Let's start off with a little back story. Countrywide spent the real estate boom times growing to be the largest mortgage company in the United States. They had very lax restrictions on who they gave loans to. Consequently now that people are worried about homeowners not paying their loans, investors have been focusing on Countrywide. A lot of investors on Wall Street have been selling Countrywide short assuming a looming bankruptcy.
The problem is a Countrywide bankruptcy could have an extremely negative affect on the financial markets not to mention weakening the national real estate market. Having the largest mortgage company go bankrupt could lead to a massive loss of investor confidence and a run on other banks not affected by Countrywide's problems. People already started pulling money from Countrywide over the last week.
So apparently I am not the only person worried about a Countrywide Bankruptcy. Bank of America made an equity investment of 2 billion dollars after the close of the stock market. It looks like for now this should go a long way to keeping Countrywide out of Bankruptcy. The 2 Billion investment comes in the form of nonvoting stock. In after hours trading Countrywide shares have increased by 20%.
Why Bank of America is investing in Countrywide is anyone's guess. But Bank of America might be interested in preventing the turmoil a Countrywide bankruptcy might bring to the financial market. And at least for now the investment will probably calm the waters. Countrywide stock which reached a high of 45 this year hit a low of 15 in the last few weeks. After the BOA announcement Countywide rose to 26 dollar a share.
Ki Gray work with
Escapeso Realty in Austin Texas. Their site provides a search for homes in the
Austin Real Estate market.
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Countrywide's stock has taken a huge hit compared to their actual losses.
Their issue is not lost money per say, but more or less liquidity issues. You may know this, but in most states, the winning bidder in a sheriff's sale has to pay for the money in certified funds, and those funds are held in escrow until the redemption period has passed. The lender does not get their money back from the loan until the redemption period has passed.
For example: Countrywide forecloses on a home for $200,000 (the amount owing). It goes to sheriff sale and Countrywide needs to invest another $200,000 in the County's escrow account to secure their interest in the property. They now have $400,000 tied up in a $200,000 (+ or- ) property. Once the property passes thru the redemption period, they get the $200,000 back from county's escrow account, and then they need to sell the property to recover the remainder of their funds.
This is why countrywide is in financial trouble, their bad loans require twice as much money or more to push them through the foreclosure process. Once the pain of the liquid asset crunch passes, they will be profitable again. Not to mention, a pinch like this gives them a great time to liquidate alot of debt, making them even more profitable when they turn around.