March 3, 2008
Countrywide's Mortgage Woes Deepen
By JAMES R. HAGERTY
March 3, 2008; Page A2
Countrywide Financial Corp.'s mortgage portfolio continues to deteriorate rapidly as defaults increase and home prices fall, a securities filing shows.
The Calabasas, Calif., lender's annual filing with the Securities and Exchange Commission, released late Friday, showed a big increase in late payments on option adjustable-rate mortgages, known as option ARMs. These loans give borrowers several choices of payment each month, including one that covers only part of the interest normally due. When borrowers choose that minimal payment, the loan balance grows.
As of the end of 2007, payments were at least 90 days overdue on 5.4% of option ARMs held as investments by Countrywide's banking arm, up from 0.6% a year earlier. Countrywide held $28.42 billion of such loans as of Dec. 31. The company said 71% of the borrowers were making minimal payments. Only about a fifth of the borrowers were required to document fully their incomes before receiving the loans.
Countrywide, the largest U.S. mortgage lender in terms of loan volume, suffered losses of about $1.6 billion in last year's second half. Early in January, Bank of America Corp. agreed to acquire Countrywide for about $4 billion. That purchase is due to be completed in the third quarter.
Countrywide disclosed that half of the $87.04 billion of mortgage loans held by its bank are backed by homes in California and Florida, two of the states hit hardest by falling home prices.
The lender also provided more details on a setback that prevented it from fulfilling its October forecast that it would be profitable in the fourth quarter.
Countrywide was blindsided during the quarter by obligations on home-equity lines of credit that it had sold to investors in the form of securities. Normally, the trusts that control such securities reimburse the lender when borrowers make further draws on these lines of credit. But if losses on the loans exceed certain levels, Countrywide isn't reimbursed immediately and may never be reimbursed unless income from the loans outstanding is sufficient to meet obligations to investors in the securities.
Countrywide said the likelihood of such a situation was "deemed remote" until late 2007. It blamed a "sudden deterioration" in the housing market. As a result, it recorded a $704 million loss to cover the estimated costs of its obligations on the lines of credit.
Further losses may lie ahead. Borrowers can pay down these lines of credit and then draw new funds later, Countrywide said. As a result, it said, the company's "maximum obligation cannot be defined."
Countrywide officials have said they didn't expect these losses in late October, when Chief Executive Angelo Mozilo forecast a profit for the fourth quarter. The company ended up reporting a loss of $422 million for that quarter.
A Countrywide computer model used to gauge risks on these securities didn't take into account the possible effects of exceeding the loss levels that cut off reimbursements, according to a Dec. 28, 2006 internal report reviewed by The Wall Street Journal.