Option Arm & REO Problems At Countrywide

Option ARM Delinquencies are Countrywide's New Scare.

Subprime mortgages aren't the only challenge facing Countrywide Financial Corp., the nation's biggest home-mortgage lender. 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.

My comment: Be prepared for a massive rise across the board on option ARM problems. Another good place to start looking for these problems is at BankUnited. See Disaster At BankUnited for massive increases in negative amortizations stemming from borrowers making minimum payments less than interest due.

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.

It now appears that many borrowers who moved into option ARMs were attracted by the low payments and may have been staving off other financial problems. More than 80% of borrowers who are current on these loans make only the minimum payment, according to UBS.

My comment: this stems from making loans to people who never really qualified for the loans. Option ARMs are history, but the damage has been done.

Countrywide says its potential losses on option ARMs are partially covered by insurance.

My comment: Exactly how good is that insurance? At some point a major insurance company or reinsurance company is going to blow up and cause a cascade of defaults.

Of the option ARMs it issued last year, 91% were "low-doc" mortgages in which the borrower didn't fully document income or assets, according to UBS, compared with an industry average of 88% that year. In 2004, 78% of Countrywide's option ARMs carried less than full documentation.

My comment: Right now the 2005 and 2006 vintages are the worst performing loans. However as home values continue to plunge, loan to values even on earlier loans are going to soar. People (and banks) that thought they had a cushion will find out their safety net is simply gone.

Countrywide also allowed borrowers to put down as little as 5% of a home's price and offered "piggyback mortgages," which allow borrowers to finance more than 80% of a home's value without paying for private mortgage insurance. By 2006, nearly 29% of the option ARMs originated by Countrywide and packaged into mortgage securities had a combined loan-to-value of 90% or more, up from just 15% in 2004, according to UBS.

My comment: There are only two words to describe this. Those words are greed and stupidity. The only other possibility is that Mozilo knew exactly what he was doing and was driving up share price based on short term unsustainable growth.

In one California branch office, employees could win prizes, such as a trip to Hawaii, for selling the most option ARMs.

My comment: See Countrywide Reaps What It Sowed for a look inside its lending practices.

We Don't Want It. You Keep It.

To prevent foreclosures and REOs, Countrywide Launches Program to Refinance or Modify Mortgages.

Countrywide Financial Corp., the nation's largest mortgage lender, said Tuesday it will begin calling borrowers to offer refinancing or modifications on $16 billion in loans whose interest rate is set to adjust by the end of 2008. Its shares fell more than 4 percent.

"Unprecedented times call for unprecedented remedies," Countrywide President and Chief Operating Officer David Sambol said in a statement. "We are determined to assist borrowers who have the willingness and wherewithal to remain in their homes, but need a little help to do it."

[Translation provided by Kevin Depew in point #3 of Five Things: "This House is Your House. Seriously, We Don't Want It. You keep it]


The Calabasas, Calif.-based company said it would reach out to borrowers who are current on their loans but are facing an imminent rate reset to discuss options. Countrywide said it would refinance about $10 billion in loans and modify another $4 billion.

It also plans to contact borrowers of some $2.2 billion who are late on their loans and having trouble paying because of a recent rate reset. In total Countrywide's plan would reach out to about 82,000 borrowers for some kind of relief.

So far this year, Countrywide has completed about 20,000 loan modifications -- a figure that represents less than 5 percent of the more than 500,000 loans the lender reports were behind in payments as of last month.

The figure amounts to about 24 percent of the roughly 82,000 loans the company said were in foreclosure as of September.

500,000 delinquent loans & 82,000 foreclosures

Let's consider the REO (Real Estate Owned) situation.

The Countrywide Foreclosures Blog is reporting Countrywide Financial REO's Off The Charts! at 195,495. All 195,495 listings are posted on the blog, state by state and the source was Countrywide's Owned Properties website.

That is a stunning number but it is either way off base or Countrywide is not fessing up on the number of foreclosures. Officially, Countrywide says there are 82,000 foreclosures.

Countrywide has since modified its version of the data and the official total is back in the 13,000 range where it was a couple of days ago. Given 82,000 admitted foreclosures, 13,000+- REOs seems on the low side.

Some of the blog comments are interesting.

Go Browns:
I just did a random sample on properties they're advertising as "bank owned" with no broker assigned in my state. Most are old REOs that have since been sold to a new party that is NOT in foreclosure, at least not in the public record. This appears to be a screw up. big shocker there....

Bubble Sitter:
A few of the houses on the goof list are ones I have seen and they have sold. Many are ones currently for sale and have a broker assigned. The ones with "no broker assigned" may be unsold additions to the list. I do know of a couple of houses in foreclosure with CFC that are not on the list! My conclusion at this point is the 89,000 REO listed with no broker assigned are going to be on the market soon.

Anonymous:
My home is definitely REO by Countrywide. It's already gone through the foreclosure process. It never appeared on the Countrywide site and still hasn't as of today even though the foreclosure happened months ago. I think it's going to end up at a second auction with one of the brokers soon. Long and short of it they are underreporting their foreclosures and I'm proof of that.

Anonymous:
***UPDATE***
Countrywide is playing with the numbers. My home is listed as of last night and lists the correct realtor whose sign was in the front yard. Today and every other day it's not there, so they are 100% playing games with their data.

I went ahead and checked about 5 other listings. Several are accounts they serviced that have foreclosed and are not re-sold, 1 was like mine.

Whatever got added last night, I'm going to guess at least 5-10% are legitimate foreclosures not reported. Worse, some are like mine that have NEVER been reported and are 1/2 a year old.

Anonymous:
I visited three Yorba Linda properties mistakenly (?) posted on CFC's website on 10/23, and observed all three are vacant properties in various states of distress compared to owner occupied properties. These properties were never listed as CFC REOs prior to 10/23.

Is 195,495 an accidental master list posting of foreclosures for all the properties Countrywide services? Are some of the listings part of the bailout program?

Whatever the answer is, Countrywide made a mistake somewhere. Countrywide has done nothing but make mistakes for years, so another one on the pile should not be so surprising.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/