It’s amazing to think in terms like this. Nowadays we all have foreclosures dotting, peppering, or downright plastering our neighborhoods. We have grown accustomed to terms like ‘loan modification’ and ‘short sale’.

But if we looked at the number of foreclosures owned by just one entity such as Fannie Mae, the aggregate appearance is just pitiful. As Reuters put it:

Fannie Mae said on Monday that the housing finance company has taken over so many homes through foreclosures that if it were a town, it would be bigger than Dayton, Ohio.

It is also on track to pass Richmond, Virginia, this year in terms of the number of houses, and would crack the top 100 municipalities as ranked by DataPlace, a web-based source of housing and demographic data.

As a record number of Americans lose their homes during the worst housing crash since the Great Depression, Fannie Mae now owns 67,519 homes.

The company, which the U.S. government placed in conservatorship in September following record losses, said in its third-quarter earnings that its inventory of foreclosed properties rose by nearly a quarter in three months and more than double from a year ago.

That puts it on par with cities such as Chattanooga, Tennessee, and Providence, Rhode Island, in terms of number of households.

The company is working hard to clear the inventory. On its website it lists dozens of homes in Detroit selling for next to nothing. One listed at $1,900 entices buyers with “100 percent financing,” a ploy with what might be described as a tarnished reputation in the United States.

Yet it seems to be working. A two-bedroom, 1,900 square foot house on Seminole Street is listed as “under contract.” The price? $50.

Enter the world’s largest Ghost Town. Apply for your own zero-down, low-interest loan today! The home of other’s dreams can be yours today!

And if things keep up, someone else’s tomorrow.

Tags: Fannie, Mae, foreclosure, loan, modification

During a recent conversation, I was shocked to find that so many people were so far down in their 401k year-to-date totals. Having withdrawn funds and searched for a better way to invest a couple years ago, I’ve been somewhat sheltered from the hammer that’s smashed a lot of dreams for those either facing retirement, or hoping to in the near or near-distant future.

CDs and ING Direct “Orange” savings accounts have returned reliable returns for me, even if they paled in comparison to the people earning 10-15% or more on their 401k plans. Reading up on insurance investing (via “EIUL” plans or Equity Indexed Universal Life) and trying to decide whether a non-matching 401k would be best or something less conventional would be better, I’ve had my money in limbo so to speak.

It seems that the time I spent losing out on thousands in the market, has come to pay itself back in gold after the adjustments hits, the Dow crashed, and the bailouts started picking up steam.

But just like those who were shocked that a house could… LOSE value… I was no different when it came to 401k performance. I would have figured the smart guys in the expensive chairs had some backup plans to mitigate heavy losses, but it seems that my confidence was misplaced. My 3% interest on my savings account started looking very good compared to some of our below commenters.

So have you lost? Have you gained? How is the market treating your 401k, and will it affect retirement in your immediate future?

Tags: 401k, investing, economy, bailout, crash

However, what so many are forgetting about is that the crux of the issue regarding house pricing and the worth of derivatives based on home mortgages still revolves around one factor that is fixed and cannot easily change: Inventory.

If the goal is for house prices to stabilize so that folks so upside down on their homes they end up walking away will be able to stay in their homes, you won’t get there as long as there are empty homes littering every neighborhood out there.

If the plan works, it will attack the central cause of American economic distress: the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

“It’s easy to forget amid all the fancy stuff — credit derivatives, swaps — that the root cause of all this is declining house prices,” Mr. Blinder [Binder is an economist at Princeton and a former vice chairman of the board of governors at the Federal Reserve] said. “If you can reverse that, then people start coming out of their foxholes and start putting their money in places they have been too afraid to put it.”

