Subprime mortgages aren't the only challenge facing Countrywide Financial Corp., the nation's biggest home-mortgage lender. Some loans classified as prime when they were originated are now going bad at a rapid pace.
These loans are known as option adjustable-rate mortgages, or option ARMs. They typically have low introductory rates and allow minimal payments in the early years of the mortgage. Multiple payment choices include a minimum payment that covers none of the principal and only part of the interest normally due. If borrowers choose that minimum payment, their loan balances grow -- a phenomenon known as "negative amortization."
Countrywide first offered these loans in 2003 and quickly became a leader in this profitable and growing part of the mortgage market. Mortgage brokers liked the higher commissions and borrowers were drawn to low payments. As lending standards loosened, more of these loans included less-than-full documentation
ARM MONSTER
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The News: At Countrywide (under Angelo Mozilo, above), delinquencies are rising for option adjustable-rate mortgages, which carry low introductory rates but can lead to a rising loan balance.
Background: Lax lending standards led to rising subprime delinquencies. There are signs of similar woes in the prime sector.
Worst to Come? In 2009-2011, monthly payments on $229 billion of option ARMs will readjust (so borrowers may have to pay more).
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http://online.wsj.com/article/SB119318489086669202.html?mod=US-Business-News
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