Wells Fargo Tries 'Family Values' on Legacy Wachovia Pick-A-Pay Mortgages

The Wall Street Journal’s “Wells Fargo Takes Chance With a Loan Exchange”, subtitled “Option ARMs Are Shifted to Interest-Only in a Recovery Bet”, suggests that the bank is playing “kick-the-can down the road” with its Pick-A-Pay mortgages. Wells Fargo (WFC) is holding $107B in legacy Wachovia ARMs that have accumulated both negative amortization and substantial housing price drops, leaving the homeowners in unrecoverable positions. The bank is hoping that time will heal the wounds.

Homeowners that either chose or could only afford payments that did not even cover interest were allowed to accumulate negative amortization usually up to between 110% and 125% of the original loan amount. After reaching the negative amortization cap, the homeowners then have to both start paying the full interest and start amortizing the principal over the remaining life of the loans. In most cases the loans become unaffordable.

Wells Fargo is offering certain Pick-A-Pay customers a reduced fixed interest-only adjustment for 6 to 10 years, along with limited principal reductions. The bank believes that the economy and housing prices will recover enough for these loans to again be profitable, or at least provide a higher net present value than foreclosure.

In essence, Wells Fargo is turning the Pick-A-Pay borrowers into renters. These homeowners will never recover their equity. But the bank argues that the homeowners selected to benefit intensely want to keep their children in a stable home and school environment.

Will the “family values” argument overpower the economic argument for homeowners to flee an underwater property? I cannot say, but these homeowners certainly don’t have any incentive to spend on maintaining their properties. The bigger question is what collateral will the bank be left with when the homeowner chooses to patch rather than replace the roof?

Disclosure: Author is long WFC.

Comments

[woollyB:]

What keeps people who "intensely want to keep their children in a stable home and school environment" from signing a lease to rent the house across the street and then walking away from their hopelessly underwater "investments"?

It's a scary, scary proposition for the housing market and the economy as a whole. Right now most people's sense of moral obligation and recovery hopes keep them paying mortgages, but there is definitely a tipping point.

Nov 05 02:42 PM

[scoobydude:]

way to jack cnbc's article with even the same phrases. what a tool

Nov 05 11:06 PM

[buoy:]

Sounds like a plan to me. The last thing a bank wants, is someone's house.

Nov 06 08:38 AM

[jcl9977879879:]

Is this reporting or cheerleading? You're long on WFC and you want to minimize a $100B time bomb. What a joke.

Nov 07 10:49 AM