Countrywide profit sinks, defaults rise

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LOS ANGELES - Countrywide Financial Corp. said Tuesday its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults among the most creditworthy borrowers.

The huge mortgage lender was forced to take impairment charges as it braced for the possibility of more people failing to make their mortgage payments.

Countrywide also said the market will become increasingly challenging as loan production subsides while lenders compete with one another more fiercely.

"This is a huge battleship and it's headed in the wrong direction," Chief Executive Angelo R. Mozilo said during a lengthy conference call with Wall Street analysts.

"Looking to the second half of 2007, we expect difficult housing and mortgage market conditions to persist," he said.

The news sent shares of the Calabasas-based company sliding $3.56, or 10.45 percent, to close at $30.50 on Tuesday.

The rise in credit-related costs were primarily related to the company's investments in prime home equity loans, Mozilo said.

Unlike subprime loans, which target borrowers with spotty credit histories, prime loans are typically available only to those with solid credit profiles who are considered less risky.

The rise in delinquencies and projections of more defaults led Countrywide to write down the value of securities backed by prime home-equity loans by $388 million in the quarter, reducing earnings by 40 cents per share.

Where are The riskiest housing markets?

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A new report projects home-price declines for the next two years. The riskiest markets are in Florida, California, Nevada and Arizona. Here's how to ride out the hard times.

By Marilyn Lewis
As if the housing market isn't bleak enough. The Standard & Poors' Case-Shiller Home Price Index reported in late June that home prices dropped more in the first quarter of this year than at any other quarter in the last 17 years. Now, a report from PMI Mortgage Insurance says home values could decline across much of the country for at least two more years.

There's a 34.6% chance on average that home prices will drop in the nation's top 50 markets in the next couple of years, according to PMI Mortgage Insurance's new U.S. Market Risk Index, which heavily factors in recent price volatility.

How far and how fast prices actually fall remains to be seen. But the report underscores the fact that today's market is decidedly different from that of recent years, when homeowners could bank on rapid home-value appreciation. (See the report or hear a podcast here.)

Headed for decline

Not surprisingly, the riskiest markets identified by the index are located in areas that saw rapid price appreciation, a reduction in affordability followed by a rapid decrease in the rate of price appreciation. Of the 15 biggest cities with the greatest risk for price decline -- with more than a 50% chance of lower home values by mid-2009 -- five were in California and four were in Florida.

What to Do When Purchasing and Leasing Your First Investment Property

You've weighed all of the pros and cons, thought about it for months and read every reference material you could get your hands on. In short, you're ready to purchase an investment property and you're ready to do it now. However, how can you get started?

1. Know what type of property you'd like to purchase. Would you like to rent out a home to a nice family or buy an apartment building for several tenants. Decide what you would like to buy before you go looking. It will save you time in the long run.

2. Once you've located a property, try to get the most for the least amount. Spending the money to have an inspection done will allow you to have more chips at the bargaining table, especially if you can repair things yourself or have associates that can do it cheaply.

3. Put an offer on the property and secure financing. Obviously, this is an important step. Once you've agreed to the terms of the sale and secured the financing, you are set.

4. After the property is yours, you'll want to make it appealing for potential tenants. Make any necessary repairs, install new carpet and paint the walls. Tenants look closely at these details and it can be a make or break deal.

5. Price your property right. Think about what you'd like to charge for rent, taking mortgage costs, utilities and maintenance into consideration. Then take a look at what similar properties in your area are renting for. If you are considering putting rent at $1200 per month when others are renting their property for $1000, find out why their rent is cheaper and make adjustments accordingly. Don't price yourself out of the market or you'll risk having a vacant house.

6. Visit with a lawyer to draw up a leasing contract. You'll want to make sure all terms are spelled out before taking on tenants. What happens if something is broken or ruined during their lease? Who is responsible for the repairs? What happens if a crime occurs on your property? You'll want to spell out liability to protect yourself and your investment.

7. Figure out what you'll do if the home is vacant for an extended period of time. How will you cover your costs if you have no tenants.

All of these are important factors to consider before taking on your first property and tenant. Remember that you want to make this a positive and possibly money-making experience. If you don't have a plan in place before the unexpected occurs, you could face losing a lot of money in the process.

"The Power" of A Real Estate Formula

It was a simple real estate formula. The ads ran in our small-town newspaper for years before I realized exactly what was going on. They were always the same: A house for sale with 5% down and payments of 1% of the purchase price. Maybe a three bedroom home for $90,000, for example, with $4,500 down and $900 per month payments.

