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Countrywide Faces $1.2B of Negative Amortization

Countrywide Financial Corp., one of the largest funders of payment-option ARMs in the nation, is owed at least $1.2 billion from borrowers who have chosen to forestall interest payments.

Roughly 5.36% of CFC's POA portfolio ($1.5 billion) is 90 days or more late, according to documents the company filed with the Securities and Exchange Commission.

According to the lender's recently filed 10-K report, CFC holds $28.4 billion in POAs on its balance sheet, 72% of which carry some type of mortgage insurance coverage.

Over the past few years POAs have become controversial because they offer borrowers four different payment plans each month, including "negative amortization" where the customer can keep payments artificially low by adding on to the debt owed.

"Our borrowers' ability to defer portions of the interest accruing on their loans may expose us to increased credit risk," the lender notes in the filing.

When the POAs were originated, the average FICO score was 717 but the lender notes that 81% of the mortgages are "stated income" loans where the borrower states his/her income and the company accepts it as fact.

Many of the loans are backed by homes in California and Florida, two of the weakest housing markets in the United States.

Earlier this year, Bank of America agreed to buy CFC, the nation's largest residential lender and servicer, for $4 billion. Last week, a Bank of America spokesman said the company plans to move ahead with the acquisition.

If BoA's purchase of CFC falls through, Countrywide will have to pay the banking giant a termination fee of $160 million, according to the company's 10-K.

CFC warns that if it loses its investment grade rating on its debt, the bank will be forced to disgorge $4.2 billion in custodial deposits.

It also warns that if Fannie Mae and Freddie Mac reduce the volume of mortgages they are willing to buy from the lender, it "could have a material adverse effect on our results of operation and financial condition."

CFC'S POA Exposure($in millions)

Total POA holdings at 12/31/07 $28,423

Accumulated negative amortization $1,216

POA no-doc or lo-doc loans 81%

Borrowers using neg-am option 71%

POA loans 90-plus days late 5.36%

Average initial FICOs on POA 717

Source: CFC's 10-K filing/Table by National Mortgage News. Questions: E-mail Paul.MuoloSourceMedia.com. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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