Tuesday, March 4, 2008

Countrywide admits:Ticking Time Bombs

I know it seems like a decade ago but people used to get a big head about their recent investment property purchase or their great 1% rate on their 1.3m condo in the city. WAMU, Countrywide, INDYMAC, World Savings(bought by Wachovia) and countless bankrupt lenders did these loans all day long. They allowed the borrower to have a payment that was less than the interest on the underlying mortgage. The "teaser rate" allowed people to qualify for a lot more home than they could possibly afford. Up until mid 2007 borrowers would be qualified based on the teaser rate that typically lasted for 5 years or until the loan had negativly amortized to 105% or 110% of the original balance. Then the loan would fully amortize. Meaning a HUGE spike in the payment. Let's not even mention the people that believed the loan officer or broker who swore on his/her upcoming BMW payment that the 1% was fixed. Yes, it is fixed but they were placing a serious bet about their income and the property market overall. Overall industry standard performance on these loans is that around 75% of people make the 1% negative amortization payment on their pick-a-pay. More like pick-your-poison.
I am all for financial innovation and creative financing but this product was heavily pushed to the point of terrible underwriting. The banks placed bets as well that property would continue to appreciate and/or the borrower would make a lot more in the future. During 2006, 60% of the loans done in Los Angeles/Orange County CA were interest only. A great percentage of the loan volume in CA done between 2004-07 were the option arm variety. The radio jingle ran" No points, no fees, lower your mortgage payment today 1% call today 1-800-...."

The time bomb begins to go off starting in 2009. These loans will be like a neutron bomb. Kill the formerly happy home owner/investor and leave the house standing in line for a foreclosure. Granted a great percentage of these will be fine, but if you think defaults were interesting from a perspective of that only happens in "working class"(read:poor) neighboorhoods then you have seen nothing like the upcoming disaster of 2009-2011. As an example here is the breakdown on a 750k loan with a 1.25% teaser and a fully indexed rate of 6.826% which is an excellent rate for a super prime borrower:

Minimum Payment Rate: 1.250%
Fully Indexed Rate (FIR): 6.826%
Minimum Payment: $2,499.39 ( Deferred Interest: $1,766.86 )
Interest Only Payment: $4,266.25
Fully Amortizing 30-Year Payment: $4,902.44
Fully Amortizing 15-Year Payment: $6,668.46
Fully Amortizing 40-Year Payment: $4,566.25 (not available)
Possible Minimum Payment Changes (based on a 30-year loan term)
Year 1
= Base of Minimum Payment
Year 2
= $2,499.39 + 7.50%
Year 3
= $2,686.84 + 7.50%
Year 4
= $2,888.36 + 7.50%
Year 5
= $3,104.98 + 7.50%

When the loan hits 105-110% of the original balance they go fully amortizing. That big old 5k payment you see above. Hmm, maybe that will impact Cheese Cake Factory, Coach, Starbucks and the local car dealer. Funny how they are already slowing down now. Wait until the big resets occur. We are in the first quarter of a long drag out football game.

If you like the math misery done for you on a negam visit the calculator here. Also if you would like to read a previous post on the topic and watch a video of the time bomb click here.

As of the end of December, Countrywide had nearly $29 billion in pay-option loans, with about $26 billion of the total having grown beyond their original loan amount, the company said in a filing late Friday with the Securities and Exchange Commission.
"Our borrowers' ability to defer portions of the interest accruing on their loans may expose us to increased credit risk," the company said. It added that its risk could be greater because the amount of deferred interest on pay-option loans was on the upswing.
The company noted some 81 percent of the loans were made out to borrowers who provided little or no documentation on their income. As of the end of December, 71 percent of borrowers with pay-option loans were electing to make less than full interest payments.
Even though borrowers with such loans had the option to just make interest payments, many were increasingly missing payments, the company said.
Some 5.71 percent of the loans based on unpaid principal balance were at least 90 days late as of Dec. 31, up from 0.65 percent a year earlier.
Like other lenders, Countrywide has since tightened its lending criteria and curtailed lending of so-called no documentation loans. It has also ramped up programs aimed at modifying loans for borrowers before their loans reset to higher rates.
At the close of last year, Countrywide's total loan servicing portfolio was valued at about $1.5 trillion.
Total delinquencies as a percentage of the number of loans was 6.96 percent, up from 5.02 percent at the end of the prior year. Some 1.04 percent of loans were facing foreclosure, up from 0.65 percent a year earlier.
California accounted for the highest portion of Countrywide loans, according to unpaid principal balance, of any state, the lender said.
The state had around $389 billion in loans, followed by Florida, with loans totaling around $113 billion. Texas, New York and New Jersey rounded out the list.
The company's banking unit, which also funds some of Countrywide's home loans, had $87.1 billion loans held for investment on its books at the end of the year.
A large portion of that stemmed from loans made in California and Florida, once-hot housing markets that have now been battered by falling prices and rising mortgage defaults and foreclosures. About $37 billion in loans were made to borrowers in California. Another roughly $6 billion pertained to loans in Florida.