Countrywide, Option ARM's & Related
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"I realized I was talking to a group...that had never seen in their adult life real-estate values go down."- Angelo Mozilo, CEO of Countrywide
Countrywide's New Scare
Option ARM' Delinquencies Bleed Into Profitable Prime Mortgages
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.".....
.....The deteriorating performance of option ARMs is evidence that lax underwriting that led to problems in subprime loans is showing up in the prime market, where defaults typically are minimal. Challenges could grow, as from 2009 to 2011, monthly payments on some $229 billion of option ARMs will be adjusted to include market-rate interest and principal, according to Moody's Economy.com......
......By 2005, option ARMs accounted for $238 billion of loan volume, or about 8% of loans originated that year, according to Inside Mortgage Finance, a trade publication. At Countrywide, these loans accounted for $93 billion, or 19%, of the company's loan volume by 2005, making it the top option ARM lender that year.
These mortgages can be highly profitable. Once the short teaser-rate period ends, the interest rate typically is higher than on other types of loans for a similar borrower. Investors were willing to pay more for securities backed by option ARMs than for those backed by traditional mortgages and guaranteed by Fannie Mae and Freddie Mac
Broker commissions on an option ARM ranged from 1.75% to 2.5% of the loan amount last year, estimates Tom LaMalfa, a managing director of Wholesale Access, a mortgage-research firm in Columbia, Md. That compares with 1.48% for standard fixed-rate mortgages and 1.88% on subprime mortgages.
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.
Mr. Mozilo (CEO of Countrywide) told investors in September 2006 that he was "shocked" so many people were making the minimum payment. He called a sampling of borrowers to find out why. The "general answer...was that the value of my home is going up at a faster rate than the negative amortization," he said. "I realized I was talking to a group...that had never seen in their adult life real-estate values go down."......
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"I realized I was talking to a group...that had never seen in their adult life real-estate values go down."- Angelo Mozilo, CEO of Countrywide
Countrywide's New Scare
Option ARM' Delinquencies Bleed Into Profitable Prime Mortgages
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.".....
.....The deteriorating performance of option ARMs is evidence that lax underwriting that led to problems in subprime loans is showing up in the prime market, where defaults typically are minimal. Challenges could grow, as from 2009 to 2011, monthly payments on some $229 billion of option ARMs will be adjusted to include market-rate interest and principal, according to Moody's Economy.com......
......By 2005, option ARMs accounted for $238 billion of loan volume, or about 8% of loans originated that year, according to Inside Mortgage Finance, a trade publication. At Countrywide, these loans accounted for $93 billion, or 19%, of the company's loan volume by 2005, making it the top option ARM lender that year.
These mortgages can be highly profitable. Once the short teaser-rate period ends, the interest rate typically is higher than on other types of loans for a similar borrower. Investors were willing to pay more for securities backed by option ARMs than for those backed by traditional mortgages and guaranteed by Fannie Mae and Freddie Mac
Broker commissions on an option ARM ranged from 1.75% to 2.5% of the loan amount last year, estimates Tom LaMalfa, a managing director of Wholesale Access, a mortgage-research firm in Columbia, Md. That compares with 1.48% for standard fixed-rate mortgages and 1.88% on subprime mortgages.
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.
Mr. Mozilo (CEO of Countrywide) told investors in September 2006 that he was "shocked" so many people were making the minimum payment. He called a sampling of borrowers to find out why. The "general answer...was that the value of my home is going up at a faster rate than the negative amortization," he said. "I realized I was talking to a group...that had never seen in their adult life real-estate values go down."......
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Comments
I bet the situation is very similar at WAMU. I've read articles saying much of their profit for the past few quarters has been driven by recognition of income on underpaid Option-ARMs. I seriously doubt their loan quality is much different than that of Countrywide. I expect to see them back at the confessional soon as well.
DJO - related to what you were saying about WaMu
Found amongst the footnotes of "Selected Financial Information"
Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $345 million, $344 million and $296 million for the three months ended September 30, 2007, June 30, 2007 and September 30, 2006.
