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Are
Countrywide’s Loans Worth the Risk? |
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Countrywide Financial Corp.,
the largest U.S.
home-mortgage lender, promotes loans that allow
borrowers to pay minimal initial amounts. James
R. Hagerty, columnist for The Wall Street Journal,
explores the risks and benefits behind these Countrywide
loans, in his July 25, 2006 article, “Do Countrywide’s
Loans Stack Up?”
“A study of
these loans by RBS Greenwich Capital, a unit of
Royal Bank of Scotland Group PLC, finds that those
granted by Countrywide aren't performing as well
as similar loans made by Washington Mutual Inc.
and a couple of other rivals. While the study shows
the vast majority of borrowers are keeping up with
payments so far, the data raise questions about
whether Countrywide has been less cautious than
some rivals in granting
the loans.”
These loans are known as pay option adjustable-rate
mortgages (ARMs). Basically, they give borrowers
several different payment options each month, including
a minimal payment that is less than the interest
they pay each month. Choosing this option will increase
the borrowers’ loan balance, creating a “negative
amortization.”
“Desmond Macauley,
an RBS analyst in Greenwich, Conn., looked at option
ARMs that have been packaged into mortgage-backed
securities.” He “found that the
performance of Countrywide loans were generally
worse than other major companies offering similar
loans.”
“For instance, for
option ARMs originated in 2004, about 1.4% of Countrywide
borrowers were 60 days or more late on their payments
by the 24th month of the loan. For WaMu, the comparable
number was 0.31%. Countrywide's late-payment rate
also generally was at the high end for loans granted
in 2005, though IndyMac was slightly worse for 2005
loans at the 15-month mark.”
Countrywide said that its option ARMs are performing
as expected and that delinquency rates are comparable
to other types of loans, including 30-year fixed-rate
mortgages.
“Indeed, the performance
of option ARMs from all these lenders is ‘relatively
good,’ compared with other types of loans,
Mr. Macauley says.”
Performance rates for option ARMs may be deceptive,
though, because since they have only existed for
a couple of years. Once they have been in existence
for at least five years, they can be properly evaluated.
“No one can say how option ARMs will
perform in the long run. Until a couple years ago,
such loans were rarities outside of California.
Then lenders began offering them widely as soaring
home prices made it harder for many buyers to meet
a traditional monthly loan payment.”
Option ARMs may be considered a risk right now,
until there is a better understanding of what to
expect. |
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