0 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
$2,499.39
= Base of Minimum Payment
Year 2
$2,686.84
= $2,499.39 + 7.50%
Year 3
$2,888.36
= $2,686.84 + 7.50%
Year 4
$3,104.98
= $2,888.36 + 7.50%
Year 5
$3,337.86
= $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.

FROM CNN&AP:

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.

Detail: Countrywide admits:Ticking Time Bombs

0 Countrywide:Sorry you can't afford it.

Obviously, you are well aware of the credit crunch and the impact it has had thus far on the once roaring real estate markets. I say it's just the tip of the iceberg. Over half the loans in CA in 2006 were NEGAM or interest only. That is a small window into the loans that pushed the bubble further and will lead to a larger, more protracted collapse than anyone anticipates. Those days seem like ancient times in the mortgage world. Countrywide announced this today:

As you may be aware, federal regulatory agencies have issued joint guidance which impacts the qualifying methodology for non-traditional mortgage products. This guidance was designed to better address risks associated with non-traditional mortgage products that offer interest-only and/or negative amortization payment features and to better support the needs of those borrowers who might not understand these types of risks. In an effort to further align our lending strategy with this guidance, effective Monday, November 19, 2007 Countrywide®, America's Wholesale Lender® began calculating borrower repayment capacity for non-traditional mortgage products using the following three criteria:

The greater of the Note Rate or the Fully Indexed Rate
A full amortizing payment
A loan amount which includes the total potential negative amortization
The resulting qualifying payment amount will be used to calculate both the Housing and the Debt-to-Income (DTI) Ratios for the loan transaction. The qualifying loan amount including the total potential negative amortization is determined as follows:
New York - 110% of the original loan amount
All other states - 115% of the original loan amount Please note, for ARM loans with MTA or COFI indices, the qualifying interest rate will be calculated using the fully indexed rate (index + margin) plus an "adjuster." The adjuster is a variable which will be used to annualize the MTA or COFI indices due to the "lagging" nature of these two indices.

The bottom line is that a borrower has to qualify at the highest possible payment the loan could have in the future. During the boom everyone underwrote to the minimum payment, either the interest only or the lower NEGAM payment. Otherwise very few of these loans would have been approved. That's how you had someone making $100k buying a 800k house. The normal historic lending ratio is to have a loan balance that doesn't exceed 4x your gross annual income.

The exotic loans that were everywhere and are now like neutron bombs, destroying the borrower but leaving the home standing are no longer available. Countrywide's action is not the first major lender to dramatically tighten lending guidelines. But, I highlight their action because they originated about 20% of all mortgage loans year to date. The removal of leverage has been very rapid. The decline of real estate in the hot markets has just begun. I am an optimist by nature but I believe we are in a recession now and we likely will be in a deep recession until 2010. The FED can't cut rates to bail anybody out because the dollar will collapse even further. Creating a whole series of global problems. It's time for belt tightening for the American consumer. Don't let this spoil your Thanksgiving. Be thankful for what matters most in life. Pray that we buckle down and fight our way back to becoming the shinning beacon of hope on the hill that world expects and we deserve to be.

Detail: Countrywide:Sorry you can't afford it.

0 Countrywide REO goes from 13k to 195k?

A developing story "scandal" started this morning when investors/realtors noticed that Countrywide on it's REO search site noted 180k more properties listed across the country. The new additions state that no broker has been assigned. I checked a few CA listings and they are indeed foreclosed properties. Check it out yourself Countrywide Foreclosure Blog.

Is this the disclosure that breaks the Countrywide balance sheet to have Bank of America come to the rescue?

Detail: Countrywide REO goes from 13k to 195k?

0 Countrywide Buying America?

Countrywide has been doing very well recently in executing their plan to own all the homes in America. As you can see from the chart the growth of their real estate owned portfolio is impressive. I know they must be anxiously awaiting the wave of subprime loans resetting so they can get those keys. A well placed source at Countrywide stated that 70%+ of the subprime folks that are calling in to refinance can't refinance because they are upside down or can't afford the new risk adjusted rates that are between 8-12%+ for a 5/1 ARM. We are running a contest to see where the readers think the Countrywide REO portfolio will end by year end. We will be giving away a copy of Devil Take the Hindmost:A history of financial speculation by Edward Chancellor and a copy of The Black Swan:The impact of the highly improbable by Nassim Taleb. To participate please send your best guess to mrmortgage at thegreatloan.com. If you would like to be added to the Mortgage Market Report include that in your email as well. We will not spam you. Winner will be announced on Jan 1st.

Detail: Countrywide Buying America?

0 Incredible Price Cuts for Countrywide REO

Have you seen the CA Countrywide REO list recently? Wow, some huge price cuts in the last two weeks. I can't even imagine what is going on in some of these neighborhoods with home prices on their REO getting dropped by 15-20% since they were listed just 6-8 weeks ago. On most of these Countrywide is taking a bath. Your thoughts if you know these areas well would be appreciated. National list here.

Detail: Incredible Price Cuts for Countrywide REO

0 "When should I buy a home?" The quick answer.

