OTS Warns Thrifts on Option ARM Defaults

Office of Thrift Supervision Director John Reich is urging thrifts to prepare for rising defaults and foreclosures on payment-option adjustable-rate mortgages. "As home values continue to drop and ARMs (particularly option ARMs) continue to adjust upward, management should establish loss mitigation strategies, which might include increasing servicing staff levels; designating loan modification and short-sale criteria; and appropriate ongoing accounting for troubled debt restructurings and REO," Mr. Reich told an industry group. Bank of America just reported that Countrywide Financial Corp. held $26.4 billion in option ARMs on its books as of June 30, and 12.7% are nonperforming. BoA completed its acquisition of Countrywide and its federally chartered thrift on July 1. "Delinquencies and foreclosures continue to rise and borrowers with option ARMs face headwinds from loan recasts due to negative amortization triggers," the OTS director told the American Bankers Association summer meeting in Orlando.