Countrywide's Loan Modification Program: The Proof Will Be in the Pudding

| About: Countrywide Financial (CFC)

Countrywide Financial (CFC) issued a press release yesterday stating that they’re going to modify roughly $16 billion worth of mortgages in order to help customers stay in their homes. Or perhaps a better way of putting it is that CFC has found themselves in a bit of a spot due to originating loans to people who can’t afford to pay them back and is looking for a way out of it.

From Reuters:

Countrywide Financial Corp, the largest U.S. mortgage lender, offered on Tuesday to refinance or modify up to $16 billion in adjustable-rate mortgages through the end of 2008 to help about 82,000 borrowers who face higher payments stay in their homes.

Countrywide plans to offer new mortgages to 52,000 subprime borrowers with $10 billion in home loans. It also plans to modify $4 billion in loans for 20,000 prime and subprime borrowers who cannot refinance, and $2.2 billion in mortgages for 10,000 subprime borrowers who are already delinquent.

[...]

Rates on 2 million mortgages will rise by the end of 2008, and one-fourth of affected homes may face foreclosure, according to the U.S. Department of Housing and Urban Development.

[...]

Countrywide's program covers so-called 2/28 and 3/27 subprime mortgages, which carry rates that are fixed for two or three years, and float thereafter. Industry wide, many such loans carried low initial "teaser" rates.

Calabasas, California-based Countrywide said it has helped 31,000 subprime borrowers convert their loans into more than $5 billion in prime, fixed-rate loans this year. Subprime mortgages go to people with weaker credit.

The company has said it services $1.46 trillion in home loans. As of June 30, payments were at least 30 days late on one in five "nonprime" loans it serviced.

"Unprecedented times call for unprecedented remedies," Chief Operating Officer David Sambol said in a statement.

Now, don’t get me wrong, if this program works out and a significant # of people are prevented from going into foreclosure and/or have loans that make sense considering their finances and budget, I’ll be first in line to applaud CFC. However, I’m skeptical for the following reasons:

  1. A recent NY Times report noted that CFC’s attempts to fix loans often had mixed results (at best) and many borrowers felt as if they were getting the run around, frustrating borrowers and community activists alike. Considering past results, CFC announcing a new program isn’t particularly encouraging.
  2. If you’re already a couple of months behind, a lower interest rate probably won’t help you. CFC would need to forgive missed payments (or move them to the back of the loan), lower the interest rate and make a host of other concessions to get the borrower caught up.
  3. Many ARM borrowers can only afford the teaser rate; this is especially true for subprime borrowers who may not be able to afford their loan even if the rate is rolled down to the prime rate level. Is CFC going to refinance down to the teaser rate, which may be so low that it’s a money losing loan for CFC?
  4. By the time a loan is in arrears to the point where a borrower needs to engage a loan modification program and/or when the borrower finally decides to ask for help, it’s often too late to help the borrower short of providing a full-fledged bailout.
  5. CFC already has a loan modification in place, so announcing a new one just a few days before their Q3 earnings report, reeks of a PR stunt, particularly in light of their past performance in this area.

Considering the above, I’m going to take this news with a grain of salt until there are actual, tangible results in the form of fewer foreclosures and a boost to CFC’s bottom line.

Sources:

Reuters: “Countrywide to Modify Up to $16 Billion Mortgages”Jonathan Stempel, October 23, 2007

Disclosure: the Author doesn’t own a position in CFC.

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