Countrywide to Disclose More -- but Not Happily

By Julavits, Robert | American Banker, February 22, 2002 | Go to article overview

Countrywide to Disclose More -- but Not Happily


Julavits, Robert, American Banker


Like Washington Mutual Inc., Countrywide Home Loans may disclose more about how it hedges its servicing portfolio, its chief executive said.

But Countrywide is already disclosing more than Wamu, he said. And he bridled about being pressured by reaction to the Enron Corp. scandal.

"I think that somehow ... 'derivative' is being held to be a dirty word, or something mysterious," said Stanford L. Kurland, who is also the president of the Calabasas, Calif., company. "It's just a bad rap" because of Enron.

Enron has cast a pall over complex financial transactions, particularly derivatives and off-balance-sheet hedging. And mortgage servicing rights, implicitly complex and hard to put a value on, have come under extra scrutiny.

But for the top mortgage players, holding such rights and hedging against them -- often with financial derivatives such as swaps and rate floors -- are widely considered crucial.

In an interview Wednesday, Mr. Kurland insisted that servicing and hedging are "definable and understandable." Still, he conceded, his company could do a better job of disclosing its activities.

"We are examining all of our disclosures and ... materials to see if we can make it clearer," he said. Analysts who follow the company are being consulted, he added.

One option, Mr. Kurland said, would be to show the "sensitivity of the hedge position" and servicing assets to interest rates.

He insisted, however, that Countrywide's derivative trades are nothing like Enron's.

Enron created derivatives that were "not marketable transactions," he said, but those Countrywide uses are marked to market every day. "There's nothing mysterious about their value, nor is there anything mysterious in terms of how they react," Mr. Kurland said. "They're just derivatives that perform in a certain manner based upon changes in interest rates."

Thomas Vartanian, the chairman of the financial services practice at the Washington law firm Fried, Frank, Harris Shriver & Jacobson, said a company's doing something complex does not prove it is doing something wrong.

"It can be very damaging to overreact and simply try to characterize a whole range of transactions as Enron-like," he said. "Modern portfolio management requires sophisticated hedging. If you didn't use sophisticated hedging, you'd be criticized by regulators."

As for servicing rights, Mr. Kurland said overly burdensome accounting is partly to blame for making them hard to explain to Wall Street.

The interest sensitivity of mortgage stocks is proof of that difficulty. Mortgage companies hedge precisely to minimize the effect of interest rates on their business, but investors evidently reject the argument that huge servicing portfolios make up for drops in loan volume.

Robert N. Husted, a principal at Mortgage Industry Advisory Corp., agreed -- and said accounting rules may be to blame. "If you picked up two different financial statements, unless you're really given a lot of information, you can't really come up with any conclusion about the risk or effectiveness of a given hedging strategy," he said. …

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