Countrywide’s New Scare

November 13, 2007

Subprime mortgages aren’t the only challenge facing Countrywide Financial Corp., the nation’s biggest home-mortgage lender. Some loans classified as prime when they were originated are now going bad at a rapid pace.These loans are known as option adjustable-rate mortgages, or option ARMs. They typically have low introductory rates and allow minimal payments in the early years of the mortgage. Multiple payment choices include a minimum payment that covers none of the principal and only part of the interest normally due. If borrowers choose that minimum payment, their loan balances grow — a phenomenon known as “negative amortization.”

Countrywide first offered these loans in 2003 and quickly became a leader in this profitable and growing part of the mortgage market. Mortgage brokers liked the higher commissions and borrowers were drawn to low payments. As lending standards loosened, more of these loans included less-than-full documentation.

An analysis prepared for The Wall Street Journal by UBS AG shows that 3.55% of option ARMs originated by Countrywide in 2006 and packaged into securities sold to investors are at least 60 days past due. That compares with an average option-ARM delinquency rate of 2.56% for the industry as a whole and is the highest of six companies analyzed by UBS.
The increase in overdue payments partly reflects a decline in home prices in much of the U.S., which has made it more difficult for borrowers to refinance or sell their homes. In addition, at Countrywide, “they were giving these loans to riskier and riskier borrowers,” says UBS analyst Shumin Li.

Among option ARMs held in its own portfolio, 5.7% were at least 30 days past due as of June 30, the measure Countrywide uses. That’s up from 1.6% a year earlier. Countrywide held $27.8 billion of option ARMs as of June 30, accounting for about 41% of the loans held as investments by its savings bank. An additional $122 billion have been packaged into securities sold to investors, according to UBS. Read More.