Form 8-K, 17 October 2007, Washington Mutual, Inc
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http://about.countrywide.com/PressRelea ... 766&ir=yes
Their 06/30 Balance sheet shows "Accumulated negative amortization(from original loan balance)" for Pay-Option Arms
12/31/06 $653,974
06/30/07 $941,980
So it looks like $288million rolled to earnings in the first six months of the year. that is less than half of what WAMU shows. Didnt see the september results, I assume they are probly out there -but it looks like this one could be biting the @ss of our hometown banker.
Also interesting, if I am reading CFC's statement correctly, is the 178% increase from $7,007,786,000 (Dec '06) to $19,,495,594,000 (June '07) of "Available-for-sale" Mortgage Backed Securities. Wow! I attribute that increase to secondary mortgage market investors being spooked.
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you got me curious. I scanned that thing pretty closely. These MBS show up in the "INVESTMENTS IN OTHER FINANCIAL INSTRUMENTS" section of the balance sheet, not "Mortgage loans held for sale " as one might expect if they came from their own operations.
In addition, if you look at their ~$123B of loan orginations, they resold $117B and show ~$3.5B in the "Mortgage loans held for sale" so it there is not $12B in excess loan production that is obvious
So it looks like these are some sort of 3rd-party MBS? Not sure where they came from.
Possibly they reflect previously sold MBS that have been put back to them by the original purchaser?
Good observations. Like you say, the source for these additional MBS's isn't clear. I think it would be significant to determine if a trend exists with respect to their "available for sale" MBS's. Their next statement should prove enlightening.
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Countrywide, Q3 Earnings
Countrywide CEO: More trouble ahead for housing market
.....Asked if the worst was over, Mozilo said, "No. I don't think so."
Last week, Countrywide reported a $1.2 billion loss in the third quarter, but its shares soared after the company said it expects to be profitable this quarter and next year......
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The CEO of Countrywide actually said this !?!
Mr Mozilo blamed the subprime crisis on "easy, low-cost money" that drove up house prices and "exotic loans and diminished underwriting standards".
Zero US effort' on housing slammed
Angelo Mozilo, chief executive of Countrywide Financial, on Monday strongly criticised the US government's response to the collapse of the subprime lending market, saying there had been "zero" effort to tackle the crisis.
"In terms of tangible effort from the federal government...there has been no programme, no federal effort, no legislative assistance – zero," he said.
He criticised the US government's refusal to lift caps on the size of loans that can be bought by Fannie Mae and Freddie Mac, the government-sponsored entities created to promote affordable housing.
Fannie Mae and Freddie Mac are prohibited from buying loans worth more than $417,000. Failure to increase this limit would continue to depress the property market and keep first-time buyers out of the housing market, particularly in California, where property is expensive, said Mr Mozilo.
"First-time buyers cannot buy a home now. Only the wealthy and privileged can afford to buy homes," he said.
Mr Mozilo's stock sales are being probed by the Securities and Exchange Commission as part of an examination of trading by executives at subprime lenders. He has sold more than $130m worth of Countrywide shares since beginning a stock-sale plan at the end of last year.....
......Speaking at the Milken Institute's State of the State conference in Beverly Hills, Mr Mozilo blamed the subprime crisis on "easy, low-cost money" that drove up house prices and "exotic loans and diminished underwriting standards".
"People stretched themselves," he said, though he implied that the blame for the crisis should be shared.
"It takes a village to do this. As long as [house] values keep falling, the subprime situation will get worse.".....
.......Countrywide, the largest US mortgage lender, last week announced a $1.2bn third-quarter loss, reflecting $2.9bn of mortgage-related writedowns, credit losses and restructuring charges.
But shares in the California-based lender rose sharply after it said it would return to profitability this quarter.
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this was added in an edit...
It now looks like he's pumping up the stock, even though all objective evidence contradicts what he's saying. I suspect the financial projections prepared by his staff tell a whole different story.
Even before Sarb-Ox this would have landed him in trouble. I can't wait for the perp-walk. He's going to look like a jack-o-lantern in his orange jumpsuit.