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When mortgages go bad

The precipitous decline in the housing market handed Countrywide Financial to Bank of America on a platter, allowing the latter to buy more than $200 billion worth of Countrywide assets for $2.5 billion in stock. Still, skeptical investors have pummeled the bank’s shares since the deal was announced in January, driving it down 43%.

The bank’s situation is a microcosm of the entire industry, which is struggling to keep mortgages from going bad. Foreclosure rates are more than 50% higher than last year, fueled by the types of risky subprime, “liar loan” and “pick a payment” mortgages that Countrywide promoted. Such unconventional loans, which lenders made with increasing abandon as the housing market lost momentum, could remain problematic for the next four years, according to Moody’s Economy.com.

In a meeting with The Times’ editorial board this week, Bank of America Chief Executive Ken Lewis said he was confident that the bank would find ways to help most of its troubled borrowers. The ones it can’t, he said, are those who unexpectedly fall on hard times. That means the unemployment rate will be a critical factor in the recovery of the housing market and the economy. Another substantial problem is buyers who abandon houses that are worth less than their mortgage debt.

Congress is nearing passage of a bill (HR 3221) that would make it easier for borrowers at risk of foreclosure to obtain smaller, more affordable loans. But the effect would be limited -- the Congressional Budget Office estimates that the bill would help less than 20% of the 2.2 million borrowers expected to face foreclosure in the next three years, and the upfront cost to banks may deter many from participating. And now may be the wrong time to tap financially strapped Fannie Mae and Freddie Mac to pay for the new loans.

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In the meantime, Bank of America is remaking Countrywide’s practices in its own, more cautious image. That too reflects an industrywide shift to improve the quality of the loans made. But Lewis acknowledged that the return to more conservative underwriting spells trouble for borrowers with lower incomes and less-stellar credit histories. Policymakers should keep that in mind as they try to protect the country against the next housing bubble.


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