An interesting discussion is going on at Mike “Mish” Shedlock’s web site on the World Savings Option ARM Mortgages that were “picked up” by Wells Fargo with the merger of Wells and Wachovia (Wachovia bought World Savings at the end of 2006). The discussion pivots on whether the World Option ARMs are a “ticking time-bomb” for Wells in the short term, or if the “10 year” recast period is going to allow Wells to weather the on-coming storm easier (or completely).

Stoking the controversy is an iStockAnalyst article which argues Wells will be OK, after it was revealed by one writer that Credit Suisse’s well-known projections for Option ARM recasts made an erroneous, blanket 5-year recast assumption. However, that writer disagrees with the iStockAnalyst conclusion that Wells is out of the woods, even though it is based on his own data!

So who is right?

Here, I will attempt to shed light on the recast portion of this argument, and hopefully clear up confusion and add to the general understanding of the subject.

The World (Savings) Option ARM differed from most other Option ARMs in the following details:

• The Option ARM had a 125% Negative Amortization cap, which meant that if you had a loan of $400,000, the actual balance with Negative Amortization could increase to $500,000. Most other Option ARMS had 110% to 115% caps, with ABC offering some to 120% and Washington Mutual having a few at 125%, but these were minimal in numbers.
• The maximum recast period could extend out to 10 years for the World Savings loans. Washington Mutual had a few loans that could also extend out to 10 years, but all other loans extended out to only 5 years.

What is most important to remember is that the 5 year and 10 year recast periods are only estimates. The periods are subject to variations based upon the index value, the start rate, and the margin offered. For a complete background on this, you can refer to a previous article I have written on the Option ARM implosion at IamFacingForeclosure.com.

For a better understand of the recast, I have calculated payment schedules for a World Savings Option ARM and an Option ARM found with most typical lenders. So as to compare apples to apples, I am using a Start Rate of 1.5%, Margin of 3.45%, and the CODI Index Value of 4.3183% for the World Loan and the MTA Index Value of 4.2187% for the generic Option ARM. The Index Month is May 2006. Amortization Caps are 125% for the World Loan and 115% for the standard loan.

As can be seen, for the first 52 months, the minimum payment schedule would remain the same. However, at month 53, the regular Option ARM would find itself recasting to the fully amortized payment, but the World Savings Option ARM would take until the 86th month to recast, far short of the 120 months that the article stated.

There are certain factors related to the recast dates that do not appear on the above payment schedule. The primary factor is that the CODI and MTA Index adjusts monthly, so each and every adjustment will affect the month that the actual recast occurred. For example, the CODI Index is now 0.8642% and the MTA Index is now 0.5442% for Oct 2009. The lower the Index, the longer the loan takes to recast, so it is likely that the loans would now approach the recast dates of 120 or 60 months. However, if the Indexes go up, then the recasts will be on track to occur quicker.

On the face of it, the articles and the Payment Schedule would tend to support the arguments that Wells Fargo will be better off with the World Option ARMS than other lenders would. However, this is NOT simply an academic exercise, so the Real World must be factored in.

Underwriting

The World Savings loan was treated differently than most other Option ARMs. That is because World was a “portfolio lender” and held these loans instead of selling them to Wall Street. This had profound implications for World underwriting.

World Savings underwrote loans using a “Make Sense” decision criteria. This underwriting allowed for most loans to be stated income, and credit scores into the upper 500’s, with mortgage lates allowed. All that needed to be done was to “document” the late with a “good” letter of explanation. Do that, and the loan was approved, no matter the issues.

The reason that World was able to embark upon their “Make Sense” underwriting was their appraisal process. Whenever the World underwriter received a loan with an appraisal from a non-World appraiser, a World appraiser would review the appraisal. Usually, this resulted in the World appraiser reducing the value of the appraisal by 10%. This gave World an “added cushion” to the loan to value and loan amount, to protect their interests. In reality, this meant that World was extending the loan offer based upon the foreclosure value of the property. How this helped World Savings is shown in the following example.

• Appraisal Value of $500,000
• 80% loan to value = $400,000
• With 125% Negative Amortization, World would loan at a 100% loan to value.
• By reducing the appraisal amount to $450,000, World would do the loan at 80% loan to value, or $360,000. Add in the 125% Negative Amortization, then World would be back at $450,000.
• The end result is that World has a 10% equity cushion in the loan (in theory).