…

Yet these institutions are deeply intertwined with the American economy. When the financial system is in danger, it stops investing and lending, depriving people of financing for homes, cars and education. Businesses cannot borrow to start up and expand. [NYTimes]

The credit crunch recently has definitely been a problem. With it being harder to make money selling a mortgage off to other markets, banks are less apt to help people with money to purchase that house. However, as we realize what caused this, we’re also starting to see an aversion to 100% no-money-down lending. That will not change for the most part. While banks may be willing to lend again, they still won’t repeat at least one mistake and lend to those with no money to put into the mortgage loan.

With inflation poised to explode as a result of this recent bailout, people aren’t making more to compensate, and thus the pool of folks obtaining mortgage loans will continue to decrease. The homes on the market that are currently empty will not be filled up by magic buyers. The fundamental problem is that many people today cannot afford their first house if it means having to put money down.

It is important to remember that at the peak of the housing market, there were enough houses built for every everyone–owner-occupiers, speculators, and even their dogs–and no one worried much about the credit worthiness of the dog. In addition, even though builder activity has slowed greatly– they continue to build.

…

A number of factors have slowed the housing market. One, a slowing economy and rising unemployment has slowed demand. Household formation has slowed. Also, we need to remember that the housing market isn’t the only consideration- there is also the commercial market to consider. The demand for commercial space has slowed as well. Two, lending standards have tightened- not only are the speculators and the dogs out of the market, but many owner-occupiers who couldn’t afford homes are in trouble also. Three, and I believe most importantly, there has been a fundamental shift in the way Americans view their homes. It is no longer an “ATM-retirement account-road to riches”. It is now a place to live. Granite countertops are no longer an “investment.” “McMansions” no longer make sense. This is causing a fundamental shift in the way Americans use their money and their credit.

The goal of the bailout is purportedly to allow credit-worthy borrowers access to the capital they need. Even if that goal is achieved, remember that our pool of homes was built for both the credity-worthy and the uncredit-worthy. There is no longer a financing plan in place for the speculators, their dogs, and the uncreditworthy. Even many of those who were formerly creditworthy are losing jobs and are facing foreclosure. Those homes are going to remain vacant and continue to go into foreclosure- and that will continue the downward pressure on prices. For commercial interests, even the credit-worthy are going to have a hard time justifying projects in glutted markets.

Home prices WILL continue to fall- this bailout will not stabilize the market- and I doubt it will even slow the decline. The same will hold true for commercial projects. Both of these have been built to excess. In an economy where businesses are failing and downsizing, it is clear that there will be a huge excess capacity of commercial space. All of this will weigh on the balance sheet of lenders.

This bailout is a bandaid – and an expensive one. [twist]

This point isn’t lost to everyone. On CNN the other day, Ron Paul exclaimed how this $700 billion bailout won’t be enough and we’ll see the government crawl back for their next fix. Being already invested, like with the Iraq War, we’ll give it to them because it’s too late to turn back.

When it’s worse to own a home than rent one, it’s time to let the market work and let the foreclosure process happen. If an limb has gangrene, you can’t fix it by putting some Neosporin on it. Sometimes the truth hurts and we need to be prepared to deal with that.

This was then:

“First Magnus Financial Corp. still is not sending out paychecks to its former employees. But the Tucson-based mortgage lender announced it is creating an assistance fund of more than $1 million to ease the burden.”

“In a news release, the company said paychecks have been delayed because its accounts were frozen by investors that provided capital to First Magnus to make loans. The company was forced to shut down operations last week because it could no longer sell the loans it originates on the secondary market.”

“Earlier, the company told employees to expect their checks by mail rather than direct deposit. Under both state and federal law, checks were due to employees on Monday.”

Seems things have caught up with them. Just released today, this is how things are looking for them now:

Defunct mortgage lender First Magnus Financial Corp. broke a federal law by providing incentive payments to mortgage brokers, according to a report.

The U.S. Department of Housing and Urban Development’s report issued July 14 said Tucson-based First Magnus violated the Real Estate Settlement Procedures Act by providing volume-based incentives for Federal Housing Administration-insured loans.

HUD found that First Magnus paid $58,571 in incentives from Jan. 1, 2003 to Dec. 31, 2005 to seven brokers for the origination of 169 FHA-insured mortgages totaling more than $24 million.

