Wednesday, January 09, 2008


This I didn't know.

Delinquent loans create huge liquidity problems for loan servicers like Countrywide because the servicer becomes a middleman between the borrowers and the people who bought their loans.

When the borrower misses payments, as a record number of Countrywide's borrowers are doing now, these contracts require that the company advance those missed payments to investors until it's clear that the amounts won't be recovered.

With Countrywide having a $1.5-trillion servicing portfolio, that puts tremendous strain on its cash flow, Cannon said.

There are a lot of weird incentives here. A company like Countrywide generally doesn't want to foreclose on underwater homes, on the other hand if they have cash-flow problems they'll need to push those foreclosures through so they can stop making payments.