It should be noted that most brokers knew the World Savings practice with regard to appraisals and if the loan to value was close to 80% and since the World procedure would likely result in the loan being declined, then the broker took the loan to another lender [Ed. note - or maybe they made sure they got a more favorable appraisal, first.].

A real problem with the Option ARM loan is in regard to the World Savings Fast Action Team. This was an underwriting program where an underwriter could usually make an approval without any upper management review. The teams were located throughout the state of California, and it was easy to simply take the original loan application and credit report to the underwriter, sit down and show the underwriter the paperwork, and the underwriter would tell you how to write up the loan, stated income or not, and other issues to address. Therefore, it was relatively easy to get even difficult loans approved.

(This was also the routine when going through the World Account Representative for the broker officer. It should be noted that the same was true of other Account Reps for different lenders. )

The reality is that most borrowers were approved for the Option ARM mortgages using Stated Income loans. The income was over-inflated, and as a result, the borrowers were never qualified for the loan. If they were lucky, they could only make the minimum payment and nothing greater. If they had been required to have impound accounts and make the impound payments as well, then they would have likely defaulted at a faster rate.

Summary

In the last two years, I have audited probably about 150 World Savings Option ARMs. These have mostly been from people in default, ready to lose their homes. The common characteristics of the borrowers reflect the following:

• Stated Income loans, though the borrowers were W-2 employees who were capable of providing income documentation. If the documentation had been provided, then the borrowers would have been declined for the loan.
• 80% loan to value first mortgages, with Margins of 3.25% to 3.45%.
• Three year prepayment penalties.
• Large Yield Spread Premiums paid to the brokers.
• Loans originated from 2004 to 2007, with years to go before the recast of the loan payment.
• All had no equity left in the homes. Between the drop in values and the Negative Amortization, each borrower was underwater.

Based upon my observations, the 10 year recast date in not worth considering as beneficial to Wells Fargo. What will be the determining factors with regard to whether the Option ARM is going to harm Wells earlier than the recast dates will be:

• The Index Values and how long that they will continue to stay low. Once rates increase, then the greater likelihood of recast issues.   [Ed. note - and should the economy continue to recover anytime soon, as the is the hope, the Fed will once again raise rates.  Should the Fed keep rates too low for too long (again), it would trigger inflation or dollar devaluation, which would likely force market rates higher on their own.]
• The steady increase in the monthly payments at the minimum rate will continue to erode the disposable income of the borrower each year, which will tend to undermine the ability of the borrower to make the payments, resulting in default.
• Failure of the borrowers to be able to make taxes and insurance payments each year, which will result in the lender making the payments for the borrower and then tacking the amount onto the monthly payments, further eroding the borrower’s repayment ability.
• Continuing falling property values, which will make the borrower even more underwater with the loan. Eventually, the decision will be made to consider strategic defaults for even borrowers who could make the monthly payments but no longer see the worth in doing so, since they could default, and then buy a “better” property in 3-4 years, at a much lower price.

A point that I should bring up regarding the Credit Suisse chart of Option ARM resets that is being discussed. I have been having discussions with Bill Matz of Master’s Touch Mortgage regarding this specific point. Bill is a licensed mortgage broker, real estate attorney, tax attorney, and financial planner. He is one of the few people I trust in the business.

It is the opinion of each of us that the chart has significant errors in it. Some of the errors relate to the issue of the 10 year recast periods. Other errors relate to how differing Index values will affect the recast times.

It is our conclusion that this chart has over-estimated the coming year’s recast numbers. A large part of this conclusion is based upon the number of Option ARMS that have recast or will recast prior to the five year term. Also, it does not factor in the number of defaults that have already occurred long before the recast period.

But whatever the final timing, Wells is surely not insulated, due to the many factors outlined above.

Disclaimer:  Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.

The Bush Administration proposed a new foreclosure relief plan today in response to the mortgage crisis. The plan encourages lenders to write down loans and shift risk to the government-backed FHA program.

Hoping to assist more than 100,000 homeowners, the administration announced their intention to expand the FHASecure program. The expansion will allow the FHA to insure new mortgages for struggling borrowers, including those with ARMs and those who owe more than their homes are worth.