First Magnus collapsed and filed for bankruptcy during the credit crunch last August. It is currently being liquidated.

Company executives have founded a new company, Stonewater Mortgage Corp., that is operating out of First Magnus’ old headquarters in Tucson.

No doubt, it likely came as a surprise to those who have been involved with the lender…

Tags: tucson, first, magnus, mortgage, lender, illegal, federal, law

And for the most part they were right. But the economy didn’t stabilize (even for agents) as hoped, mortgage rates were already too low, and many mortgage loans were wrapped into tricky packages like Option ARMs and other types of non-standard formats, some that enticed buyers solely on discounts. As these events took their toll, it was only a matter of time before the foreclosure creep started moving inland affecting larger metro areas of Phoenix, Tempe, and other long established markets.

Foreclosures across metro Phoenix number 16,647 for the first half of the year compared with 9,966 during all of 2007 and 1,070 in 2006.

Last summer, when foreclosures were just starting to climb, the highest rates of home defaults were found on the Valley’s more affordable fringes. The problem worsened, hitting a wider swath of homeowners who bought at the peak of the housing boom through subprime loans. Although some of the Valley’s fringe areas such as Surprise, Anthem and Buckeye continue to have high foreclosure rates, the problem has moved inward.

“It has become more of an equity problem than a subprime problem,” said Tom Ruff, a real-estate analyst with Information Market.

An equity problem is exactly what this is too. Many new home builders immediately started undercutting recent buyers by adding large incentive deals to buy new rather than slightly used. Added to price cuts, there was no way for a new home buyer to sell their home without already having put in 20% or more down as a down payment or taking a loss on the house.

Many of the homes going into foreclosure were bought or refinanced during the peak of the housing boom in 2006, according to property records. Home prices are down almost 30 percent from that time, so many people struggling now owe much more than their home is worth. The median resale price today is $210,000.

Notice of trustee sales, or pre-foreclosures, also continue to climb. There were 35,111 pre-foreclosures filed in Maricopa County through July. That compares with 30,166 for all of 2007. When pre-foreclosures stop climbing, foreclosures could peak a few months later, Ruff said.

Other parts of the country have already hit their foreclosure peak.The troubling trend of homeowners walking away from homes they are upside down on also persists and is pushing up foreclosure figures in the Valley, according to real-estate agents and housing counselors. These are homeowners who may be able to make payments but don’t want to continue to pay a mortgage for $50,000 to $100,000 more than their house is worth now.

As long as foreclosures continue to rise, home prices are likely to fall.

Indeed, home prices are starting to fall. But there are some very important things to remember about buying a home in this new market. Many homes were picked up off the foreclosure block, in an auction, or on the other side of a short sale. Many of these homes have sat dormant for months if not years, and may have problems that don’t appear obvious on first glance. One more reason a home inspection pays for itself in today’s market. Buyers would be wise to make sure they have something to cover their rears when something breaks. It’s no secret the banks won’t be there. They’re having their own problems.

Tags: foreclosure, arizona, mortgage, loans, prices

It’s official: Bank of America has acquired Countrywide Financial, marking the completion of an audacious rescue of one of the most troubled lenders in the United States. The deal will expand Bank of America’s reach in the mortgage business — but, in the current environment of rising defaults and delinquencies among American homeowners, the expansion obviously comes with serious risks.

Countrywide was among the largest lenders in California and Florida, two states hit especially hard by the housing downturn. Both states have sued Countrywide alleging it engaged in unfair and deceptive lending practices. What’s more, Countrywide has a big portfolio of home equity lines of credit, which some fear will be hit with a rash of defaults as borrowers run short of cash.

Some analysts had urged Bank of America to abandon the deal. And judging from the swings in Countrywide’s stock in the six months since the deal was announced, the markets have been questioning Bank of America’s commitment to buying it.