Thousands of numbers, graphs, charts and economic reports can be boiled down for the first time home buyer looking in the previously smoking hot markets for the quick explaination to the question of "When should I buy a home?" When you see this chart of Countrywide's total national foreclosure inventory that they own and are trying to sell via thousands of realtors across the country start to stabilize and then move down again things are getting better. I don't think that will happen until 2010-11 as the amount of loans resetting to much higher rates is just starting in earnest this Oct/Nov, right before Christmas. These are homes that went to the auction step and Countrywide was the high bidder and won because they were trying to protect their skin in the game. Chart courtesy of the good guys at Countrywide Foreclosure Blog. Here is a recent scheduled adjustable mortgage reset chart also:

Detail: "When should I buy a home?" The quick answer.

0 Bank of America Helps Rival Countrywide.

Countrywide and BOA are competitors across a variety of business segments. It came as a surprise to the markets that Bank of America had agreed to buy $2b dollars worth of Countrywide preferred stock. Countrywide shares rose sharply in afterhours trading, the perception is that this is the start of a move to merge the companies together. Bank of America is not a star in terms of mortgage origination. Countrywide needs a source of cheap funds and BOA has an enormous pool of savings and CD account money to tap into. On the surface it looks like a great merger. But, I think the real issue of concern is that Countrywide is going around Wall St with cap in hand to raise any money that is available. As of now the terms of the preferred stock deal are not known but this wasn't cheap money so it makes you wonder if the giant Countrywide is going to fall into another banks arms or just fall apart. Heard any news, rumors about Countrywide? Post a comment.

Detail: Bank of America Helps Rival Countrywide.

0 Countrywide Seeks Cash.

As a source of mortgage funds most lenders such as Countrywide, Ditech and all the hundreds of mortgage bankers repackaged the debt to get fresh funds to lend with the help of the big Wall St investment banks. These debt securities were sold to mutual funds, hedge funds, foreign banks, etc. The appetite for CDOs as they are known has dried up for all but the most stellar loan scenarios. The investors that bought these instruments have been burned and are demanding higher rates or are completely done with mortgages altogether. So where do the lenders get more money to lend? Going back to the old school banking playbook, Countrywide is taking the lead on this one and soliciting the highest CD deposit rates in the country. Check for yourself by looking at your local paper or checking bankrate.com under the CD tab.

They need to raise funds ASAP to fund the 40 billion dollar monthly pipeline. You will notice that many large lenders are on the CD tables with very attractive rates for the CD investor. Thinking ahead, won't this result in a dramatic change in the type of loans offered and the rates charged? They can't pass off the risk now, they are not selling these loans. These will stay on the bank balance sheet and must perform. After all, you can't tell grandma that her CD is gone because the bank loaned money to a flipper using a NEG AM. Something about FDIC insurance and bank regulators prevents Countrywide and others from making wild loans when they use their banking centers as a source of funding. Would you deposit money with Countrywide?

Detail: Countrywide Seeks Cash.

0 Interesting Info from Countrywide.

Given the daily rush of news, I think a lot of careful analysis gets lost. Thinking about Countrywide's conference call almost a month ago, these slides are very valuable in thinking about where housing and the mortgage industry could be heading. Countrywide services about 20%+ of all mortgage paper in this country. So they have a remarkable opportunity to analyze the specific loan performance of various types of credit and mortgages from conventional to jumbo and the exotics that we may never see again(i.e. option arms and 2/28 ARMs.) Please post your insightful comments. Enjoy this info and give it some thought:

Detail: Interesting Info from Countrywide.

0 Countrywide Mortgage in Liquidity Crisis.

Forbes 8-6-7:
"Countrywide Financial offered hope Monday that it might avoid the fate of other troubled lenders. The mortgage company revealed that it has cash access that could help it survive brutal industry conditions. In Monday filings with the Securities and Exchange Commission Countrywide revealed it has $186.5 billion in available liquidity. It also said it has access to $46.2 billion in highly reliable short-term funding. "

Fast forward ten long days. Today we were greeted by another bad sign that mortgage markets have stopped working. Countrywide is the largest lender in the country. They originate through retail and broker channels roughly 20% of all mortgage loans. They funded $40 billion last month. This is not subprime, or ALT A, the majority of these loans are very prime mortgage loans to folks fully documenting their income. They were forced to tap a line of credit they have to the tune of $11.9 billion. They did this because they couldn't use their traditional financing of borrowing in the short term commercial paper market. This is bad in that the largest lender in the country is not being trusted by the global community to lend money to on a very short term basis.

The impact of these events and others to follow is that mortgage rates will likely continue to rise for any mortgage loan that doesn't fall into the conforming guidelines of Fannie Mae or Freddie Mac. This will have large ripple effects throughout the financial community and especially so in housing over the coming days. The rates for non-conforming loans is between 6.75-7.75% for scenarios of putting 20% down, fully documenting income, and prime credit levels. This is up from the high 6% range. This is putting pressure on the $650-$1.5m market. This can be clearly illustrated by our friends at http://www.irvinehousingblog.com/. Above these values you move into super jumbo mortgage rates and they have been in the 8-10% range for most scenarios. I have to get back to the grind. Stay sane and remember that Rome isn't burning, it's just a little smoke.

Detail: Countrywide Mortgage in Liquidity Crisis.