Not everyone will qualify though. High risk borrowers and borrowers who missed more than just a couple of mortgage payments will be turned away. Approval will also depend on a lender’s willingness to write down the mortgage principal owed. The maximum amount that could be borrowed under the expanded program would be either 90 or 97 percent of the home’s value, depending on the borrower’s risk profile.

Democrats are expected to oppose the effort. They are in the midst of writing more aggressive legislation to deal with the foreclosure problem. Although their legislation also calls for expansion of the FHA program, there are a lot of other provisions in the bill.

The FHA’s Financial Woes

Although both Democrats and Republicans are looking to the FHA to rescue homeowners in trouble, there is some question as to whether or not the agency is equipped to deal with the foreclosure crisis.

By its own estimates, the FHA will be operating in the red this year. Congressional officials are projecting a $1.4 billion shortfall in fiscal 2009 for the agency. If this happens, American taxpayers will be forced to subsidize the FHA for the first time in its 74-year history.

Some housing officials are now blaming the bad ink on an FHA program that allows seller-financed down payment loans. Under the program, sellers arrange to cover buyers’ down payments. The seller concessions are generally added to the total cost of the loan.

Only 2 percent of FHA insured loans were seller-financed down payment loans in 2000, but they grew in popularity during the boom and the FHA did nothing to keep the program in check. By 2007, seller-financed down payment loans accounted for a whopping 35 percent of all FHA loans.

The problem with this is that the foreclosure rate on seller-financed down payment loans is two to three times that of other loans, putting the FHA’s portfolio in a very precarious position.

Already, the FHA backs 3.8 million loans worth approximately $365 billion. If Congress and the Bush Administration have their way, the agency will be greatly expanded. Since the FHA has a government insurance fund of only $20 billion, and statistics show that 25 percent of FHA insured borrowers go into default again after a workout, there is almost no doubt the agency will have problems handling all the loans that do end up in foreclosure.

Under pressure from consumer groups and troubled homeowners to prevent further collapse in the housing market, Senate Democrats and Republicans are working together to create a foreclosure relief bill.

Approximately $1.5 million worth of subprime mortgages will reset to higher rates before then end of 2008. And subprime is just the tip of the iceberg. Before the credit bubble has deflated completely, an estimated $1 trillion in defaults and writedowns are expected as bonds, commercial mortgages, leverage loans and other mortgage loans go sour.

Lawmakers are under extreme pressure from some groups to do something to bail out Main Street. Since the bailout of Wall Street firm, Bear Stearns, the pressure has increased considerably.

Although the Democrats have been pushing for broader government intervention for some time now, the Republicans have held firm on their belief that such action might cause more problems than it fixes.  

This week a notable change occurred. The Senate agreed to set partisan differences aside to create legislation that is meant to prevent foreclosures and bolster the ailing housing market. The new consensus is that immediate action must be taken.

On Tuesday, the Senate voted overwhelmingly to move forward with new housing legislation. Late Wednesday, they unveiled the Foreclosure Prevention Act.

Democrats and Republicans have reached a tentative agreement on the core details and will be debating amendments in the coming days. The core of the plan provides:

• A $4 billion fund for local governments to clean up neighborhoods riddled with foreclosed homes.
• $100 billion for mortgage counseling programs.
• $10 billion for federal tax-exempt bonds to help finance and refinance home purchases.
• A $7,000 tax credit to people who purchase newly built homes, foreclosure properties or properties owned by sellers in default.
• A new loan limit for the Federal Housing Administration that will allow borrowers to finance 110 percent of an area’s median home price versus 95 percent.

The Foreclosure Prevention Act also includes special provisions for soldiers. If the bill is signed into law, lenders will not be able to foreclose on a soldier’s home for at least nine months after the soldier returns from active duty. Lenders will also be forced to put a one year rate freeze on mortgages that are held by active-duty soldiers who face a rate reset.

Amendments that are up for debate include a plan that will give bankruptcy judges the power to write down mortgage principal and a plan that will offer tax breaks to homebuilders who have experienced credit losses over the last two years.

If the legislation is approved, it will go before the House of Representatives and eventually President Bush. There is already some doubt as to whether or not it will make it all the way. A White House spokesperson released a statement Wednesday afternoon saying there were “serious concerns about some of the elements.”
 

