Rumors that Countrywide Financial Corp. was preparing to file for Chapter 11 bankruptcy protection sent the mortgage lender’s stock price tumbling by more than 20 percent Tuesday, before trading was halted and the company issued a denial.
The New York Stock Exchange briefly halted trading of the company’s stock to allow Countrywide to issue a statement saying there was “no substance” to the rumor or to additional speculation that rating agencies are preparing to downgrade the company’s debt.
Trading was resumed after the announcement and Countrywide’s stock, which closed at $7.64 Monday, bounced back above $6 after hitting a low of $5.76.
Today’s rumors echoed similar fears in August, when Countrywide faced a liquidity crisis and analysts at Merrill Lynch & Co. and Friedman, Billings Ramsey analyst Kenneth Bruce warned that the company could face bankruptcy if it was forced to sell off assets at fire-sale prices.
Instead, Countrywide announced plans to lay off 12,000 workers, drew down an $11.5 billion line of credit with 40 banks, and gave Bank of America the right to buy a minority interest in the company in exchange for a $2 billion loan. Countrywide lined up an additional $12 billion in financing in September.
Countrywide and other mortgage lenders faced a crisis when Wall Street investors stopped buying many types of mortgage-backed securities and short-term “commercial paper” debt used to finance their operations, because of concerns about rising delinquencies and foreclosures.
Countrywide, which reported $1.2 billion in third-quarter losses in October, is scheduled to report its fourth-quarter results this month. Statistics for December could come out this week or next.
Last month, the Calabasas, Calif.-based lender said it funded $23.1 billion in residential mortgage loans in November, up 5 percent from October but down 40 percent from a year ago.
The stocks of bond insurers MBIA Inc. and Ambac Financial Group Inc. were also down sharply Tuesday, after analysts at Morgan Stanley said rising defaults will take a toll on both companies’ bottom lines.
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