Losses Threaten Countrywide Deal
Capital position threatened by lower payment options.
In Countrywide's 10K, filed last Friday, the company detailed the abysmal performance of option adjustable-rate mortgages, or Option ARMs. Option ARMs allow borrowers to choose between monthly payment options, the lowest of which result in principal being added to the balance of the loan, known as negative amortization (see number five).
Option ARMs more than 90 days delinquent increased to 5.4%, up 900% from a year ago. In Countrywide's $28 billion Option ARM portfolio, 71% of borrowers are only making the minimum payment and 80% of the loans did not require borrowers to verify their income.
$87 billion of the company's entire mortgage portfolio is backed by loans in either California or Florida
The Wall Street Journal notes higher than expected losses on home equity loans have forced loan servicers to trap repayments to protect bond investors. Countrywide is obligated to continue advancing borrowers' requested funds, further pressuring its capital position. The firm claims this situation was "deemed remote" until late 2007, and that its "maximum obligation cannot be defined."
Countrywide's already shedding assets, likely beginning with its REO portfolio of thousands of bank owned properties. The true value of REO assets is widely unknown, and forced selling may cause banks like Washington Mutual (WM) that hold vast quantities of this paper to incur additional losses. Shareholders will experience more pain, but eliminating this rot is one of the first steps to repairing the industry's balance sheets.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.