Presidential candidate Hillary Clinton unveiled a new four-part mortgage relief plan at a speech before 150 elected officials and students at the University of Pennsylvania yesterday. The plan calls for immediate action and direct government intervention.

Senator Hillary Clinton has been proposing ideas to provide foreclosure relief for more than a year now. On Monday, she added to those proposals, calling for $30 billion and government intervention.

Her new four-part plan, which includes some of her previous proposals, is the most aggressive plan floated by a presidential candidate so far. In addition to interest rate freezes and a foreclosure moratorium, Clinton wants to see a $30 billion fund that will allow cities and states to improve neighborhoods by buying foreclosed properties.

To encourage loan restructuring, she suggested mortgage servicers be given more protection against lawsuits from investors. According to her, evidence suggests servicers are less willing to modify mortgages because they fear litigation.

Clinton also stated that she would support controversial legislation recently introduced by Representative Barney Frank (D) and Senator Christopher Dodd (D) that calls for $20 billion in public funds to establish a federally backed mortgage auction. 

Other ideas she mentioned included a huge expansion of the Federal Housing Administration (FHA) and an emergency, non-partisan “working group” that could brainstorm new ways to prevent more foreclosures. She recommended tapping economists, as well as former Federal Reserve chairmen Alan Greenspan and Paul Volcker and former Treasury Secretary Robert Rubin to lead the group.

Her speech comes as the mortgage crisis threatens to overwhelm the economy. The latest statistics show that nearly one million people are facing foreclosure, and more trouble is expected as rates reset and home prices continue to fall.

Senator Barrack Obama’s campaign issued a statement after Clinton’s speech to say that Obama is also working to ease the credit crisis. He too has suggested a “homeownership preservation summit,” expansion of the FHA and a larger mortgage bond program.

Other ideas Obama has come out with previously include stiffer penalties for predatory lenders and a simplified tax code that will allow more people to benefit from the mortgage income tax credit.

Republican presidential candidate John McCain is traveling down a different road. Today, he warned against government intervention, saying it is not the “duty of the government” to bailout irresponsible borrowers or lenders.

Breakdown of Hillary’s Proposals

• 90-day foreclosure moratorium
• Freeze the interest rates on subprime ARMs for at least five years
• Allow the FHA to guarantee up to $400 billion in refinanced mortgages
• Put underwater mortgages on the government’s balance sheet on a temporary basis
• Introduce legislation to protect mortgage servicers from investor lawsuits
• Create a $30 billion stimulus package to allow cities and states to purchase foreclosed properties
• Set aside $10 billion to expand the mortgage revenue bond program
• Create a “high-level emergency working group” to brainstorm more ideas to help ease the foreclosure crisis

Government regulators eased capital requirements for Freddie Mac and Fannie Mae on Wednesday. The move is meant to ease the housing crisis, but critics say it will cause the two overleveraged firms to hang themselves at the expense of taxpayers.

The Office of Federal Housing Enterprise Oversight, which oversees Freddie Mac and Fannie Mae, agreed to allow the two government-sponsored entities to reduce their mandatory cash cushion by a third. The plan is expected to free up $200 billion that will go to buying up more mortgages and mortgage securities.

This is the third consecutive step the government has taken to ensure the two firms will be able to take on more of the country’s bad mortgage debt. The first came when Congress raised the limits for the loans that Fannie and Freddie can buy or insure from $417,000 to $729,750. The second occurred March 1 when Fannie and Freddie were released from the combined $1.5 trillion cap on their mortgage investment holdings.

The initiatives taken recently by the government are controversial because it raises the risks the two companies will be allowed to take on. This in turn raises risks for taxpayers. Although Fannie and Freddie are publicly-traded companies, they enjoy the benefit of an implicit government guarantee. In other words, taxpayers will be expected to flip the bill if Fannie and Freddie ever fail. 

And the risk of failure is very real. In the fourth quarter of last year, the two GSEs were responsible for nearly 75 percent of the mortgage backed securities on the market. They are also losing money fast and expect to see more red ink in the future.

Fannie Mae posted a record $3.55 billion fourth quarter loss. Analysts believe the company’s credit losses will continue to rise this year and in 2009. Freddie Mac is in a similar position. The company reported a record $2.45 billion net loss during the same period.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, assured everyone at a news conference today that Freddie and Fannie are “safe and sound” and would remain that way.

