Mortgage Forum

Mike

*Countrywide gets downgraded*

Ratings agency S&P cut Countrywide’s debt to junk Friday, citing Bank of America’s failure to commit to a guarantee of Countrywide’s obligations after Bank of America completes its $4 billion takeover of the mortgage lender.

S&P cut Countrywide to “BB+/B” from “BBB+/A-2.” Triple-B is the lowest investment grade. S&P’s decision comes just days after Bank of America said in a regulatory filing that it hadn’t decided whether to guarantee $38 billion in Countrywide parent debt.

“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the company wrote on page 59 of the filing said. Bank of America is due to complete its purchase of Countrywide later this year, and the decision not to guarantee the Countrywide debt could leave the mortgage lender’s creditors facing losses. Chris Whalen, a principal of bank watcher Institutional Risk Analytics, said in a note earlier this week that Bank of America’s decision could lead to massive upheaval in the market for bank debt.

If B of A walks away from the debt, bondholders - including state pension funds - could suffer catastrophic losses. That could scare investors out of the market for bank loans as well as other securities issued by banks. “It is BAC’s behavior, not the deteriorating financial condition of CFC, which is injecting potentially dangerous instability into this situation,” Whalen wrote.

Countrywide’s shares, after spending most of Friday’s session around the unchanged mark, fell 4% in afternoon trading. Moe, and others, what effect, if any will this have on CW mortgage holders?