The WSJ asked UBS to prepare an analysis of bonds backed by Countrywide option
ARMs, and has a
big story about the results today. It’s not entirely clear what information
was available to UBS that wasn’t available to the WSJ, but it does leave the
poor reader not really knowing what to think: at one point, UBS and Countrywide
are flat-out contradicting each other, and the WSJ gives no indication of which
one is more plausible.
By 2006, nearly 29% of the option ARMs originated by Countrywide and packaged
into mortgage securities had a combined loan-to-value of 90% or more, up from
just 15% in 2004, according to UBS.
Of all Countrywide’s option ARMs, including those kept by the bank as investments,
fewer than 5% have had a combined loan-to-value ratio over 90%, a spokesman
said.
There are two ways this discrepancy could conceivably be resolved. The first
would be if Countrywide kept most option ARMs on its own books, and securitized
only the most toxic. But earlier in the article we have already been told that
Countrywide has $27.8 billion of option ARMs, while it securitized $122 billion.
The second possibility is that Countrywide wrote an enormous number of option
ARMs with relatively low LTVs prior to 2004, then saw the proportion with high
LTVs rise to 15% in 2004 and eventually 29% in 2006. But if you add up all the
prior years, it’s still less than 5% overall. This explanation doesn’t really
hold water either, since option ARMs were very much a niche product before 2004.
So we’re left with a question mark hanging over the UBS analysis. And once
it’s there, other numbers spring out, and we ask ourselves whether we should
believe them or not:
Of the option ARMs it issued last year, 91% were "low-doc" mortgages
in which the borrower didn’t fully document income or assets, according to
UBS, compared with an industry average of 88% that year. In 2004, 78% of Countrywide’s
option ARMs carried less than full documentation.
All these numbers are enormous: 91% of option ARMs were basically
stated-income loans? That’s crazy, if it’s true, and would prove that Countrywide
was a particularly lax lender – but now I’m not sure how much I can trust
these UBS numbers.
I’d love to see more detail on all of this. Specifically, since the UBS report
was commissioned by the WSJ, I’d like the WSJ to simply post the report on its
website, so we can read it and judge for ourselves, rather than having to rely
only on the WSJ’s journalists’ précis. Any idea why the WSJ seems to
be keeping the report to itself?
(Thanks to Mark Gimein for calling my attention to the article.)