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Countrywide option ARM home loans deteriorate more

NEW YORK (Reuters) - Countrywide Financial Corp said thousands of borrowers with $25.4 billion in option adjustable-rate mortgages (ARMs) owe almost as much as their homes are worth as home prices slide and more homeowners abandon their properties.

Another sign of borrower distress: One in eight is at least 90 days late on payments.

As of June 30, the typical borrower owed 95 percent of the value of his home, up from 76 percent when the loan was made, Countrywide, the big U.S. lender, said in a regulatory filing on Monday.

Countrywide’s $25.4 billion in option ARMs represents about 28 percent of total mortgage loans it holds for investment. Option ARMs offer different payment options -- such as making smaller payments or even partially skipping payments -- but the principal owed on the mortgage may actually increase.

Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent. The average FICO, a widely used credit score, dropped to 680 from an original 715, but topped the 620 that some analysts deem a cutoff for “subprime.” The U.S. median is 723.

The data reflect how the nation's housing crisis has hurt borrowers with good credit -- and how Bank of America Corp's BAC.N $2.5 billion acquisition of Countrywide last month could pose hazards for Kenneth Lewis, the chief executive of the largest U.S. retail bank.


Lenders industrywide have said many borrowers who owe more than the value of their homes are abandoning the properties because they don’t expect to recoup their losses.

“People still don’t understand what a catastrophe this is,” said Christopher Whalen, senior vice president and managing director at Institutional Risk Analytics of Torrance, California. “The guys who are really on the hook are Bank of America shareholders.”

Bank of America stock closed down 6.7 percent at $31.13 on Tuesday on the New York Stock Exchange, and has fallen 24.6 percent this year. The KBW Bank Index .BKX shed 6.4 percent on Tuesday, and is down 25.6 percent in 2008.

Sinking home prices and relaxed underwriting standards have left many people with negative equity in their homes, leading to a surge in foreclosures.

In a July 21 conference call, Bank of America Chief Financial Officer Joe Price said the bank estimated write-downs and adjustments of $14.3 billion to Countrywide’s loan book, including the option ARMs.

“Under purchase accounting rules, these adjustments go through the capital account and do not affect current or future earnings,” spokesman Scott Silvestri said on Tuesday. “These write-downs are based on estimates of the inherent losses in the portfolios over the life of the loans.”

Price said the forecast reflected a projected drop in home prices of 25 percent to 30 percent, with declines in California and Florida nearer to 40 percent.


Bank of America is not the only big lender with option ARM headaches.

Wachovia Corp WB.N said borrowers in its $122 billion "Pick-a-Pay" option ARM portfolio owed 85 percent of what their homes were worth on June 30, up from 71 percent. In California's Central Valley, the average was 109 percent, meaning that borrowers, on average, were underwater.

The average overall FICO score was down to 661 from 675. Wachovia took a second-quarter write-down of $3.3 billion on option ARMs.

Countrywide said borrowers holding 83 percent of its option ARMs received loans with little or no documentation of income. About 66 percent of the option ARMs went to California and Florida borrowers, Bank of America said.

Through May, U.S. single-family home prices fell 18.4 percent from a July 2006 peak, according to the S&P/Case-Shiller index of 20 metropolitan areas.

In that period, prices fell 27.5 percent in Los Angeles, 28.5 percent in San Diego, 25.2 percent in San Francisco, 30.6 percent in Miami and 25.6 percent in Tampa.

This year, Bank of America agreed to modify or work out $40 billion in troubled mortgage loans over two years in an effort to keep 265,000 customers in their homes.

The bank expects the acquisition of Countrywide to add to profit this year. But Institutional Risk Analytics’ Whalen said losses on Countrywide might be higher than the bank expects.

Editing by John Wallace/Jeffrey Benkoe