride on 7/21/2008 10:26:00 AM

Here are some interesting comments on the deterioration in the HELOC portfolio, on falling house prices and Countrywide losses and debt ...

From BofA on HELOCs:

Now credit in our consumer real estate business primarily home equity continued to deteriorate as a result of the weaker housing market. The problems to date have been centered in higher CLTV loans particularly in states that have experienced significant decreases in home prices. Almost all of these states have been growth markets for the past several years. Our largest concentrations are in California and Florida which represented 41% of the portfolio but 63% of the losses. Home equity net losses increased to 923 million or 3.08% up from 1.71% in the prior quarter. 30 day delinquencies [improved 6 basis points] which is definitely positive but as we know one quarter doesn't signify a sustainable outlook. Consistent with the prior quarter 82% of net charge offs related to loans where the borrower was delinquent. Greater than 90% CLTV on refreshed basis represent 35% of loans versus 26% in the first quarter. This change reflects the continued decline in home prices most acutely in the states I noted earlier. Like others in the industry a large piece of the deterioration is centered in acquired portfolio not originated through the franchise a practice we discontinued in 2007. These purchased loans represent only 3% of the portfolio but 21% of the net losses.
emphasis added
And on Countrywide:
“Let me give you some preliminary purchase accounting estimates around some of the largest exposures realizing they may change somewhat as they are finalized. Our estimate at this time on the loan portfolio would be a loss exposure of approximately 15.6% or $14.3 billion for the held for investment portfolio as of the end of June. Factoring in charge offs already taken in 1.7 billion this is a loss estimate of just over 17%. Obviously the [marks were highest] subprime, option arms and home equity and lowest for prime first mortgages. The percentages range from a preliminary high in the mid-20s to a low in the single digits. All but about $1 billion of this will be [reflected] in purchase accounting. After considering the existing $5.1 billion allowance for loan losses at Countrywide and excluding the $1billion I just mentioned, is estimated to be $8.1 billion. In determining these preliminary markets we assume peak to trough of 25 to 30% including estimated depreciation in Florida and California in the high 30s to just over 40%.”
But that may be optimistic since they can't sell any loans:
“While we originally envisioned selling a large block of [Countrywide] loans shortly after transaction closed, the markets are not currently conducive, and we have tabled that plan for now.“
And on the Countrywide debt:
“We have received a lot of questions about Countrywide's public debt. All I can say at this point is we don't intend to guarantee the public debt but we understand the ramification of not paying. We will keep you informed as we continue to integrate the country wide transaction.”