Countrywide Financial (NYSE:CFC) shares dropped over 20 percent yesterday after the company filed its quarterly 10-Q statement with the SEC containing a modified "risk factors" section. The regulatory filing indicated that the company was facing "unprecedented disruptions" in debt and mortgage-finance operations that could hurt future earnings and the company's financial condition.

The largest U.S. home mortgage lender by volume said that reduced demand from investors for its mortgage securities is causing them to retain more loans instead of selling them. Perhaps most interestingly, the company openly admitted that it has no idea where the situation is headed or how it could affect the company in the future. The reduced demand from investors means that prices are being pressured down despite fundamental valuation. As a result, it is nearly impossible to accurately value the mortgage portfolio.

As a result, Countrywide said that it transferred $1 billion of its subprime mortgages from "held for sale" to "held for investment" while also marking down the value of the loans to $800 million. Meanwhile, evidence is piling up supporting the notion that this market is in trouble. Payments that were 30 days late spiked to 20% from 14% last year while delinquency rates spiked to 3.7% from just 1.5% a year earlier.

In the end, if this credit crunch passes by and people end up continuing to purchase subprime mortgage loans, it could pay off nicely for Countrywide. However, predicting where the market is headed at this point is rather futile as the problems seem to continue to worsen.

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