September 7, 2007

Countrywide to lay off 20 percent of workforce
Largest U.S. home lender to cut up to 12,000 jobs; Indymac announces 1,000 layoffs.
By MATHEW PADILLA
The Orange County Register

Countrywide Financial, the largest U.S. home lender, said Friday it plans to eliminate up to 12,000 jobs, or 20 percent of its workforce, in the most sweeping job cut by a lender since the mortgage industry imploded this year.

Countrywide's announcement tops a week of major cutbacks by other lenders and mortgage-related businesses. In all, 16,450 jobs tied to lending are expected to disappear. It's unclear how many job losses are in Orange County, but most of the companies have local offices.

Lenders are scrambling to survive amid a nearly two-year long slump in housing sales and a dramatic increase among borrowers who default on their home loans.

Countrywide, which expects mortgage industry volume to drop 25 percent next year, said the layoffs will occur over the next three months and include 900 job cuts announced Wednesday.

The company said it might let fewer workers go than expected if interest rates fall or the housing market improves.

Countrywide is firing people because it's struggling to sell mortgages to investors, said Sean Egan, managing director of Egan-Jones Ratings Co. That's likely to continue next year, he said. "It's probably not going to be the last cut," Egan said.

Wall Street investors have stopped buying most risky mortgages and some larger loans to people with good credit, experts say.

In response, major lenders like Countrywide and Indymac Bancorp in Pasadena are focusing on loans they can sell to government-sponsored buyers Fannie Mae and Freddie Mac. They're doing a lot less subprime or Alt-A loans – two categories of riskier loans that skyrocketed alongside home prices.

Indymac on Friday said it would cut about 1,000 jobs, or 10 percent of its staff, and it will slash its dividend by half and may lose money this quarter.

Experts say all of this means more buyers are being squeezed out of pricey markets like Orange County.

"I personally believe that the housing numbers are going to look pretty bad by October or November," said Manuel Ramirez, an analyst in the San Francisco office of Keefe, Bruyette & Woods who follows lenders.

He said sales will continue to decline and price drops may accelerate in some markets.

"I think all this pulls the marginal buyer out of the market. There weren't that many buyers in the market to begin with," Ramirez said.

Rates have spiked on jumbo loans – prime loans above $417,000 in California – by nearly one percentage point in the past seven weeks. In Orange County, jumbo loans are going for about 7.57 percent with a one-point fee.

Still, Ramirez said a borrower with good credit and a down payment of 20 percent or more can still get a jumbo loan for under 7 percent directly from major lenders, some of which are cutting ties to mortgage brokers.

Lenders want more control over their loans, Ramirez said.

Indymac, for example, is expanding its retail operations even as it cuts other jobs. It hired about 800 retail workers from a failed competitor, the company said. In Orange County, it picked up 120 workers through hires and an acquisition.

Grove Nichols, an Indymac spokesman, said retail was previously a weak area for the company, which it is correcting. And he said many new hires are in sales and earn commission. "You pay them when they produce revenue," he said.

Layoffs are spreading beyond lenders.

Santa Ana-based First American Corp.,one of the largest U.S. title insurers, said Tuesday it's reducing staff by 1,300, or roughly 4 percent of its workforce. Since fewer consumers are getting mortgages these days, they also are buying fewer policies to insure against conflicting property claims.

Still, layoffs at Countrywide, which were rumored all week, dwarf all other cutbacks. The lending giant has struggled since mid-August when a Merrill Lynch analyst downgraded its stock and warned of a potential liquidity crisis.

The next day it tapped an entire $11.5 billion credit line with 40 banks. And late last month Bank of America bought $2 billion worth of its securities that can be converted into common stock, effectively injected Countrywide with cash.

Countrywide's scaling back is a natural response to a drop in investor demand for mortgages, said Michael LaCour-Little, professor of finance at Cal State Fullerton.

"In a world where a high percentage of mortgages are securitized, if you can't securitize them, lenders aren't going to make them," he said.