Mortgage lender draws on $11.5bn line

Mortgage lender draws on $11.5bn line
By FT reporters
Copyright The Financial Times Limited 2007
Published: August 16 2007 18:49 | Last updated: August 17 2007 06:24


Countrywide Financial, the biggest US mortgage lender, was on Thursday forced to use an $11.5bn credit line from 40 of the world’s largest banks, raising fears that the global liquidity crisis was worsening.

Shares in Countrywide closed 11 per cent lower in New York as the company said it drew down the credit facility to boost its liquidity after the global credit squeeze curbed access to short-term financing from debt markets.

Ratings agencies responded with cuts to Countrywide’s credit rating, leaving the lender on the cusp of junk status.

Late payments and defaults on US mortgages have reached their highest level in more than five years, prompting sharp falls in the value of mortgage-related securities and severe funding problems for lenders.

In a sign of how rapidly the crisis has escalated, Countrywide said as recently as August 2 that it had strong and diverse funding sources, demonstrating the speed with which the crisis has escalated.

Bankers and investors expressed increasing alarm that even large, well-capitalised financial institutions were having difficulty accessing the wholesale markets they use to fund their businesses. Some banks are concerned that, if the liquidity shortage persists, they will have to absorb assets currently financed in the markets on to their balance sheets.

Rebecca Engmann Darst, an analyst at Interactive Brokers, said: “While Fed officials are proceeding as if a calamity has yet to occur in the US subprime mortgage market, it would appear that some in the market believe the calamity is simply yet to be fully appreciated.”

Countrywide’s move came as shares in Northern Rock, one of the UK’s leading mortgage lenders and a pioneer in the European capital markets, fell a further 4.2 per cent on Thursday, adding to a 5.3 per cent loss on Wednesday, as investors concluded the turmoil in the markets would undermine its future growth.

Shares in Rams Home Loans, one of the largest residential home loan providers in Australia, dipped nearly 60 per cent after it said it had failed to refinance hundreds of millions of dollars of short-term debt.

The setback came two days after Rams said its current year profit forecast of A$58.5m was likely to suffer materially owing to tougher credit conditions.

Rams’ funding crisis underlines the risks associated with non-bank home loan providers which have come to light barely three weeks after the group launched on the stock market with a A$885m listing.

Reporting by Anuj Gangahar and Saskia Scholtes in New York, Peter Thal Larsen in London and Peter Smith in Sydney