A fairly sophisticated money guy I know, who regularly pulls down nearly 7 figures a year, sent me an interesting email this morning.

He wanted to know what would happen to the mortgage on his vacation home if Countrywide Financial should file for bankruptcy. Countrywide gave him his mortgage.

The answer, “Nothing,” may be reassuring to him. He has had his home for more than 5 years, and undoubtedly Countrywide doesn’t even own his loan anymore. They probably bought the servicing rights. But if he’s asking the question, imagine how the average homeowner (or worse, home buyer!) feels right now.

Right now, Countrywide doesn’t have a problem with cash coming in each month (well, they do, but let’s exclude their sub-prime and exotic mortgage loan payments for the moment). Instead, they have a problem with liquidity — getting enough financing on Wall Street to continue making loans to the thousands of folks who want them.

Buying up a bunch of Homebanc branches in the last few weeks, in order to gain market share going forward, probably seemed like a smart idea. But then again, that was last week. This week life is different. A bond trader I know on Wall Street says he thinks bankruptcy seems likely, given how no one wants to lend Countrywide any money. The Wall Street Journal concurs.

Is this a done deal? Watch for continued 3-digit drops in the stock market, and increased volatility, if that’s how this deal plays out.

August 16, 2007