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Will Countrywide go to the confessional tomorrow

Countrywide reports earnings (or likely a loss) tomorrow and the question is how forthcoming will they be and how will the markets react to Chairman and CEO Angelo Mozilo's comments.

UBS prepared a report for The Wall Street Journal regarding Option ARM's. These tricky little loans give borrowers various payment options.

"They typically have low introductory rates and allow minimal payments in the early years of the mortgage. Multiple payment choices include a minimum payment that covers none of the principal and only part of the interest normally due. If borrowers choose that minimum payment, their loan balances grow -- a phenomenon known as "negative amortization."  

Click here to read Countrywide's New Scare at WSJ Online.

Needless to say, many borrowers are in trouble with these loans, after all, you could take a $520,000 mortgage and make the minimum monthly payment of $1673 rather than the typical payment of $3134 if you had a conventional 30 fixed rate loan at 6.05%. The consumer bought more house than they could afford and it turns out, they couldn't afford it after all. Are you surprised.

Will you be surprised tomorrow?

Countrywide's stock has dropped to nearly a 5 year low today, as of 3:30 Eastern as I am writing this, the stock is off 8.32% or $1.15 to $12.68.

Will Angelo go to the confessional tomorrow?

Will Bank of America own Countrywide next week?

 

Published Thursday, October 25, 2007 2:12 PM by Howard Arnoff

Comments

# re: Will Countrywide go to the confessional tomorrow

Not to mention the Deferred Interest a borrower would make on this type of loan. If thy were to do nothing but make the minimum payment for the maximum time permitted they would owe a whopping $572,000! Never having made a dent in the original amount borrowed.

INSANE LOAN certainly not meant for the less than financially inclined or a person living paycheck to paycheck.

These loans do serve a particular clientele whom may be better suited to understand its dynamics.

Tomorrows conference call will be fascinating I am sure....I will be listening.....

Thursday, October 25, 2007 8:51 PM by Mike

# re: Will Countrywide go to the confessional tomorrow

Full disclosure is probably no more than handing the borrower a little brochure and asking them to sign a little sheet of paper saying they understand the terms.

Unfortunately, you can't beat the client over the head and make them really understand the consequences of what they are signing for.

But who is really to blame when the borrower fails to live up to their end of the deal - namely to pay the money back.

However, I'm sure this product got oversold by the lenders and now the piper is calling.  

Friday, October 26, 2007 3:55 AM by Howard Arnoff

# re: Will Countrywide go to the confessional tomorrow

It was more than oversold. It was borderline fraudulently marketed & misrepresented.

Adds were run day in & day out trumping the minuscule payment & many borrowers were never ever fully informed of this loans pitfalls, particularly the propensity to accrue deferred interest to 110 percent of the loans face value forcing the loan to recast at a much higher payment.

Brokers & Bankers both have an inherent fiduciary responsibility to its clients & this responsibility was recklessly abandoned in the name of profits & fees.

I cant tell you how many times I had to sell against a complete liar pitching this loan to a prospect only to see them completely surprised when I illustrated to them the fact they will owe much more than they borrow in the end.

Friday, October 26, 2007 11:48 AM by Mike

# re: Will Countrywide go to the confessional tomorrow

Mike, so tell us how you really feel about this :)

It was sold hard because it was very profitable to the lender. But buyers listen only to what they want to hear and this was music to their ears. I still get annoyed about advertisements touting unrealistic low payments, a subject I've written about here in the past.

For some reason, I must only deal with smart, conscientious real estate buyers because after the mortgage mess blew up, I've tried to think back about every transaction I've had and can't think of one that had the "scent" of a bad loan.

I do remember a few transactions on the listing side where the buyer's loan looked a little shaky but my fiduciary duty was to my seller in those instances.

As to Countrywide today, only a 1.2B loss, some modest loan loss reserves, the stock is rallying and all is well. I wouldn't buy their stock (personal opinion, not investment advice).

While I personally like my preferred Countrywide lender and I enjoy using their website to pay my mortgage, I think there is still trouble on the horizon that they felt was better left unsaid today.

Friday, October 26, 2007 12:10 PM by Howard Arnoff
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