Until recently, Lockhart has been firmly against loosening regulations for Fannie Mae and Freddie Mac. There has been some speculation that his rapid change of heart stems from political and lobbyist pressure.

Federal Reserve Chairman Ben Bernanke publicly urged lenders yesterday to forgive a portion of the principal owed on loans. Bernanke insists the time has come for banks to consider this tactic if they want to prevent foreclosures. 

There is no hard data to quantify how many homeowners are making the decision to walk away from their troubled mortgages, but the general consensus is that the numbers are high enough for lenders to be legitimately concerned.

So what’s a bank to do?

According to Fed Chairman Ben Bernanke, the best thing banks can do to combat the “walk away” trend is to slash the amounts owed on delinquent loans. This was the solution he proposed yesterday to the Independent Community Bankers of America. As one might imagine, the idea received a lukewarm response from bankers.

Nevertheless, Bernanke insisted that restoring equity with a principal reduction could be the most effective way of preventing foreclosures and delinquencies among borrowers who are underwater in their mortgage.

“The fact that many troubled borrowers have little or no equity suggests that greater use of principal write downs or short payoffs, perhaps with shared appreciation features, would be in the best interest of both borrowers and lenders,” Bernanke told the crowd.

Principal balance reductions have been very rare so far. The banks that are offering modifications typically deal in loan extensions or rate reductions.

Bernanke reports that most lenders are reluctant to forgive portions of mortgage debt because it could establish a trend that forces them to write down the principal again and again if home prices continue to fall.

The Fed Chairman argued that while this may be true, lenders still have the opportunity to mitigate losses. He backed up the claim with a recent study that estimates total losses exceed 50 percent of the principal balance in the average subprime foreclosure.

Support for Bernanke

The speech Bernanke made yesterday flies in the face of everything Treasury Secretary Henry Paulson said just one day earlier:

“Being underwater does not affect your ability to pay your mortgage,” Paulson said in his speech. “Any homeowner who can afford his mortgage payments, but chooses to walk away from an underwater property is simply a speculator–and one who is not honoring his obligations.”

What this means is that Bernanke may now be at odds with the Bush Administration. It is very unlikely that Bush, Paulson or anyone else from that camp will endorse the write-down strategy.

On the other hand, the Democrats are keen to put their hands on the problem and may be willing to offer a stamp of approval in the next day or two.

The most opposition will naturally come from banks and investors, who have already taken a beating and may not be looking for seconds.

Project Lifeline is the new relief plan that grants a 30-day grace period to homeowners facing foreclosure proceedings. Critics say the plan is for banks, not homeowners.

In mid February, six major lenders (Bank of America, Citigroup, Countrywide Financial, JPMorgan Chase, Washington Mutual and Wells Fargo) voluntarily agreed to an initiative known as Project Lifeline.

Less than a week after the announcement was made, the rest of the lenders in the Hope Now Alliance jumped on the bandwagon. Members of the Alliance include nearly 90 percent of the subprime servicing market and nearly 70 percent of the entire mortgage servicing market.

Although Project Lifeline has been adopted by most U.S. servicers, it will not be extended to all borrowers. The lifeline is aimed at severely distressed borrowers only. Homeowners who are less than 90 days past due will not even be considered.

Furthermore, Project Lifeline is more of a statement of intent than an actual program. All it really does is freeze foreclosure proceedings for 30 days to buy homeowners a little more time to work out their mortgage problems. It is not a workout plan, but a delay that allows borrowers more time to sell, refinance or engage in some type of loan modification program.

It is also worth noting the 30 day freeze is not automatic. All lenders are agreeing to do is initiate contact with borrowers. Homeowners who respond may or may not be considered for the 30-day reprieve. It’s up to the lender to decide who gets it and who doesn’t.

Too Little, Too Late?

Not surprisingly, Project Lifeline has been heavily criticized for being a stall tactic for banks versus an actual lifeline for people who are drowning in mortgage debt.

Some of the banks who have voluntarily agreed to this are so capital impaired that they can’t afford to eat the loans and just let borrowers walk away from an appreciating asset. In other words, it is the banks that desperately need a lifeline.

There is also some question as to whether or not the Project Lifeline gesture is just for show. Although lenders have been foreclosing, most have been willing to sit on a bad loan a lot longer than they normally would.

