Countrywide Eliminating the Option ARM?

Countrywide appears to be eliminating the Option ARM, at least from the wholesale channel. Another sign of the tightening taking place at the beleaguered lender in an attempt to finalize the Bank of America purchase earlier this year. How do I know they are eliminating the Option ARM (known commonly as the neg am or pick-a-pay loan)? I got this note from a processor on a file:

This file has been denied with countrywide because they are ending the option arms ? did you want me to sub this to world ? or did you want to do a 5y i/o?

It wouldn’t surprise me if they are eliminating the option ARM from wholesale. With Bank of America estimating that $739 billion in mortgages could be in danger over the next 5 years (many of them surely option ARMs) the bank understandably is being quick to eliminate any additional exposure to the exploding loan.

The King is Dead

Countrywide was the king of Option ARMs (particularly the low and no doc liar loans) with nearly 35% of their originations over the last 5 years comprised of the loan that lets homeowners “pick their payment” by offering 4 payment options, including one that accrues interest on top of their loan balance to make monthly payments deceivingly affordable.

Many borrowers took the low payment and ran, betting on rising home prices to bail them out of the negative amortization run up in their loan balance. Loan officers were more than happy to write them. Little documentation and huge fees made it an easy and very attractive loan to write. California option arm loans netted commissions in yield spread premiums in the tens-of-thousands of dollars. 30-60k in commission wasn’t unheard of on these loans.

Now many “good credit” borrowers are upside down in their homes with little chance of making the fully amortized payment that results when the loan balance hits 115% of the original balance (of 5 years passes, which ever comes first). This is part of the Option ARM shockwave that will hit when these negative amortization loans start to recast.

I’ll let you know when we get an official announcement and any updates about the wholesale vs. retail channel offering.