Pay-Option Loan Risk plagues Countrywide
Blame the lender or blame the borrower?
Countrywide Financial Corp., the largest home loan provider, could see further trouble ahead with another risky slate of loans -- pay-option adjustable rate mortgages.
These pay-option loans give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance. In most cases, the borrower would just pay the interest, leaving the principal balance untouched. The objective of these borrowers were to capitalize on the housing boom to exact a substantial profit when they sell the home after a few years.
Unfortunately, with the housing market in the dumps, these borrowers are stuck with these pay-option loans which have grown beyond their original loan amount because they cannot make the payment. Countrywide says they had nearly $29 billion in these risky loans at the end of December, of which $26 billion of the total have grown beyond their original amount.
81 percent...that's EIGHTY-ONE PERCENT of these loans were made out to borrowers who provided little or no documentation of their income.
71 percent with pay-option loans elected to make less than full interest payments.
5.71 percent of borrowers are at least 90 days late, up from 0.65 percent a year earlier.
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Honestly, why pick a loan where you just pay off the interest? Plus you got folks not paying the full interest which basically increases the overall balance of the loan. Then of course these borrowers are claiming that their lender or broker were hiding the real facts from them. Boo hoo. Total bullsh*t. Even if the housing market was going up 15-20% per year, the profit take will be small if you let the interest pile up on the original loan. A majority of these Countrywide loans originated in California and Florida which may explain the tempting aura of high profits to these borrowers.
You can blame the bank for offering the loans, but also blame the borrower for being stupid enough to take it.
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