When a friend started doing the same thing he explained the process to me. It was a way to get a great return on capital, and it was the opposite of buying with no money down. There is no down payment at all when you buy, because you buy for cash.

The Simple Real Estate Formula

You probably know that when you buy for cash, you can often get a much better price. With no financing contingencies in the offer, and the promise of a faster closing, sellers are willing to sell for less. You can offer $95,000, for example, on a house that might be worth $108,000. If you can't get it for less than, say, $99,000, you walk away - there are always other opportunities.

Once you buy the house, you put few thousand into high-return repairs and improvements. These might include paint, carpet, and maybe asphalt for a dirt driveway. For our example, we'll say you spend $5,000. Let's suppose the house is worth $116,000 now. You're ready for the next important step in this real estate formula.

You put it up for sale, targeting buyers who can't get financing easily. You provide the financing. Because you are making it easy for the buyer, you can get more than the $116,000 value for the home - and do it without paying a realtor's commission. Let's say you sell it for 123,000. The buyer needs a down payment of just 5%, or $6,150, and makes monthly payments of $1230 per month. You charge higher interest than the going rates at the banks, of course.

This is a win-win situation. Your buyer is able to buy a home instead of renting, and you get a capital gain of perhaps $16,000 after expenses, plus good interest. Your total rate of return will often be over 20%!

In our town, the first to do this consistently were a father and son team of lawyers. They saved money by doing their own foreclosures when necessary. Once they foreclosed, they raised the price and sold the home all over again.

They made millions. Did you know that if you can get an average return of 18% on your money, you'll turn $75,000 into more than one million dollars in about fifteen years? That's the power of a good real estate formula.

Solutions for the Subprime Lending Crisis

There are solutions for the subprime lending crisis that entail making changes to the way lenders are handling this crisis. There are distinct groups of individuals that are causing this foreclosure epidemic. First, there is the homeowner who got a "teaser interest rate" that was affordable at the time but became unaffordable when the interest rate adjusted. In addition to the teaser interest rates, lenders started a policy of "no documentation of income" or no-doc loans that did not require borrowers to show proof of their income and are now referred to as "liar's loans". The problem was that homeowners couldn't afford the payment if there were any increases due to taxes, insurance, or an interest rate adjustment.

Next, there are individuals that purposely chose low-interest rate, interest only, and even negative amortization (neg-am) loans with the intent of flipping the property after one or two years and taking a huge capital gain. In the past few years, these "speculators" became trapped, either unable to sell or renting them with negative cash flows. The most viable option for these investors was to give the property back to the lender by foreclosure rather than bleeding monetarily every month.

Another typical foreclosure involved a homeowner cleverly refinancing his property but never making a payment and in effect selling his home to the lender, by taking out his equity on the refinance. There is a lingering question about whether these homeowners had "intent" to defraud the lenders, but that is better left to another discussion. And lastly, there are true personal hardships that resulted in foreclosure. Our estimates are that 95% of these homeowners want to keep their homes but are unable to reinstate the back payments.

Lending institutions can resolve many of these foreclosure issues by:

* Having counselors available to work with the homeowner for a solution. Possible solutions include loan modification (putting the late payments and costs on the end of their loan, accepting partial payments of the amount due until paid, reducing the interest rate adjustment(s), freezing the interest rate for the term of the loan, getting a deed in lieu of foreclosure in exchange for giving the homeowner a credit for a rental truck when they vacate, accepting partial mortgage payments for a limited time, assistance with applying for and getting government assistance including grants that could reduce the loan, and doing financial planning and credit counseling.
* If the borrower is an investor who can no longer afford the loan, the lender should get a deed in lieu of foreclosure, or a loan modification that is workable for both the lender and the investor which would be paid when the property was sold or refinanced.
* If a homeowner refinanced and never made a payment, the lender should request a deed in lieu of foreclosure and if the homeowner refuses, the lender should get a judgment after the foreclosure auction and collect this judgment. If fraud is suspected, the case should be pursued by local authorities for prosecution.
* True hardship cases should be handled on an individual basis with the interest of the borrower in mind. Loan modification and any other reasonable offers of help should be used to help resolve the problem. If a solution is impossible, a deed in lieu of foreclosure should be requested with a minimal compensation for moving expenses.

While certain banking regulations preclude some of these solutions Congress and the Federal Reserve must quickly realize the nature of this crisis and its resemblance to the former Savings and Loan crisis. Immediate action should be taken before it becomes expensive for every taxpayer. To their credit, a number of insightful lenders have already taken steps to have counseling staffs on hand and work with homeowners. Now is the time to take more aggressive action before hundreds of thousands of homeowners find themselves no longer owning a home or even homeless.