And yet Kenneth Lewis, Bank of America’s chief executive, has been resolute that the purchase would go through.

One of the biggest problems is that while Bank of America has said that the combined mortgage branch will no longer originate subprime mortgages and stop making Option ARM loans (which can be deadly), the amount of those existing loans it absorbs from Countrywide put BofA at considerable risk.

Wachovia recently made an unexpected announcement that they were removing the pre-pay penalty from ALL Option ARMs implying that they see the massive liability to be great enough to forgo profits that can be made on it.

It may seem like a small step, but it’s a rather significant one for a bank like Wachovia.

With BofA mum on any details of it doing the same, we’re lead to believe that they’re chasing the dollar, even if the dollar is veering every close to that gigantic cliff off in the distance. Bank of America might be wise to consider evaluating its footing before getting too close.

The tremors from the existing banking and economic crisis are enough to move giants and it’s not a time to be caught with your pants down.

Bank of America is assuming that losses from lawsuits, now worthless Home Equity Lines of Credit, and Option ARMs, will be much less than they can make for the bank, so we’ll see if their bet pays off.

Tags: countrywide, option, arm, mortgage, bofa, lending

But the truth is that you still have to ask a few basic questions.

There are several strands to the market’s optimism about an early V-shaped economic recovery. Among these is the fact that, while certainly not good, the various US macroeconomic indicators, like GDP growth and employment, for the first quarter of the year were not nearly as bad as the Cassandras had led us to fear.

…

Valid as these arguments might be, they totally overlook the fact that the US economy is still being adversely impacted by the very same three negative shocks that caused the US economy to go into a funk in the first place. Worse still, it would appear that at least some of these adverse shocks are now intensifying.

What are those three negative shocks?

Are US house prices at the national level now not declining at an accelerating pace in a manner that has no precedent in the past seventy years?

Have not international oil prices dramatically risen to around US $125 a barrel, or approximately double the level that they were a year ago, thereby more than offsetting the US government’s tax rebate program?

And is the US financial system not still in the throes of what Paul Volcker has referred to as the “mother of all credit crises”, as vividly illustrated by the Federal Reserve’s recent still very gloomy survey of bank lending intentions?

There’s no doubting the first question. We’ve seen proof of that in all of our neighborhoods recently.

The second is a bit more convoluted and complex, but we end up noticing the end result of higher gas prices each time we make a trip to fill the tank.

And the third, is something that the Ron Paul campaign has continued to preach about for some time now. Whether you agree that the Federal Reserve should be eliminated or disagree – there’s no doubt that we’ve seen that lowering rates has NOT helped the situation.

Over the past year, declining home prices have already wiped out around US $2.5 trillion in US household wealth. They have also caused analysts to raise their estimates of the potential losses to the financial system from mortgage lending to US $500 billion. This has effectively put an end to the ability of households to use their homes as ATMs to finance their consumption spending. It is little wonder then that US consumer sentiment has plummeted to multiyear lows.

Sadly, the immediate outlook for US home prices is grim. At present an estimated excess inventory of around 1 million unsold homes is weighing heavily on the housing market. Compounding this situation of excess supply is the fact that private sector mortgage lending has all but dried up in the wake of large sub-prime mortgage losses.

Worse still, a rapidly increasing rate of foreclosures is substantially adding to supply on an already glutted market. And there is every prospect that the foreclosure rate will continue to increase as declining home prices boost the number of households with negative equity in their homes to around one third of all households by the end of the year.

…

To be sure, policy measures have been introduced to stimulate the economy in the form of a US$170 billion tax reduction package and Federal Reserve interest rate cuts totaling 3 1/4 percentage points. However, with the very real prospect of the US economy sliding deeper into recession, one might ask whether enough has been done to cushion the economy from America’s largest housing market and credit market bust since the Great Depression.

