Shortly after the news of US mortgage lender HomeBanc Corp having filed for Chapter 11 bankruptcy protection, after agreeing to sell most of its assets to Countrywide Financial Corp, and shut shop (See: US mortgage lender HomeBanc files for bankruptcy) shares in Countrywide Financial, the biggest US mortgage lender, fell 13 per cent on Wednesday on fears that it could face bankruptcy if conditions deteriorate.

Merrill Lynch has advised its clients to sell shares in the lender, saying, "If liquidations occur in a weak market, then it is possible for Countrywide to go bankrupt." The warning came a day after Countrywide announced that foreclosures and mortgage delinquencies had risen in July to their highest levels since early 2002.

Several home loan providers have gone bust while many others are struggling with rising defaults, the refusal of investors to buy loans they make, and the unwillingness of banks to extend credit.

Countrywide suffered growing defaults as rising interest rates made it harder for people to pay their mortgages. Its shares fell $3.17 to $21.29, which was its biggest fall in a single day since the crash of 1987 and its shares have fallen 50 per cent so far this year.

There was speculation in the market that Countrywide had been facing difficulties selling short- term debt, which would make it difficult or unacceptably expensive for the lender to run its day-to-day operations.

On 24 July, Countrywide slashed its full-year forecast after reporting a 33 per cent fall in three-month earnings to $485.1 million, its third consecutive fall. For the full year, it has cut its full-year earnings outlook to between $2.70 and $3.30 per share, as against $3.50-$4.30 in April and $3.80-$4.80 in January.

So far, the lender has cut 108 jobs and tightened up its lending guidelines and cut back on the sub-prime lending that has caused default problems for mortgage lenders.