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Teaser Freeze Bad News For Countrywide (CFC)
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Fallout from the subprime meltdown continues to poison and taint virtually everything Countrywide Financial (NYSE:CFC) touches. Just when the company looks on the cusp of recovery another dose of fallout hits and the prognoses gets worse. The past two weeks have been no exception to the pattern.
The latest additions to the list of problems include President Bush's plan to freeze teaser rates on subprime mortgages, a union boycott of the company's banks and a rumor that the stock's dividend could be on the chopping block. (To learn more about the meltdown, see our Subprime Mortgage Feature.)
Rate Freeze Could Hurt Countrywide
President Bush outlined a plan on Thursday December 6 which could provide some relief to homeowners that were lured into subprime mortgages by attractive teaser rates.
Bush's plan was developed by Treasury Secretary Henry Paulson in conjunction with lenders. It would freeze teaser rates on subprime ARM mortgages for a period of five years. That means it would prevent them from resetting for five years. It also allows homebuyers with bad loans some refinancing options.
Bush has estimated that about 1.2 million people could receive some help from the plan. That said, it is unclear if the details of this plan will be altered, as some Democrats think that it does not go far enough. (To learn more on Democrat reaction, see "Bush Rolls Out Mortgage Relief Plan".)
Now this may sound good, particularly if you are a person who got bamboozled by a slick mortgage broker; however, it could handcuff companies like Countrywide Financial. These companies often need to raise rates in order to make money and possibly stay in business. Also, to me it doesn't seem fair to transfer the burden from the mortgage holder to the shareholder. (For added insight on the moral debate, see Subprime Lending: Helping Hand Or Underhanded?)
Union Problems
Labor union Unite Here is recommending to its members and the public at large that they boycott the Countrywide's banking arm. The union wants a guarantee that the company won't foreclose on consumers who are late in making their adjustable mortgage payments.
Now, being from the New York metropolitan area, I'm used to union protests. Every couple of days I see some sort of picketing by union members. However, this might be a bit different.
The group represents 450,000 workers in the hotel, restaurant, retail and manufacturing industries. That's a lot of people, and this could have some pretty big repercussions on the company going forward. If nothing else, I think that it could generate a lot of bad press for the company in the weeks ahead. (To read the full Associated Press news report, see "Union Calls for Countrywide Bank Boycott".)
Dividend in Jeopardy?
Another problem was added during chief executive Angelo Mozilo's discussion of the quarterly dividend during an appearance on CNBC this past week. It's what Mozilo didn't say that caught people's attention. Mozilo declined to speak about whether the company would keep its 15-cent-per-share dividend (the current dividend yield is about 5.5%).
The fact that Mozilo apparently did not discuss this matter in detail, and hasn't taken steps to clarify the matter since the interview, suggests to me that the future of the dividend is uncertain. Now to be clear, it probably wouldn't be the end of the world if the company did cut its dividend. However, it is just one more thing that could prevent some potential retail and institutional investors from getting involved in the stock.
Bottom Line
The stock is flirting with the $10 range. Some institutions may only invest in companies that trade above the $10 mark. Again, going below $10 is not the end of the world, but it's one more issue that could turn off would-be investors.
Countrywide's woes over the past several months have been highly publicized. Judging by the news events of the last weeks, it appears the company's and its shareholder's problems are far from over.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
The latest additions to the list of problems include President Bush's plan to freeze teaser rates on subprime mortgages, a union boycott of the company's banks and a rumor that the stock's dividend could be on the chopping block. (To learn more about the meltdown, see our Subprime Mortgage Feature.)
Rate Freeze Could Hurt Countrywide
President Bush outlined a plan on Thursday December 6 which could provide some relief to homeowners that were lured into subprime mortgages by attractive teaser rates.
Bush's plan was developed by Treasury Secretary Henry Paulson in conjunction with lenders. It would freeze teaser rates on subprime ARM mortgages for a period of five years. That means it would prevent them from resetting for five years. It also allows homebuyers with bad loans some refinancing options.
Bush has estimated that about 1.2 million people could receive some help from the plan. That said, it is unclear if the details of this plan will be altered, as some Democrats think that it does not go far enough. (To learn more on Democrat reaction, see "Bush Rolls Out Mortgage Relief Plan".)
Now this may sound good, particularly if you are a person who got bamboozled by a slick mortgage broker; however, it could handcuff companies like Countrywide Financial. These companies often need to raise rates in order to make money and possibly stay in business. Also, to me it doesn't seem fair to transfer the burden from the mortgage holder to the shareholder. (For added insight on the moral debate, see Subprime Lending: Helping Hand Or Underhanded?)
Labor union Unite Here is recommending to its members and the public at large that they boycott the Countrywide's banking arm. The union wants a guarantee that the company won't foreclose on consumers who are late in making their adjustable mortgage payments.
Now, being from the New York metropolitan area, I'm used to union protests. Every couple of days I see some sort of picketing by union members. However, this might be a bit different.
The group represents 450,000 workers in the hotel, restaurant, retail and manufacturing industries. That's a lot of people, and this could have some pretty big repercussions on the company going forward. If nothing else, I think that it could generate a lot of bad press for the company in the weeks ahead. (To read the full Associated Press news report, see "Union Calls for Countrywide Bank Boycott".)
Dividend in Jeopardy?
Another problem was added during chief executive Angelo Mozilo's discussion of the quarterly dividend during an appearance on CNBC this past week. It's what Mozilo didn't say that caught people's attention. Mozilo declined to speak about whether the company would keep its 15-cent-per-share dividend (the current dividend yield is about 5.5%).
The fact that Mozilo apparently did not discuss this matter in detail, and hasn't taken steps to clarify the matter since the interview, suggests to me that the future of the dividend is uncertain. Now to be clear, it probably wouldn't be the end of the world if the company did cut its dividend. However, it is just one more thing that could prevent some potential retail and institutional investors from getting involved in the stock.
Bottom Line
The stock is flirting with the $10 range. Some institutions may only invest in companies that trade above the $10 mark. Again, going below $10 is not the end of the world, but it's one more issue that could turn off would-be investors.
Countrywide's woes over the past several months have been highly publicized. Judging by the news events of the last weeks, it appears the company's and its shareholder's problems are far from over.
Looking to cook up a market-stomping stock portfolio? Check out our FREE report "7 Ingredients to Market Beating Stocks" and get started right now!
by
Glenn Curtis
Glenn Curtis started his career as an equity analyst at Cantone Research, a New Jersey-based regional brokerage firm. He has since worked as an equity analyst and a financial writer at a number of print/web publications and brokerage firms including Registered Representative Magazine, Advanced Trading Magazine, Worldlyinvestor.com, RealMoney.com, TheStreet.com and Prudential Securities. Curtis has also held Series 6,7,24 and 63 securities licenses.
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