Countrywide Financial Corp., stuck with tens of billions of dollars in "alternative" mortgages it can't sell, is pushing customers to refinance into traditional loans that can be easily unloaded by the struggling lender.The home-loan giant seeks to have $12 billion of these exotic loans refinanced into uncontroversial mortgages and has told its sales force to pull out all the stops to get borrowers to go along, internal documents show.
Countrywide has authorized employees to knock 1 percentage point off its usual loan-origination fees, waive steep prepayment penalties on existing loans and loosen certain other requirements that would normally apply. If that doesn't work, salespeople are to quickly "elevate any/all issues" to their supervising vice president, a directive says.The initiative is designed to give the Calabasas-based company loans it can sell to government-sponsored home-finance behemoths Fannie Mae and Freddie Mac or loans that can be insured by the Federal Housing Authority or guaranteed by the Department of Veterans Affairs. Backing by the FHA or VA makes loans easy to market.The cash-raising effort demonstrates the financial desperation that led Countrywide to accept a $4.1-billion takeover offer from Bank of America Corp. last week. It also shows how the sub-prime meltdown has transformed the mortgage industry.Lenders once found eager buyers for sub-prime and other exotic loans on Wall Street and elsewhere, but that demand has dried up in the wake of surging defaults. If lenders want to sell the loans they make, they now generally must meet the standards of the big government-affiliated mortgage players. These for the most part don't accept the kind of mortgages that helped propel the housing boom with features such as ultralow "teaser" payments and little verification of the borrower's income.Countrywide said Wednesday that its refinancing initiative would give borrowers better rates and other terms while freeing capital for additional lending or other uses. It's unclear exactly what kinds of loans are in the $12-billion refinance mix, except that they are for less than $417,000 -- the limit for purchase by Fannie Mae and Freddie Mac. A senior Countrywide loan officer described them as a "hodgepodge" that includes many adjustable-rate mortgages with optional ultralow payments made to borrowers with good credit who obtained them on a "stated income" basis -- without documenting their earnings. Delinquencies on such "option ARMs" are rising rapidly.Countrywide had always intended to sell the loans but was stuck with them when the market shifted."Countrywide is desperate to dump them to recoup the capital by refinancing them into marketable loans," the loan officer said. "It's the equivalent of a manufacturer who gets stuck with a ton of unsold merchandise after the Christmas season. So he says, 'Let's liquidate the inventory.' " The company's sales memo illustrates the role of aggressive selling in the home-loan business."A lot of these companies had an intense sales culture, and Countrywide was one of them," said Martin Eakes, founder of the Center for Responsible Lending, an advocacy group. "And now the funnel has been restricted to Fannie and Freddie and the FHA, and that's all that they can force through it."The documents describing the program make clear that the replacement loans must be "conforming" -- adhering to the standards of Freddie Mac and Fannie Mae -- or "government loans," the highly documented mortgages that can be backed by the FHA or VA. "You must figure out how to originate every loan as a Conforming or Government loan!" the instructions read. "Ineligible Loan Types: Do not originate!!!" The instructions also spell out how to make computerized "exception requests" -- attempts to win approval for loans that don't meet regular standards for refinancing -- and to contact supervising "sales leaders" to review the requests.If borrowers ask why they are being pitched a new loan, loan officers are told to reply: "As you may have read in recent news articles, Countrywide is committed to ensuring our borrowers are in the best situation possible. We want to help you by determining if we can significantly improve your mortgage rate and payment." The refinancing initiative, however, is separate from Countrywide's participation in a mortgage industry plan, promoted by Treasury Secretary Henry M. Paulson Jr., to systematically modify or refinance certain sub-prime mortgages, the kind of loans given to people with poor credit. But Countrywide and other lenders also are trying, with the encouragement of the Bush administration, to refinance as many "prime" adjustable-rate loans as they can before the rates borrowers pay shoot up. Replacing dicey loans with more affordable mortgages may cost lenders less in the long run.Countrywide said in a news release Wednesday that it had helped more than 81,000 borrowers avert foreclosure in 2007, mostly by modifying loans or restructuring payments. The company added that it had agreed with the Assn. of Community Organizations for Reform Now, a national consumer group, on a plan to help sub-prime borrowers who are not covered under the Paulson-backed loan modification program. The plan includes homeowners who have fallen behind on their loans even before higher payments kick in.As for Countrywide's $12-billion refinancing initiative, its success is "by no means certain," said Frederick Cannon, a mortgage industry analyst at Keefe, Bruyette & Woods in San Francisco. "It will be pretty tricky in this market," he said. For one thing, Fannie Mae and Freddie Mac, after being burned by the national slide in home prices, now buy mortgages for no more than 75% of a property's value."But I guess desperate times call for desperate measures," Cannon said.