Option ARM’s and Home Equity Loans hurting Countrywide.

Options ARM’s are one year adjustable rate loans in which the borrower picks the rate at which they pay every year, within a range. That’s the “option” part. The lower rates in the option are not enough to pay all the interest due, so when borrowers choose those lower rates the unpaid interest is added to principle. The borrowers are, in effect, borrowing more.

According to the Wall Street Journal, Countrywide, the largest mortgage lender in the country, had $28.42 billion in outstanding Option ARM’s and 5.4% were more than 90 days overdue. Not only that but, 71% of the borrowers using these ARM’s were making minimum payments. That means Countrywide is being forced to loan more and more money to this group of not very qualified buyers.

To me the shocking thing is that only 20% of the Option ARM borrowers were required to fully document their incomes when the loans were made. A similar problem is occurring in Countrywide’s home equity loans. Some people are drawing down their credit lines while others are not paying, and Countrywide is having trouble raising the extra money from the bond holders who back those loans.

Sounds to me as if Countrywide stuck its chin out there and asked the market to take a whack at it. The market is responding.

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