No matter how you slice it – this quote puts things into perspective. It’s a dog-chasing-tail scenario and for us to call things based on the change in one side of it, is anything but responsible:

“A very real danger of rapidly declining home prices for the US economy is that it raises the real risk of creating an adverse feedback-loop. For as declining housing prices reduce consumer wealth and add to the financial system’s losses, they push the economy further into recession. Yet as the economy slides deeper into recession, it exacerbates the downward spiral in housing prices.”

Tags: ron, paul, federal, reserve, credit, crisis, recession, tax, rebate, checks

JPMorgan Chase on Tuesday said it plans to transfer 420 customer-service jobs from the Valley to locations outside Arizona as part of an ongoing workforce-efficiency drive.

Affected workers will be eligible for other jobs with Chase, which has 475 openings in Arizona in retail financial services and other areas. Those who don’t land new jobs with the company will receive severance packages.

Chase, the largest bank operating in Arizona based on deposits, counts about 9,000 workers in the state.

Mary Jane Rogers, a Chase spokeswoman, said the transfers don’t stem from weakness in any particular business unit.

“We’re continually reviewing our business priorities looking for efficiency,” she said. Chase plans to transfer the jobs to Texas, Ohio, the Philippines, Missouri and Michigan – places where she said Chase has lower operating costs and excess capacity.

Chase plans to transfer the positions gradually through year-end and will give 60-day notices to affected workers, most of whom handle telephone calls from customers and perform account-maintenance and research work. The affected employees are among 2,000 workers at a Chase facility near Sky Harbor International Airport.

Efficiency. The most beautiful and horrible word all at once – depending on which side of it you’re on.

There were some colorful comments that seemed to hint at some more reasons behind this:

It’s hard to believe that Chase will have lower operating costs anywhere in the US. Arizona wages are so low, it must be almost the bottom. So I guess most of these jobs will go to the Philippines.

This is a hard blow to Arizona which needs these low level jobs urgently because of our failing schools turning out so many people who are not qualified for anything better.

“ongoing workforce-efficiency drive” in plain American English=kiss your jobs goodbye. Chase will pay $1.25 per day to Makmoud in the Philippines and put the labor cost savings in the executive’s year end bonus. Chase would hire illegal aliens for cheap if they could, at least the paychecks would stay in the Arizona economy.

YEAH MY SISTER IN LAW THAT WAS WORKING FOR CHASE SHE TOLD ME TODAY THAT THEY GOT NOTIFY THAT THEY WILL BE GETTING LAID OFF. SO NOW CHASE IS GETTING READY TO GO TO THE PHILLIPPINES AND INDIA. SO NOW WHEN PEOPLE CALL CHASE WE ARE HARDLY GOING TO UNDERSTAND IN WHAT THESE PEOPLE ARE SAYING. THANKS FOR NOTHING CHASE! SELL OUTS!!!!!!!!!!!!!!!!!!!!!

It’s called capitalism. Selling out is a key component. Chase axed the entire fitness center and staff at their building on University and Mill Ave in Tempe. I hear from a friend who is privy to inside info that job cuts will role out at that same Tempe location next month!

Chase has just lost my business. I will be closing my account by End of week. I was already upset with Chase and their poor customer service, but this just shows that I do not need to put my money into an organization that won’t support the local economy. Desert Schools… HERE I COME…

What part of capitalism don’t people understand?
The robber-barons that control the U.S. would kill half the working class if it added 2 cents per share to their dividend.

Carnegie once said about the poor “No problem with the poor. We can always hire half of them to kill the other half.”

Only a fool banks at a bank when a credit union is available.

I’ve worked at Chase over two years and they have been actively outsourcing IT jobs the entire time I’ve been there. There are now more IT employees in Bangalore than there are here in Phoenix. I have suffered through two years of dealing with incompetent bumbling Indians who have taken American jobs who can just barely speak English and have zero respect for America.

Wake up AZ this is the wave of the future in corporate America and Chase is no different. The name of the game is cut costs by offshoring every job you can and use the goodwill you generate in those third-world countries to get more business from them.

