Countrywide offers help for reset shock

NEW YORK (CNNMoney.com) -- Countrywide Financial, the nation's largest mortgage lender, announced a program Tuesday to refinance or modify up to $16 billion of its loans.

The program is targeted to 80,000 borrowers who face the risk of default because their current variable rate mortgages would see payments jump to levels they could not afford.

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"Countrywide believes that none of our subprime borrowers that have demonstrated the ability to make payments should lose their home to foreclosure solely as a result of a rate reset," said a statement from Countrywide President David Sambol.

The bank says it has identified 52,000 borrowers, who collectively have borrowed about $10 billion, that it believes it can move into prime loans or those guaranteed by the Federal Housing Administration.

Another 20,000 borrowers who have more severe credit issues but are current with their loan payments could be eligible for modifications of their loans. That group has loans totaling about $4 billion.

Finally, Countrywide said it will send letters offering pre-determined, pre- approved rate reduction for an additional 10,000 borrowers who are delinquent on payments on loans totaling $2.2 billion.

The move was welcomed by foreclosure prevention counselors. Everyone at the Home Ownership Preservation Foundation, which operates a foreclosure hotline (1-888-995-HOPE), was talking about it, according to spokeswoman Tracy Morgan.

"We're impressed," Morgan said. "It's going to be an important offering."

Benefiting the most from Countrywide's initiative, according to Morgan, will be the delinquent borrowers. For the others, the ones with good payment records, "Refis are out there already," she said. "The real value is addressing the borrowers who have fallen behind."

The number of those delinquent borrowers the program addresses is small, however. Of the 9 million loans Countrywide services, about 450,000 are at least 30 days late with 80,000 in some phase of foreclosure.

The 10,000 delinquent borrowers to whom the company will offer rate reductions total only about 2 percent of Countrywide's late payers.

According to Steve Bailey, Senior Managing Director of Loan Administration for Countrywide, the program has a limited target; it's aimed at borrowers with 2/28 and 3/27 hybrid ARMs that have reset recently or will adjust over the next 15 months.

"We have heard so much in the press and from Washington calling these loans into question," he said.

The only hybrid ARM borrowers not eligible for help under the program are already late payers who, because of other complicating factors such as job loss, divorce or medical bills, the company judges have virtually no chance of making payments even if their loans are restructured.

The company claimed it already has performed 35,000 workouts for delinquent borrowers this year, but these included mostly small tweaks such as spreading out past-due loan payments over 12 months or over the life of the loan. More radical solutions, such as reducing rates or rewriting the terms of the loans entirely, were much more rare - until now.

Even the new programs, while more far reaching, are, according to Mike Larson, a real estate analyst for the Weiss Group, "baby steps."

Many lenders are doing them because the feds are "twisting their arms." You're going to see these announcements all the time," he said, "because regulators are breathing down the lenders' necks."

It is in Countrywide's interest not to have borrowers default on home loans. Besides the losses that the lender would take during the course of such a default, there is a glut of both new and existing homes already for sale on the market. That oversupply of homes is pushing down prices and pushing back the time it takes to sell the homes.

Countrywide Financial (Charts, Fortune 500) has had its own problems due to the problems in the mortgage securities market.

The company is expected to announce a deep loss when it reports results Friday, along with a sharp drop in its business levels in the third quarter. It has announced it will have to take charges of between $125 million and $150 million to lay off staff and close offices.

Problems with subprime mortgage delinquencies and defaults are affecting a wide variety of financial firms. Bank of America (Charts, Fortune 500), the nation's No. 2 bank. reported last Thursday that net income fell 32 percent, as it set aside an additional $865 million for credit losses and announced that loans that have gone bad rose by nearly $1 billion.

In addition, Washington Mutual (Charts, Fortune 500), the nation's largest thrift, reported a steeper-than-expected decline in earnings and warned it is bracing for more difficulties ahead in the housing market.

Also within the last week Wachovia (Charts, Fortune 500), the nation's No. 4 bank, said profit fell 10 percent, hurt by $1.3 billion in losses and writedowns related to turmoil in the credit markets.