Realty Check

I could say, “What took you so long,” but that would be rude. Today, just three days before the nation’s largest mortgage lender announces its quarterly earnings, Countrywide Financial Corp.

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[CFC  Loading...      ()   ] sent out a press release announcing a “comprehensive home preservation program to reach out to borrowers at risk of default.”

Let’s boil it down:

          1. A refi program for “Borrowers currently in a subprime loan with a strong payment history." This will allow about 52,000 C’wide borrowers to refinance about $10 billion worth of loans. They can try prime or FHA loans. For those with credit issues, “Countrywide will offer Fannie Mae or Freddie Mac’s expanded criteria programs.”

         2. A modification program to help borrowers who are “current but unable to qualify for a refinance and are likely to have difficulty affording an upcoming reset.” C’wide will send out letters and put out calls three months prior to the loan reset dates to see if these folks need help. This could result in modification of 20,000 loans worth $4 billion.

         3. For subprime borrowers currently delinquent, C’wide is offering a loan modification process. They’ll give a pre-determined, pre-approved rate reduction. This could help 10,000 borrowers with loans worth $2.2 billion.

This all sounds good, but I’m still wondering why this, why now? Well I got an email this morning from Janet Tavakoli of Tavakoli Structured Finance. She practically eats mortgage data for lunch. She says Countrywide may seem like it’s doing this out of the goodness of its big ol’ corporate heart, but really it has to do with the fact that recoveries on subprime loans are far worse than ever anticipated so far. Here’s what she writes:

“Last week I met with a major mortgage servicer of geographically diverse U.S. subprime loans. They work 13-hour days trying to salvage what they can, doing anything to avoid reporting a delinquency or foreclosure. They disclosed disturbing information unavailable even on trustee reports. The servicer asserted the rating agencies are incorrect in their optimism; recovery rates of 60% are unattainable. My average recovery rate assumption of 30% is also currently unattainable.”

Tavakoli says the servicer has been selling loans for 3-6 cents on the dollar. What are the issues? Legal costs relative to the low loan balances are huge and delays are long. Values of the homes are nowhere near what they were, so they’re looking at negative equity.

In other words, Countrywide is saving its own skin, as well as saving home ownership. The company simply has to do this because there is no way it can survive otherwise. Obviously they are seeing the recovery rates and just don’t want to risk it. This is a pre-emptive strike, and I say no matter what the motivation, it’s a positive move from Countrywide.

Here is a blog on Countrywide's Forclosures throughout the U.S.

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