Countrywide Tightens Their Belt And Eliminates The Option ARMLast year I touched on what an Option ARM is (also referred to as Neg-Am [Negative Amortization]) and how millions may lose their homes as a result of them being pushed on those who already cannot afford a home. If you look at the video below, you’ll see how sneaky Option ARM’s can be and how easy it is to be fooled by the fine print.

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”.

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