Countrywide Financial Corp. will eliminate option-ARM, subprime and low-documentation programs following its upcoming merger.
Bank of America Corp., which is expected to complete its acquisition of the Calabasas, Calif.-based lender by Oct. 31, disclosed the planned changes in testimony today before the Federal Reserve in Chicago, according to an announcement. The changes will be made to the combined mortgage business as soon as practical once the deal closes.
In addition to the elimination of non-traditional option-ARMs with monthly payments that might not cover all interest, the Charlotte, N.C.-based company said it will "significantly curtail other non-traditional mortgages, such as certain low-documentation loans" and "continue its long-established policy of not originating subprime mortgages."
ARM originations accounted for $109 billion of Countrywide's $408 billion in residential fundings last year, while nonprime business was $17 billion.
The bank also said limits will be placed on prepayment penalties, and borrower protections that limit the risk of future payment shock and ensure long-term affordability will be placed on non-traditional loans such as interest-only and hybrid ARMs.
"We recognize this tightening, by definition, restricts the availability of credit to some borrowers," BoA Global Consumer Credit Executive Bruce Hammonds said in the statement. "However, this will help ensure that those who get loans can afford to repay them."
BoA, which eliminated its wholesale lending channel late last year, didn't discuss plans for Countrywide's mortgage broker business. Broker originations accounted for $70 billion of Countrywide's 2007 volume.
But BoA said it will continue to offer conforming and government mortgages as well as interest-only loans where the interest-only period is a minimum of 10 years. It will also continue to offer hybrid ARMs with limited payment increases.
The Bank of America Charitable Foundation and Countrywide plan to provide $35 million in grants and low-cost loans to local and national nonprofit organizations for foreclosure prevention and the purchase of vacant single-family homes for neighborhood stabilization, the release said. The foundation has already allocated $10 million in direct grants, while Countrywide and its community partners have allocated $5 million. An additional $20 million will be directed toward grants as well as lending and investing efforts.