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More Homeowners Have Problems Paying Mortgage

Borrowers with $25.4 billion of option adjustable-rate mortgages owe almost as much as their homes are worth, and one in eight is at least 90 days late on payments, according to Countrywide Financial, the lender bought by Bank of America last month.

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As of June 30, the typical borrower owed 95 percent of the value of his home, up from 76 percent when the loan was made, Countrywide said in a regulatory filing.

Seventy-two percent of borrowers were making less than full interest payments, and 12.4 percent were at least 90 days delinquent.

The average FICO credit score dropped to 680 from an original 715, but topped the 620 that some analysts deem a cutoff for "subprime." The U.S. median is 723.

The data show how the nation's housing crisis has hurt borrowers with good credit, and how Bank of America's $2.5 billion acquisition of Countrywide on July 1 has potential hazards for Kenneth Lewis, the bank's chief executive.

Countrywide's $25.4 billion of option ARMs at its banking unit represent about 28 percent of total mortgage loans held for investment.

Lenders industrywide have said many borrowers who owe more than their homes are worth are abandoning their properties because they don't expect to recoup their losses.

"People still don't understand what a catastrophe this is," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics of Torrance, California.

"The guys who are really on the hook are Bank of America shareholders." Through Monday, Bank of America shares were down 19 percent this year. The KBW Bank Index was down 20 percent.

Option ARMs let borrowers skip part of their payments and add the balance to principal.

But sinking housing prices and relaxed underwriting standards left many people with negative equity in their homes, leading to a surge in foreclosures.

In a July 21 conference call, Bank of America Chief Financial Officer Joe Price said the largest U.S. retail bank may face $14.3 billion of pre-tax losses on Countrywide's loan book, including the option ARMs.

Price said the forecast reflected a projected drop in home prices of 25 percent to 30 percent, with declines in California and Florida nearer 40 percent.

Excluding amounts reserved at Countrywide, further losses could total $8.1 billion, he said.

A Bank of America spokesman declined to elaborate.

Bank of America is not the only big lender with option ARM headaches. Wachovia said borrowers in its $122 billion "Pick-a-Pay" option ARM portfolio owed 85 percent of what their homes were worth on June 30, up from an original 71 percent.

In California's Central Valley, the average was 109 percent. The average overall FICO score was down to 661 from 675.

Wachovia took a second-quarter write-down of $3.3 billion on option ARMs. Countrywide said borrowers of 83 percent of its option ARMs got their loans with little or no documentation of their income.

Bank of America has said about 66 percent of the option ARMs went to California and Florida borrowers.

Through May, U.S. single-family home prices had fallen 18.4 percent from their July 2006 peak, according to the S&P/Case-Shiller index of 20 metropolitan areas.

By region, the declines over that time were 27.5 percent in Los Angeles, 28.5 percent in San Diego, 25.2 percent in San Francisco, 30.6 percent in Miami and 25.6 percent in Tampa.

Bank of America this year agreed to modify or work out $40 billion of troubled mortgage loans over two years, in an effort to keep 265,000 customers in their homes.

The bank expects the acquisition of Countrywide to add to profit this year.

But Whalen said Bank of America's losses on Countrywide might be double the $14.3 billion it projected.

"Lewis wanted the branches, the growth and the people, and Countrywide has very good people," Whalen said.

He added, "He also didn't want to leave the portfolio out there, because someone else would have bought it." In afternoon trading, Bank of America shares were down 97 cents, or nearly 3 percent, to $32.41 on the New York Stock Exchange.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.

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