How Egregious was Countrywide’s Option ARM Lending?

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


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.)

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