Over the course of the past year, the endless woes of the US housing market have become explicably tied to the word ‘subprime’ as the result of mounting foreclosure rates among low-income/poor-credit borrowers.

But according to the Wall Street Journal, the ugly monster that has become the domestic credit crunch is showing its teeth once again, with loans that were classified as prime at their origin spiraling downward in record numbers.

These loans, which are known as option adjustable-rate mortgages (option ARMs), are very similar in nature to subprime ones. They have relatively low introductory rates and allow for minimal payments during the beginning periods of the loans’ lifetime. Something known as “negative amortization” is also part of the deal and inflates loan balances if borrowers choose to make a minimum payment that includes none of the principal and only a portion of the interest that is normally due.

The loans became an instant success when Countrywide first unveiled them in 2003 but as of late, a UBS AG analysis shows that 3.55 percent of option ARMs originated by Countrywide in 2006 and packaged into securities that were ultimately sold to investors are at least two moths past due. In regards to how Countrywide fairs when compared to the other giants within the same sector, Countrywide’s delinquency rate is a full percentage point higher than that of all other competing lenders.

According to UBS analyst Shumin Li, “they were giving these loans to riskier and riskier borrowers.” Furthermore, it is crucial to point out that the sharp upturn in late payments and delinquencies also stems from home prices in the US that have been dropping lower and lower for quite some time now.

Among option ARMs held in their own portfolio, 1.6 percent of Countrywide borrowers before 2006 were at least 30 days late on their payments. As of June 30, that figure had climbed to 5.7 percent. The Wall Street Journal writes that “Countrywide held $27.8 billion of option ARMs as of June 30, accounting for about 41% of the loans held as investments by its savings bank. An additional $122 billion have been packaged into securities sold to investors, according to UBS.”

What was once a problem limited mainly to the subprime sector is evidently beginning to make its way to the prime folks and the Journal says that ‘lax underwriting’ is one of the biggest culprits. According to Moody’s Economy.com, the problem could get a whole of a lot worse within a few years (2009 to 2011) when these option ARMs are adjusted to account for market-rate interest as well as principal.

Reiterating his utter confidence in the notion that the company will undoubtedly come out of the credit crunch with their heads above water, Countrywide Chairman and CEO Angelo Mozilo noted that delinquent payments are “bleeding” into prime mortgages.

Part of the problem could be the result of the simple fact that option ARMs do have the potential to be quite profitable. Tom LaMalfa, a managing director of Wholesale Access, found that the average broker’s commission on an option ARM ranges from 1.75 percent to 2.5 percent. To get an idea of the inflated profit margins for these brokers, the average standard fixed-rate mortgage provides the average broker with a commission of 1.48 percent. A subprime mortgage will normally fetch an average rate of 1.88 percent.

But why are so many people (people with reputable credit) making late payments and even becoming delinquent on their loans? Seeking to find the answer with the aid of a random sampling of some of his clients, Mozilo found that the average answer was that “the value of my home is going up at a faster rate than the negative amortization.” Mozilo was quoted as saying: “I realized I was talking to a group that had never seen in their adult life real-estate values go down.”

Just like a lot of other problems circulating around the financial sector, the root of the problem goes back to temptation. The Journal reports that for a borrower with a $520,000 mortgage at a 30-year fixed rate of 6.05 percent has monthly payments of $3,134. With an option ARM carrying just a one percent introductory rate, the monthly payments shoot down to just $1,673.

To subscribe or visit go to:  http://www.riskcenter.com