Posted: August 23, 2007
Because Countrywide mortgage is an icon of the industry, what happens to the company can have an emotional affect on borrowers and investors. So when the company found it suddenly difficult to obtain its usual sources of short term corporate debt (called commercial paper), they sprang into action and called in the big guns, asking for a line of credit from 40 banks and an investment of preferred stock from Bank of America. They received both.
It may seem surprising that they were able to obtain such quick financing from so many different sources. But I can tell you from my corporate acquisition days that most large capital companies have these banks lined up well in advance. Because no one funding source is willing to take the risk of so large a capital need, each bank bids what they are willing to provide when asked. Then each bank continues to analyze the financial strength of the company to determine if they would still be willing to pony up if needed. Countrywide called in the calvary, and they responded.
We are seeing in this example a return to traditional ways of funding our mortgage companies versus a strong reliance on Wall Street.
I think this is good news and it may show in hindsight the point at which the mortgage market began to become more efficient and the capital markets behind the industry began to gain confidence, leading the way to stabilization of at least the credit crunch of the real estate market.
We'll just have to wait and see.