Alert: Downey Savings Abruptly Stops Doing Pay Option ARMs

Posted on July 10th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

The message below was just sent to approved mortgage brokers this evening. This is effective immediately. I believe that Downey was the last remaining Pay Option lender after Wachovia abruptly shut down the program a couple of weeks back. Unlike IndyMac, Downey is going to grin and bare it and fund all of this toxic garbage through 8/29. This is great news for the consumer and broker who have loans in process. Kudos to Downey for that.

The bad news is when lenders stop doing certain loans it is not because they are making a fortune on them…just the opposite. You have seen lender cut out loan programs since early last year stating with subprime. The Pay Option was Downey’s top program for years.

Don’t ya think they would have done earlier? Perhaps sometime BEFORE the stock price fell from $75 a year ago to $2.06 today? Perhaps Cramer telling everyone in July of 2007 it was going to $100 and writing ‘DSL’ across his knuckles kept the hope going beyond all reason ability. Heck, the stock price was at $38 on Feb 1st 2008! Everyone knew Pay Options would take any company down that owned them. I don’t understand why banks did this to themselves.

“From Downey Savings On Neg-am (Pay Option ARMs) loans:
 
Effective immediately, we will be eliminating the Portfolio Products A100 and A141. All loans in the system will need to lock by close of business Monday July 14, 2008.  The loans must fund by Friday August 29, 2008. “

***NOTE – SEE DOWNEY’S PAY OPTION ARM RATE SHEET. SEE BOTTOM. THEY LIMIT THE BROKER COMMISSION TO $50K! NO WONDER THEY ARE IN TROUBLE! This is the program at the heart of the Alt-A meltdown. Click here.  downey-ratesheet-last-

I saw Notice-of-Default rates on Pay Option ARMs begin to surge in Q4 2007. The largest Pay Option lenders/investors were Countrywide, IndyMac, Wamu, Wachovia, American Home Mortgage, Downey, First Federal, Bank United and Bear Stearns. Notice anything in common when looking at their stock charts? A kid in a high-school investment club could have figured this one out last year but the smartest guys in the room and the banks couldn’t. What a shame.

Remember, all of these banks will have significant earnings restatements in the future. This is due to negative amortization being booked as revenue on Pay Option ARMs despite the money never being actually collected. It is phantom income that will never be realized in the case of foreclosure and may never be realized regardless.

Banks are allowed to book negative amortization, also called ‘deferred income or CINA’, as revenue because in theory they will collect it when the home is foreclosed. Well, we know that is not accurate because values are down 30% in the past year in CA where the majority of these loans were made and homes are not selling in foreclosure other than to the bank in 98% of the cases. Pay Option ARMs were the absolute most toxic loan program ever created. Even worse than subprime 2/28’s and 3/27’s.   -Best Mr Mortgage

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11 Responses to “Alert: Downey Savings Abruptly Stops Doing Pay Option ARMs”

  1. E.O. – Do you have a job? Is it a gov’t job? You have to be one of the most bitter, angry people I see commenting on blogs. Not to mention the racist crap!

  2. I have to respectfully disagree regarding the POA beatdown. As far as bad loans go, the POA doesn’t come close to the 125% First Plus loans offered a number of years ago. I also don’t think that they are as bad as FHA and subprime loans where you are dealing with poor credit and no money down….If I am not mistaken, Downey, 1st Fed, and World, have been offering these for a number of years as their main loan product. The problem with these loans is that they were not only improperly marketed by the banks into a perfect storm RE bubble, but also improperly embraced by borrowers in the bubble markets that needed to continually stretch to maintain their lifestyle or to purchase a bubble house. Technically, during certain periods, and for certain borrowers these loan are very sound. In a period of low short term rates(1-3%), with a good margin, you will be under the current fixed rates. It’s not necessarily a good or bad loan, it just depends on the borrower.

  3. I don’t know Sean, POA’s are quite bad given how easy they are to market in a predatory fashion, with the teasers and the minimum payment rate.

    Also, POA’s are a double-whammy because they defraud both investors/stockholders AND borrowers.

    I’m not even sure banks thought far enough ahead to consider the value received in foreclosure. They probably thought “the borrower is bound to repay all the neg-am (with interest), therefore they will. After all, we have the 2005 serfdom—oops—bankruptcy law in place…”

  4. HousingRealist:

    Study my website – and get REAL – before it’s too late!

    PS to admin: Your continued censoring of my Comments will come back to haunt you (or worse) – and that’s for REAL!

  5. Ok…So Mr. Mortgage..what does that spell for all those Option Arms out there from the boom years? What will be the alternatives for someone who has a Option ARM and with today’s standards doesn’t have a snowball chance in HELL to refi it? I suspect that those McMansion owners are shaking in their boots as they call their mortgage brokers only to find out they will have to PROVE their income, not just a fancy 720 credit score, and that their payments may go up by as much as 77%…I think it would be great if you did a article on a scenerio of someone who has a option arm at say a mortgage balance of $700K and what their payments will be, what rate they will face and what they will need today to qualify for the refi vs. what they needed 18 months ago…

  6. Threatening the admin deserves getting a lifetime comment ban. And optimist, isn’t your webpage filled with religious trash and conspiracy theories? Who can take that stuff seriously?

    Mr. M, thanks for all you do for us. Rest assured that there are sane and rational people that enjoy your contributions.

    Best,

    GH

  7. Here here.. couldn’t agree more GH

  8. It is completely ridiculous that these loans ever made it to the market place in the first place. As much as I hate the Federal Reserve and their power over the government and citizens, they seem to be the only ones who will make the rules to disallow these loan products for the future.

    EO: Your website “brings me to tears” … because it’s the worst designed site besides user pages on MySpace. Rethink your colors, layouts, and images. How can anyone even read what you are preaching if the color scheme is too painful on the eyes?

  9. Mr. M, I don’t post often as I’m here to learn but I just want to say how much appreciate your insights and the forum you’ve created for an intelligent discussion for these important events. For each one who doesn’t appreciate your efforts (or otherwise threatens you), please know there are people like me who do appreciate your work.

    Thanks and enjoy your weekend!

  10. […] Alert: Downey Savings Abruptly Stops Doing Pay Option ARMs […]

  11. […] Alert: Downey Savings Abruptly Stops Doing Pay Option ARMs […]

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