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.
***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