Following Wells Fargo’s claim that they were not part of the ‘dirty little foreclosure problem,’ it appears that they are now finding indigestion in their acquisition of Wachovia. Pursuant to an agreement reached with eight Attorneys General, Wells has agreed to pay $24M in damages and haircut by $400M the balance of those “Pick-A-Pay” loans originated by Golden West Financial, which was acquired by Wachovia back in 2006. In addition, Wells Fargo agreed to an additional $300M in interest rate reductions, term extensions and other benefits to the borrowers.
Pick-A-Pay loans (also referred to as Option ARMS), for those of you not familiar with this product, was the brainchild of Golden West. Like offering either spinach or candy to a child, these loans offered the borrower the option either to make fully amortizing payments each month or to make a negatively amortizing payment. A negatively amortizing payment means the borrower pays less that the accrued interest for that month, and the difference is then added to the then outstanding unpaid principal balance of the loan. Add to this the fact that the interest rate had an initial “teaser” rate and is tied to some index that adjusts and you have a recipe for disaster to the borrower. And guess which payment most borrowers chose, especially since this product was aimed right at the “best” sub-prime borrower?
The settlement covers only owner-occupied properties where a borrower is in financial distress. The initially reduction of a loan's balance will be to 150% LTV. Additional steps could include reducing the loan's interest rate, extending the term of the loan and other changes that reduce a borrower's monthly payment to no more than 31% of gross monthly income. Borrowers who make three years of timely payments could qualify for an additional principal reduction.
Which means that Wells Fargo is giving away ice in the wintertime. Servicers are authorized, and in this climate of HAMP, virtually required, to modify loans that are in distress with either rate or term modifications, as well as providing principal modifications under HAMP or HOPE NOW. The interesting part of the settlement is the 150% LTV haircut. Given that the settlement is with some of the big problem states (Florida and Nevada especially), the 150% LTV appears to be a line in the sand by Wells Fargo as to the market depreciation they are willing to recognize (on behalf of the securitization investors) for the Pick-A Pay loans.
The settlement, however, appears to be only the tip of Wells Fargo’s iceberg. The settlement, in which Wells naturally did not admit to any wrongdoing (least the plaintiffs’ bar gets a hold of this issue), was for improper/fraudulent marketing of the Pick-A-Pay loan. But it only was for eight states, which did not include California, Golden West’s home state. So, having issued over $109B in Pick-A-Pay loans from 2005 to 2008 (as reported by Inside Mortgage Finance), Wells may be seeing more Attorneys General come a-knocking. Like the shot gunning of Ameriquest back in 2005, it is when all those little Attorneys General gang up that they can really hurt a large financial institution. However, it appears that these Attorneys General may not have gotten the critical mass this time to do any real damage to Wells Fargo. At a cost of less than 1% of the originations spread over eight states, adding all of the remaining states impacted will not put a dent in Wells Fargo’s armor.
This is truly is a scene out of an action movie: the evil Wells Fargo has borrowers running on a conveyor belt that is going faster than the borrowers can run. The foreclosure meat grinder at the end of the conveyor is getting closer and closer. The movie heros (the Attorneys General), pull hard on the frozen lever to stop the conveyor’s machinery. Are they in time . . can they stop the machine from turning the borrowers into foreclosure hamburger? Or will their efforts be too little, too late.
Tune in next week/month/year for the exciting conclusion!
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