Terry Francisco, a spokesperson for Bank of America, has admitted that Project Lifeline would have little impact on what the bank was already doing to help borrowers.  Francisco said the real goal of the initiative is to make the borrower process “easy to understand.”

As home prices drop and mortgage payments rise, an increasing number of borrowers are handing in the keys to lenders and walking away from their mortgage.

A new term has been coined for the envelopes that lenders all over the country are receiving from struggling homeowners: jingle mail.

The phrase is used to describe desperate borrowers who are sending their keys back to lenders and walking away from their mortgage obligations. New reports show that this is happening much more frequently as an increasing number of homeowners find they are underwater in their mortgage.

Fitch Rating is claiming that borrowers’ apparent willingness to simply give up on their mortgage has contributed heavily to the high default numbers we are seeing now. On February 1, the company announced they would slash ratings on mortgage debt for this reason.

Does Walking Away Make Sense?

Foreclosure used to be a rare thing, typically resulting from job loss, illness, or a death in the family. But changes in the mortgage industry in recent years have altered the how and why of foreclosure.

Most of the borrowers who are walking away now are doing so because of increasing payments and depreciating assets. There is also the fact that the majority of the borrowers now have nothing to lose–they didn’t put anything down and therefore have very little invested.

Walking away can make sense for them because it can be less costly than going bankrupt in an attempt to save a single asset that is losing value by the day. Of course, this depends heavily upon where the borrower lives.

Different states have different rules for borrowers and lenders. For example, the state laws in California make it difficult for lenders to collect additional money after foreclosing and selling a property. In other states, like Michigan, lenders are allowed to go after the borrower for the difference.

Troublesome for Lenders

Not surprisingly, lenders are disturbed by the jingle mail trend. Wachovia and Bank of America have both discussed the issue in recent conference calls and say there is a definite change in the mindset of borrowers. Wachovia CEO Ken Thompson noted that some of the borrowers had the ability to pay, but weren’t willing to so since they have lost so much equity.

Most of the banks have no real desire to take the homes back as it will be very difficult to recoup all of the money that it is owed. A large number of borrowers overpaid for the home, didn’t put anything down, and didn’t make enough in payments to dent the balance. The chance that banks will break even on these sorts of properties, let alone make a profit, is slim to none.

What Is Happening to the Abandoned Homes?

For the most part, nothing is happening. Vacant homes can be found in nearly every city in America. In the better neighborhoods, the houses sit empty and neighbors take care of the lawn so that their own homes look better. In bad neighborhoods, the houses are sometimes burned out and used for illegal purposes.

There have also been reports of homeless who are taking refuge in abandoned properties. The homeless are outnumbered by vacant houses in many different cities. In Cleveland, for example, there are at least three abandoned houses for every one homeless person.

Brian Davis, the director of the Northeast Ohio Coalition for the Homeless, said the foreclosure crisis is a low-cost (i.e. free) housing option for people who don’t want to sleep outside or take refuge in a shelter. Since many of the abandoned homes still have lights, heat, and running water, they are convenient overnight stops for someone who needs a place to stay.

Countrywide Financial Corp. has teamed up with the Association of Community Organizations for Reform Now (ACORN) to help subprime borrowers avoid foreclosure. All of Countrywide’s borrowers with subprime loans will be eligible for relief, according to an announcement made earlier today.

Although Countrywide completed more than 81,000 home retention workouts in 2007, the lender is still having huge problems with defaults. As of December 31, a whopping 33.64 percent of Countrywide’s subprime loans were delinquent, up from 21.22 percent a year earlier.

Last month, the struggling lender agreed to be bought by Bank of America, the second largest U.S. bank. The deal is projected to be finalized sometime in the third quarter of this year.

In the meantime, Countrywide will open up a new plan to subprime borrowers who need more manageable loans to avoid foreclosure. The lender intends to work with the advocacy group ACORN to formalize workout plans for borrowers.

What makes this plan different from some of the other previously announced initiatives is that relief will be available to all of Countrywide’s subprime borrowers, regardless of their default status. This means that workout options are available for those who are current on their mortgage payments and for those who are not.

Furthermore, borrowers do not need to have an ARM to apply for help. Subprime borrowers who have fixed rate mortgages can also seek out various workout solutions.

