Countrywide concerned about pay-option loans

Posted Mar 4th 2008 12:22PM by Zac Bissonnette
Filed under: Bank of America (BAC), Countrywide Financial (CFC), Housing

During the days when subprime lending wasn't widely seen as a quagmire, pay-options mortgages were popular. Here's how it worked: "homeowners" (I will hence forth put "'homeowners" in quotes when I'm referring to situation where the borrower owes more on the home than it's worth) could choose to make a smaller monthly payment than normal, and then tack the difference on at the back-end of the loan. This came in very handy for borrowers looking to travel to Cancun or invest in plasma-screen televisions.

Now, Countrywide Financial (NYSE: CFC) is worried about these negative amortization loans. At the end of December, the company had $29 billion in pay-option loans, with $26 billion of that amount having increased beyond the original loan amount. People with pay-option loans are exercising that option and will likely continue to do so -- the housing downturn means that you have to think that the increased loan balances are leaving a huge chunk of those subprime borrowers upside down.

Here's the best part: 81% of those loans were made to borrowers who provided little or no documentation of income.

I wonder how much of this carnage Bank of America (NYSE: BAC) was aware when it decided to buy into the company. Obviously it sees value but I can't help being skeptical: Given its status as a poster child of pathological stupidity, does the Countrywide brand really have any value at all?

Tags: BAC, Bank of America, BankOfAmerica, CFC, Countrywide Financial, CountrywideFinancial

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Reader Comments (Page 1 of 1)

3-04-2008 @ 12:51PM

David Huston said...

Hmmmmmmmmmmm. First, if a person buys a home, she/he becomes the title holder, and thus the homeowner, regardless of its equity. Second, Countrywide might have stumbled onto something: the pay/optional homeowners won't pay, and their homes won't be foreclosed upon, and (given enough time) home prices will recover. At a minimum, today they won't have to join the legions of homeless who don't have the option to pay less.

3-05-2008 @ 6:07PM

Americas Watchdog said...

Hi Zac;

We have the National Mortgage Complaint Center & we have been warning about "pay option mortgages" for years. But now CFC saying that they had no idea that pay option arms are a "problem" & "now they are concerned" is a good one. This is almost as funny as CEO Angelo going on CNBC last February saying "Countrywide is a great company & we are well positioned"......that is, as he was dumping shares in his own company.

Actually the pay option mortgage product exposure is not just limited to CFC. WA MU and Wachovia also went heavy on this insane mortgage product. WA Mu may not survive as would be the case for CFC, had not Bank of America & Ken Lewis stepped in. (we are not sure if Ken stepped in---or stepped in it?-----we are inclined to think he stepped in it---whew that smell)

What is amazing about Wachovia is they are still running TV ads promoting this insane product.

And its just when you thought Wall Street & banks could not get any more foolish.