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Countrywide Worried by Tendency to Choose Lowest Payment Option

Seventy-five percent of his payment option borrowers choose the one with the cheapest mortgage payment, Countrywide Home Loans' chairman and chief executive said here. And that worries him enough that Countrywide has written a letter to each of them.

Angelo Mozilo, addressing the Pacific Northwest Mortgage Lenders Conference, said the high incidence of borrowers choosing the negative-amortization option of a PO - the cheapest option - has him wondering, "What happens when we reset? We do a lot of that product."

In fact, the industry veteran is so concerned that he has had Countrywide send out a letter to eight million borrowers advising them what their reset payments would be if they had to reprice them now. Monthly payments tripled for some of those hypothetical cases, he said.

Mr. Mozilo, who has been in the mortgage lending business for 53 years, shook his head visibly when thinking about why upscale borrowers with 750 FICO scores would choose payments that actually add to their indebtedness. He postulated that many of them are in an age bracket, about 35 to 37 years old, that has never experienced a financial downturn yet. They may be counting on rising real estate values to offset those higher loan amounts.

Mr. Mozilo said he hopes these borrowers "can refi out of that product." He added, "It could be OK but I'm concerned about it." And he noted that many borrowers opt out of those neg-am features during the second year of the loan.

The senior executive said that the recent spate of industry consolidations (he mentioned World Savings, GMAC-RFC and Washington Mutual closing its correspondent channel) will continue for the next 12-24 months. Commercial banks will be especially hard hit, he said. And some familiar names will exit the business.

"I think you will be surprised at some of the announcements over the next 12-24 months," he said. Banks will experience a "massive" consolidation, which didn't seem to worry him too much, because he told attendees, "We have too many banks in this country."

Commenting on Freddie Mac and Fannie Mae, Mr. Mozilo said the GSEs would not return to be "the powerhouse they were at one time, nor do I think it would be a very good thing if they were."

He endorsed the current managements of the embattled mortgage agencies, but said in the past the two had been "very arrogant" and were "now suffering the consequences of arrogance." But he called putting a cap on their balance sheets "terrible" and pointed to several instances, including after Sept. 11, 2001, where Fannie and Freddie "kept the markets open and stable."

Mr. Mozilo sees some serious deterioration in real estate values coming, though he doesn't know how much and some markets will not be hit as hard. Added to that, rising delinquencies will cause more foreclosures and foreclosure sales, which tend to go to the first bidder, will depress RE prices as well.

Curt Culver, chairman and CEO of MGIC, Milwaukee, noted that the mortgage market, while cyclical, has been expanding for the past 35 years, tripling each decade. He said mortgage volumes in the 1970s came to $1 trillion, in the eighties $2.9 trillion, $8.8 trillion in the 1990s, and this decade the industry is on track to do about $24 trillion in loans. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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