At Countrywide, Option ARM Woes Mount

In case you haven’t heard: option ARMs are a problem, and Countrywide holds ’em in spades. The Calabasas, Calif.-based lender’s latest 10-Q filing with the Securities and Exchange Commission underscores the pain that’s now flowing through the veins of Bank of America (BAC) (Countrywide filed a Q2 report because its acquisition wasn’t complete until July 1, for those curious to know). Countrywide held $25.4 billion in pay option mortgages at the end of June; a full 12.4 percent of those loans were 90 or more days delinquent. Want to know more? Get ready to cringe: 83 percent of the portfolio was underwritten via low-doc or no-doc programs, and 72 percent of those borrowers still paying on the loans elected to make less than a full interest payment in June. Average original LTV of 76 percent had increased to refreshed LTV of 95 percent — that’s the average for the entire portfolio, folks — by the end of April. What to know still more? Despite a severe delinquency rate well into double-digits, Countrywide’s own recast projections suggest that the worst of the portfolio’s recasts won’t hit until sometime in 2011 ($6.96 billion in projected recast volume, net of repayments). All of which means that 90+ day delinquency figure really only has one direction to go from here. And Countrywide knows it, too; the company, like other lenders with significant option ARM exposure, has been aggressively looking to restructure loans for borrowers stuck in pay-option mortgages, to the tune of $1.2 billion in troubled debt restructuring this year alone. Countrywide, by the way, also holds $32.3 billion in home equity loans in portfolio; the performance there isn’t likely to be much better than what’s being seen in option ARMs, although the company didn’t break out credit performance for the area in its filing. While Countrywide’s option ARM holdings are large, the company doesn’t hold the largest such portfolio of loans. That distinction would go to Wachovia Corp. (WB), which holds $122 billion in option ARMs, a substantial part of the bank’s $488.2 billion in total loans; no other U.S. bank has as much exposure to option ARMs in real-dollar terms. The North Carolina-based bank yanked its option ARM lending program earlier in the year, as mounting losses and continuing home price declines made the product unprofitable. Bank of America has recently touted a commitment to modify or work out $40 billion in troubled mortgage loans over two years in an effort to keep 265,000 customers in their homes; it now seems likely that a good chunk of that total will come in the form of option ARMs via Countrywide. BofA CEO Kenneth Lewis said that he expects the acquisition of Countrywide to add to profit this year, sentiment that some analysts have attacked as bluster. Disclosure: The author held various put option contracts on WB and no positions in BAC when this story was published; indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.