Bank of America officials told regulators today they plan to discontinue Countrywide Financial Corp.’s option ARM loan program and "significantly curtail" other nontraditional mortgages such as low-documentation loans "as soon is as practical" after closing a deal to acquire the company later this year.

At a hearing in Chicago today, Bank of America officials said that after the merger — scheduled to close in the third quarter — the combined company will no longer make subprime loans, in accordance with Bank of America’s existing policies.

Countrywide curtailed almost all subprime lending last year, after the credit crunch forced it to focus on originating loans eligible for purchase or guarantee by government-sponsored entities Fannie Mae and Freddie Mac.

Bank of America’s new lending guidelines for the combined company also include limits on prepayment penalties, and protections on interest-only and hybrid adjustable-rate mortgages (ARMs) designed to limit the risk of payment shock.

The hearing, conducted by the Federal Reserve, is the first of two where regulators are gathering public input on the pros and cons of Bank of America’s $4 billion plan to acquire of Countrywide. While some fear the potential for reduced competition, others see an upside in that the combined company would be subject to more regulatory oversight than Countrywide was during the housing boom.

The Fed has scheduled additional hearings for April 28 and 29 in Los Angeles (see Inman News story).

If the merger goes through, Bank of America said the combined company will continue to offer:

  • Conforming loans underwritten to standard guidelines of government-sponsored enterprises and the government, including FHA and VA loans and other loans designed for low- and moderate-income borrowers.

  • Interest-only fixed-rate and adjustable-rate mortgages (ARMs) that are subject to a 10-year minimum interest-only period, which lessens the possibility of short-term payment shock.

  • Fixed-period ARMs that provide borrowers low initial rates with the security of fixed payments, subject to protections against steep increases in payment amounts.

Bank of America announced Monday that first-quarter net income fell 77 percent, to $1.21 billion, from a year earlier. The bank boosted provisions for losses by $4.78 billion due to rising losses in home equity, small business and home-builder loans, and net charge-offs were $2.72 billion, or 1.25 percent of total average loans, compared with 0.81 percent a year ago.

The Charlotte, N.C.-based bank said direct-to-consumer mortgage originations rose 32 percent to the highest levels since 2003, after low mortgage rates in January encouraged refinancing.

The bank’s consumer real estate division saw net revenue increase 57 percent, to $1.31 billion, as mortgage banking income more than doubled to $656 million. But the division posted a net loss of $773 million due to deterioration in the home equity portfolio.


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