Some of the options Countrywide will offer to an estimated 100,000 customers include a loan modification for ARM loans that offers a five-year pre-reset rate freeze and short-term repayment plans. Some borrowers will also have the option to refinance into a prime loan.

It is hard to estimate how much of an impact (if any) Countrywide’s subprime relief plan will have. Approximately 40 percent of current subprime ARM foreclosures can be attributed to borrowers who already had at least one loan modification or repayment plan but defaulted anyway, according to the Mortgage Bankers Association.

Countrywide’s impact will also depend on how many borrowers get repayment plans and how many get loan modifications. Repayment plans are not nearly as effective because the lender takes funds that are owed and tacks them onto the back end of the loan. Although the borrower’s delinquent status is erased, the problem is not.

Repayment plans are the prevailing tactic of the HOPE NOW alliance, which includes 16 of the nation’s largest conventional and subprime mortgage servicers. During the second half of 2007, nearly 75 percent of all subprime workouts involved payment plans versus loan modifications.

Will Countrywide try to forestall the inevitable like the HOPE NOW alliance or will they make a true effort to renegotiate all of their bad loans?

During a conference call with reporters, Acorn president Maude Hurd didn’t offer any estimates about repayment plans and loan modifications, but did say that Countrywide’s new practice will help all subprime borrowers and “fill the gaps” left by other foreclosure relief initiatives.

Mary Jane Seebach, managing director of public affairs for Countrywide, said the company also has intentions to announce future programs that will help prime borrowers and borrowers with pay option loans.

Home equity loans and lines of credit are putting lenders in an even bigger pinch as the number of home equity defaults rises to record levels.

Countrywide Financial Corp, the lender with the nation’s biggest home equity loan book, announced last week its $32.4 billion portfolio of prime home equity lines of credit is deteriorating rapidly. The company took a $704 million charge as a direct result of home equity loan defaults.

And Countrywide isn’t alone. The loss rates are climbing for all lenders, according to Frederick Cannon, an analyst at Keefe, Bruyette & Woods.

Home equity lenders extended $504 billion in new home equity loans and lines of credit in 2006 and $456 billion in 2007. Estimating the extent of any one lender’s exposure to home equity loans is difficult because the risk is generally carried off the balance sheet. In other words, trouble isn’t always obvious until loans have deteriorated past a certain threshold.

What is clear is that defaults are rising. Home equity loan defaults have increased by nearly 50 percent in a year’s time and delinquencies on lines of credit have doubled in the same time period.

Not All Lenders Are Foreclosing

Although equity borrowers are defaulting in high numbers, some banks have been hesitant to foreclose on homes, choosing instead to walk away from the loans altogether.

“More often now than ever before we are writing off the loan,” says Bob Caruso, Bank of America Corp.’s national servicing executive. “The customer still owes the money, but it is no longer an asset on our books.”

This strategy may seem like a step away from the norm, but it is rapidly becoming the most prudent route for a home equity lender. Foreclosing can leave the lender deeper in the red because the owner of the first mortgage must be bought out.

Since falling home prices have insured the property’s value will not be enough to cover the costs of foreclosure in many cases, it’s generally better to just write off the loan.

Lenders Tightening Credit

Sixty percent of the U.S. banks responding to a recent Federal Reserve survey say they have instituted tougher criteria for home equity lines of credit. Lenders have also tightened guidelines considerably on home equity loans.  

Countrywide sent letters to 122,000 customers recently to announce that Countrywide was freezing the ability to draw from existing lines of credit.  The letters were sent to areas where home prices have dropped considerably, according to a Countrywide spokesperson.

Washington Mutual, Citigroup and the USAA Federal Savings Bank have all made similar moves, citing the right to do so under the borrowers’ creditor agreements.

Lenders have also begun to alter their definitions of good credit and ample equity. A score of at least 680 or 700 is now required to get a home equity loan in most cases, according Bob Walters, chief economist for Quicken Loans.

The state of the local housing market is considered by many lenders as well. For example, Bank of America allows borrowers to tap up to 90 percent of their equity throughout much of the nation. But the same lender limits the amount to 80 percent in areas like Miami and Las Vegas, where home prices have fallen.

The Los Angeles Times reported last week that Chase will take follow suit by limiting the maximum amount of equity that can be borrowed to 70 percent in Florida, California and other housing depressed areas.