Countrywide Option Arms Continue to Deteriorate Significantly

Countrywide Financial, now part of Bank of America, released some rather alarming information about its option arm portfolio, which represents 28% of total mortgage loans it holds for investment.  According to a regulatory filing made yesterday, thousands of borrowers with $25.4 billion in option arms owe as much as their homes are worth.  One in eight is at least 90 days late on payments.  As of June 30th, the typical borrower owed 95% of the value of his home, up from 76% when the loan was made.  The drastic increase in loan-to-value ratios on these loans stems partly from precipitous declines in home values in Southern California, where Countrywide is based.  The fact that 72% of borrowers were making less than full interest payments on their mortgages merely compounds the problem.  This implies that 72% of the borrowers will not be able to afford the inevitable increase in their mortgage payments when they are required to pay the full interest and principal due.  Furthermore, borrowers are adding to their debt burden as the negative amortization causes the principal on their mortgages to increase.  The increase in principal coupled with declining home prices are a lethal combination.  As homeowners face the prospect of owing more on their mortgages than their homes are worth, they are more than likely to hand the keys to the bank.  For more depressing statistics on the looming option arm disaster, you can read my recent post on the topic.  It includes a very handy chart from the Wall Street Journal that is worth my yearly subscription rate.