Oh, great! Now folks in the Phillippines will have access to my financial dealings. Why not! We’re global, eh! That’s why it’s so darned funny that we’re actually building a wall–a wall!!–along our southwestern borders. Absolutely nothing is restricted to the USA any longer. I understand that our passports–our passports!!–are done in Thailand or somewhere like that. As if no one in a Southeatern Asian country might like to immigrate to the U.S. So, where, might I ask, are we actually practicing “homeland security”? What a joke!

Time to start outsourcing our cash to different venues. It’s time to FORCE the banks to reveal a couple of things:

1. Who thier owners are…. BOFA (Bank owned [by] Foriegn (inappropriate term)) is owned by the Arabs, Bank One the same can be said.
2. Where thier main areas of employment are… Thanks to Bill Gates and the dumbing down of America more and more HB1 will be maintained, more foriegn workers.
3. Make them absolutely prove they will leave 99% of thier base operations in the USA.

And stop the administration and congress from letting these f’ing corporations write thier own ticket. If the idiots that call themselves congress can’t write bills to protect the American people them put them out on their asses. Concerning Bushes legacy, I really want the economy to fall flat on it’s ass while that B@$t@rd is still in office. His legacy will expose him and his ilk for the lying scum they are.

Chase sucks and is run by morons.

That aside, I think it’s funny when people direct their anger towards those in India. If someone was offering you a good job wouldn’t you take it?

We shouldn’t be mad at them rather we should be mad at corporate america.

Let’s face it, corporate america is sailing us down the river. Our main export now is jobs. This isn’t the fault of capitalism, it’s the fault of greed. That’s ok, their money won’t do them much good when all the poor people are trying to break into their house. Hitting someone with a hundred dollar bill doesn’t hurt too much. They’ll get theirs in the end but we’ll all get screwed along the way.

Be interesting to see how much this affects their bottom line once you factor in any resulting loss in customers.

Tags: Chase, Bank, lending, outsourcing, jobs, recession, depression, layoff

A record 18.6 million U.S. homes stood empty in the first quarter as lenders took possession of a growing number of properties in foreclosure.

The figure is 5.7 percent higher than a year ago, when 17.6 million properties were vacant, the U.S. Census Bureau said in a report today. The vacancy rate, the share of homes empty and for sale, rose to 2.9 percent, the highest since the bureau started keeping count in 1956. About 2.3 million empty homes were for sale, compared with 2.2 million a year earlier, the report said.

The worst U.S. housing slump in more than a quarter century is deepening as falling values encourage buyers to delay purchases in hopes of getting a better deal. The median U.S. home sale price may drop 5.8 percent in 2008, the most on record, followed by another 4.7 percent decline next year, Fannie Mae, the world’s largest mortgage buyer, said April 7.

“We think it unlikely that prices begin to stabilize until vacancy rates start declining,” Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. in New York, said today in a report for clients.

There were 129.4 million homes in the U.S. in the first quarter, the study said. In addition to homes for sale, the report counted 4.1 million vacant homes that are for rent and 4.7 million that are seasonal.

Most foreclosures are contained in the report’s “other” category, which includes homes tied up in legal proceedings as well as homes that are empty because the owner is renovating and living somewhere else, according to the Census Web site. There were 7.5 million such homes that were vacant, up from 7.3 million a year earlier, the report said.

I’ve said before that a “good time to buy” is relative to your plans. In this case, liquidity is also important. Can you survive a job loss and still make your payments? Can you stay in your house for 10 years before you break even after being upside down on your home mortgage loan for several years?

Very important questions to ask yourselves as we get more and more statistics from very reputable sources. Is it really a better time to rent than to buy right now?

Personally, I say no. Until you can purchase a property that cashflows and rents for the cost of your mortgage and HOA bill, I believe many Americans will be holding on to their pockets for the next couple years until things pick up.

Will The Housing Bubble Continue?

