Parting is Such Sweet Sorrow: The Option ARM Dies

Well, maybe I’m being a bit dramatic, but it seems to me that the Option ARM, if not technically dead, certainly joined the endangered species list today with Countrywide’s sweeping changes to program qualification. Big hat tip to Bill and Paul who alerted me to the changes. The news of the day is Countrywide’s announced changes to loan qualification which include the Option ARM:

Dear Valued Business Partner:

As you may be aware, federal regulatory agencies have issued joint guidance which impacts the qualifying methodology for non-traditional mortgage products. This guidance was designed to better address risks associated with non-traditional mortgage products that offer interest-only and/or negative amortization payment features and to better support the needs of those borrowers who might not understand these types of risks.

In an effort to further align our lending strategy with this guidance, effective Monday, November 19, 2007 Countrywide^®, America’s Wholesale Lender^® began calculating borrower repayment capacity for non-traditional mortgage products using the following three criteria:

• The greater of the Note Rate or the Fully Indexed Rate
• A full amortizing payment
• A loan amount which includes the total potential negative amortization

The resulting qualifying payment amount will be used to calculate both the Housing and the Debt-to-Income (DTI) Ratios for the loan transaction.

The qualifying loan amount including the total potential negative amortization is determined as follows:

• New York - 110% of the original loan amount
• All other states - 115% of the original loan amount

Please note, for ARM loans with MTA or COFI indices, the qualifying interest rate will be calculated using the fully indexed rate (index + margin) plus an “adjuster.” The adjuster is a variable which will be used to annualize the MTA or COFI indices due to the “lagging” nature of these two indices.

Russ, I know they’re not a portfolio lender, but at some point don’t the portfolio folks have to start reassessing risk like the rest of these guys? I mean Downey Savings, a perfect example of an Option ARM portfolio company has seen 50% of their stock price wiped off the map due to the crunch; I can’t imagine too many people pouring money in to the company with out knowing how those Option ARMs are looking on the books. The question is are portfolio Option ARM companies built on a house of cards, or worse, a house of land mines?

I mean, this really is the death knell for the Option ARM, is it not? Who is going to qualify at the fully amortized 8.25% payment on this loan fully documented with out some ridiculous stated income and an underwriter asleep at the wheel? Not too many folks, and if they do qualify, they’re probably not choosing the Option ARM. What’s that you say? The 8.25% is only with 3 points on the back? OK, so how many people are going to be selling the Option ARM with out the 3 points? Not too many. So kiss this toxic waste loan good bye (and sorry investors for the inconvenience) as just another poster child of the mortgage miasma that was the early 2000’s.

What do you think, over dramatic or right on target? Oh, and check my eulogy to the Option ARM in this post.

Edit: took out the fully doc’d part - thanks for the tip!

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