Countrywide to Drop Option Arm Post Merger

April 22, 2008 No Comments »

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Once Bank of America completes the pending buyout of mortgage lender Countrywide Financial, a number of actions will be taken to ensure only the best home loans are originated by the combined behemoth.

According to a report from the Wall Street Journal, Bank of America testified before the Federal Reserve Bank of Chicago today, saying it would not originate subprime loans and scale back in many other high-risk departments.

Among the changes is a plan to scrap negative amortization loans, otherwise known as option arms, which allow borrowers to pay less than the actual amount of interest due each month.

These risky types of loans soared in popularity in recent years as borrowers searched for ways to keep monthly mortgage payments low due to skyrocketing home prices.

They were also highly incentivized by Countrywide and other lenders, increasing the sale of such loans and adding to the current mortgage crisis we now face.

Additionally, Bank of America plans to reduce the number of low documentation loans extended to borrowers, such as stated loans, while limiting the severity of prepayment penalties and keeping borrowers payment shock in check.

It comes as no surprise that Bank of America would scale down some of the offerings currently available at Countrywide, considering their risk appetite and the present lending environment.

But some also wonder if wholesale and correspondent lending will survive at Bank of America once the migration is complete.

(photo: redvers)

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