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Some of the more startling figures in an ugly first-quarter earnings report published April 29 by Countrywide Financial Corp. were the sharp increases in 90-day delinquencies and charge-offs reported in the company's $24.5 billion pay-option adjustable-rate portfolio. The developments served as fodder for an article in the April 30 edition of The Wall Street Journal, but that portfolio was an area of investor concern many months before the company's recent distress.
Delinquencies in the option ARM portfolio spiked by 3.7 percentage points to 9.4% during the first quarter, and charge-offs, which generally occur at 180 days of delinquency under the company's criteria, soared by more than 250% on a sequential basis to $125.3 million. In all, Countrywide lost $893 million in the quarter, including a $1.3 billion provision for credit losses at unit Countrywide Bank FSB.
As highlighted by the extensive discussions surrounding option ARMs during a series of investor days convened by Countrywide in September 2006, management was aware of the trepidation with which some of the Street viewed the company's rapid growth in that product line, both in terms of originations and, more acutely, in Countrywide Bank's held-for-investment portfolio.
"There's probably not a single day that doesn't go by that I talk to half a dozen people outside the company, and none of them are excited that we're putting those loans in portfolio," said then-Countrywide Chief Risk Officer John McMurray in comments made to fixed-income investors Sept. 13, 2006, with respect to option ARMs held at the bank. "So we obviously have to have a good rationale for doing so." McMurray was recently named chief enterprise risk officer at Washington Mutual Inc.
Countrywide's investor presentations from that month, no longer posted on the company's Web site but available for posterity on SNLi, reflected the broad interest in...