Countrywide

Source: WSJ/UBS

A wave of delinquencies is expected between 2009 and 2011 as more than $200 billion in option ARMs readjust, and for some lenders, most notably Countrywide Financial, the problems have already begun.

During a Wall Street Journal commissioned survey, UBS found that option ARM delinquencies are increasing at Countrywide, rising from 1.6 percent a year earlier to 5.7 percent as of June 30.

UBS also found more than 80 percent of the option ARM borrowers who are current are making only the minimum payment, which means their outstanding balance is growing larger and larger. Chances are many of these borrowers will end up in the precarious position of owing more on their home than it is actually worth.

Because so many of Countrywide's option ARMs--91 percent in 2006--were low documentation mortgages, there is no real way to tell whether or not borrowers will have the income necessary to afford readjusted payments.

Countrywide says they are not worried; potential losses on option ARMs are partially insured. There is no denying though that the company participated heavily in the option ARM market, and that a reckoning day can't be far away.

Countrywide first began offering option ARMs in 2003. By 2005, option ARMs accounted for $93 billion--19 percent of the company's loan volume according to trade publication Inside Mortgage Finance. The fact is notable because option ARMs accounted for $238 billion of loan volume that year for all lenders. Countrywide had more than 40 percent of the option ARM mortgage market.

'To a certain extent, Countrywide is the mortgage market,' said Inside Mortgage Finance publisher Guy Cacala in an interview with CNN. 'In everything we track - subprime, Alt. A., jumbo loans - they really didn't have a rival.'

This would explain why Countrywide is struggling with more than just option ARMs. At the beginning of July, more than 20% of Countrywide's subprime loans were at least 30 days past due. Prime home equity line of credit borrowers were also defaulting in record numbers.

BankUnited

Source: BankUnited Financial Corp

Countrywide isn't the only lender in trouble because of option ARMs. In a recent press release, BankUnited Financial Corp, the nation's second largest mortgage lender, reported that $6.5 billion of their $7.6 billion option ARM portfolio is now negatively amortizing.

Since 70 percent of BankUnited's residential loan portfolio and 60 percent of the entire loan portfolio consists of option ARM loans, this is a serious problem--more than half of the company's total portfolio is negatively amortizing. If home prices continue to decline and scheduled resets go into effect as planned, BankUnited could find themselves in a sticky situation.

Like Countrywide, BankUnited, has an extremely high volume of low documentation and stated income loans. Only 18 percent of the loans in the entire portfolio were fully documented; 42 percent were stated income loans, 31 percent were reduced documentation loans, and 9 percent were no documentation loans.

Although BankUnited reported a 73 percent fall in fourth quarter earnings on Tuesday, the company's chairman and chief executive officer Alfred R. Camner said he is not overly concerned.

'There is significant volatility in the markets, the housing sector is still in a downturn, and non-performing assets have not yet leveled off. However, we do have several things in our favor: our capital position is strong, we are a Florida-based banking franchise, and our net charge-offs remain manageable,' said Camner in a press release.