All signs point to yes. If you think that the ARM resets are now over and we’re in the clear. That we simply need to clear out this inventory issue and we’re good to go – consider this:

3 out of every 5 stated income loans had inflated income by at least 50%

As Slate pointed out in their article:

In 2006, a man named Steven Krystofiak gave a statement in a Federal Reserve hearing on mortgage regulation, representing an organization called the Mortgage Brokers Association for Responsible Lending. The organization had compared a sample of 100 stated income mortgage applications to IRS records.

More than 90 of the applications overstated the borrower’s income at least a little. More strikingly, more than three out of five overstated it by at least 50 percent. This isn’t a few people fibbing a little. This was the whole system breaking down.

The consequences are predictably depressing. A blogger named Michael Shedlock has done some terrific work tracking the performance of these kinds of loans. Shedlock analyzed one particular bundle of loans from Washington Mutual consisting of 1,765 mortgages from around May 2007, a total of $519 million in loans.

These were not “subprime” loans. The borrowers’ average credit score was 705, well within prime territory. This is a fairly typical package of loans for a mortgage-backed security, but one thing that does make it stand out is the proportion of these loans that didn’t ask for income documents: 88 percent.

Historically, a year into the life of a loan, well less than 1 percent of typical prime loans would be 30 days late or more. By the end of January, when Shedlock first looked at it, just eight months after the loans were made, almost one in five were at least 60 days overdue.

I believe we’ll be mid-way through 2009 before we see the dust start to settle. Even then, remember that just because things are slowing down, real estate isn’t appreciating. Consumer confidence has to rise before the market will allow real estate to appreciate anywhere near low-normal levels for several years to come.

Tags: foreclosure, loans, ARM, mortgage, real, estate, bubble

Now, I’ve never been one to promote Countrywide or even pretend that they are anything but criminals based on how they prey one people looking to buy a home. When insiders and former employees confess that “the company’s (Countrywide) commission structure rewarded sales representatives for making risky, high-cost loans”, it’s easy enough to let the facts speak for themselves.

Here’s a quick video from armcrash about how Option ARMs can be devastating for the unsuspecting:

But putting that all aside for a little bit, Morgan received an interesting note from a Countrywide loan processor on one of his files recently:

Countrywide appears to be eliminating the Option ARM, at least from the wholesale channel. Another sign of the tightening taking place at the beleaguered lender in an attempt to finalize the Bank of America purchase earlier this year. How do I know they are eliminating the Option ARM (known commonly as the neg am or pick-a-pay loan)? I got this note from a processor on a file:

This file has been denied with countrywide because they are ending the option arms – did you want me to sub this to world – or did you want to do a 5y i/o?

With Bank of America estimating that $739 billion in mortgages could be in danger over the next 5 years (many of them surely option ARMs) the bank understandably is being quick to eliminate any additional exposure to the exploding loan.

…

Countrywide was the king of Option ARMs (particularly the low and no doc liar loans) with nearly 35% of their originations over the last 5 years comprised of the loan that lets homeowners “pick their payment” by offering 4 payment options, including one that accrues interest on top of their loan balance to make monthly payments deceivingly affordable.

Many borrowers took the low payment and ran, betting on rising home prices to bail them out of the negative amortization run up in their loan balance. Loan officers were more than happy to write them. Little documentation and huge fees made it an easy and very attractive loan to write. California option arm loans netted commissions in yield spread premiums in the tens-of-thousands of dollars. 30-60k in commission wasn’t unheard of on these loans.

Now many “good credit” borrowers are upside down in their homes with little chance of making the fully amortized payment that results when the loan balance hits 115% of the original balance (of 5 years passes, which ever comes first). This is part of the Option ARM shockwave that will hit when these negative amortization loans start to recast.

Aside from the very small percentage which benefit from an Option ARM, especially in this market caught in a downward spiral, it makes you wonder why it took Countrywide this long?

Then again, if you’ve read the New York Times article on Countrywide, we all know the answer starts with “M” and ends with “oney”.

Tags: countrywide, option, arm, negative, amortization, loan, lending, housing, bubble