Countrywide and Risk Management – They Just Can’t Get The Models Right

Just who is doing the due diligence for Bank of America on the acquisition?

Countrywide’s Mortgage Woes Deepen
Countrywide Financial Corp.’s mortgage portfolio continues to deteriorate rapidly as defaults increase and home prices fall, a securities filing shows. The Calabasas, Calif., lender’s annual filing with the Securities and Exchange Commission, released late Friday, showed a big increase in late payments on option adjustable-rate mortgages, known as option ARMs. These loans give borrowers several choices of payment each month, including one that covers only part of the interest normally due. When borrowers choose that minimal payment, the loan balance grows…The lender also said it took a big loss in the fourth quarter on home-equity lines of credit.

Further losses may lie ahead…Countrywide was blindsided during the quarter by obligations on home-equity lines of credit that it had sold to investors in the form of securities. Normally, the trusts that control such securities reimburse the lender when borrowers make further draws on these lines of credit. But if losses on the loans exceed certain levels, Countrywide isn’t reimbursed immediately and may never be reimbursed unless income from the loans outstanding is sufficient to meet obligations to investors in the securities.

Countrywide said the likelihood of such a situation was “deemed remote” until late 2007. It blamed a “sudden deterioration” in the housing market. As a result, it recorded a $704 million loss to cover the estimated costs of its obligations on the lines of credit…A Countrywide computer model used to gauge risks on these securities didn’t take into account the possible effects of exceeding the loss levels that cut off reimbursements, according to a Dec. 28, 2006 internal report reviewed by The Wall Street Journal.