Wachovia to Poll Mortgagors

[Mike]

Hey Moe, I remember about six months ago you had a post on option arms depicting the "map of doom." I can't find it now, but I wanted to append this post to it. I'll bet Wachovia doesn't even want to know their customers' perceptions of the Pick-a-Payment proram. They certainly wouldn't want to go public with it or the common shareholders would run for the exits.____________________________________________ _________________________Wachovia Taking New Steps to Assure Borrower Understand Loans By David Mildenberg June 18 (Bloomberg) -- Wachovia Corp., which ousted its top executive after estimating it may lose more than $4.5 billion on adjustable-rate home loans, will start calling would-be borrowers to explain the risks of such mortgages. Wachovia is contacting applicants through independent mortgage brokers to ensure ``the customer understands the key features of the Pick-A-Payment loan product,'' according to a June 11 memo from Tim Wilson, head of loan origination at the Charlotte, North Carolina-based company. The loans let borrowers defer part of their monthly bills. Wachovia and lenders including Countrywide Financial Corp. and Washington Mutual Inc. have been burned by delinquent option adjustable-rate mortgages, often called option-ARMs. Wachovia is led by interim Chief Executive Officer Lanty Smith who replaced Kennedy Thompson on June 2, two years after the bank's $24 billion purchase of Golden West Financial Corp. at the peak of the housing boom. ``Stepping so much into the underwriting process is very unusual and almost unprecedented,'' said consultant David Lykken of Mortgage Banking Solutions in Austin, Texas. ``My sense is that to appease the federal regulators they are saying we will do this extra kind of due diligence.'' Wachovia spokesman Don Vecchiarello confirmed the new policy, which took effect this week. Golden West was the market leader in option-ARM mortgages, with about $120 billion of the loans when it was acquired by Wachovia. The loans, termed Pick-a-Payment by Wachovia, allow borrowers to make lower initial payments that don't even cover the accrued interest. Almost 70 percent of Wachovia's borrowers choose to pay as little as possible. Loans Backfire The unpaid portion gets added to the principal of the loan. That can backfire on the bank if a borrower defaults while home prices are falling, leaving the lender unable to recover the full amount owed. U.S. single-family home prices fell at a 6.7 percent annualized rate in the first quarter, Waltham, Massachusetts- based research firm Global Insight Inc. said June 2. Originations of option-ARMs fell more than 50 percent last year after making up 8.9 percent of the almost $3 trillion in U.S. home loans made in 2006, according to estimates by industry newsletter Inside Mortgage Finance. Delinquencies are rising as interest rates tied to the loans increase, forcing borrowers to make larger payments. Once option-ARM borrowers' loan balances reach a predetermined limit of 125 percent of the mortgage amount, Wachovia requires higher payment rates. Losses Surge The mounting losses will add to the $392 billion in asset writedowns and credit losses tied to the U.S. housing slump reported by the world's largest financial institutions. Wachovia on April 14 said losses on its option-ARMS may reach $1.7 billion this year and $2.8 billion in 2009. That estimate may be optimistic with the bank potentially setting aside almost $17 billion to cover losses, CreditSights Inc. analyst David Hendler wrote in a June 2 report. Wachovia's new policy ``is far too little and far too late and indicative of how bad it is,'' said William Purdy, a Soquel, California, lawyer who concentrates on home refinancing. ``These loans are ticking time bombs and probably the worst thing the bank can say it has ever done to its customers.'' The new policy of calling borrowers applies to loans initiated by brokers, which make up almost a fifth of the bank's mortgage lending, said Vecchiarello, the Wachovia spokesman. The bank began contacting would-be borrowers to verify information and improve customer service. `Comfortable' With Loans ``We feel comfortable making these loans even in this market environment,'' Vecchiarello said. About 60 percent of Wachovia's home loans are in California, among the states hardest hit as housing prices slide. Most lenders no longer offer option-ARMS, said Chandrajit Bhattacharya, vice president and mortgage strategist at Credit Suisse in New York. ``I don't see any issuance at all'' of nontraditional mortgages, he said. Bank of America Corp. won't offer the product after completing its purchase of Countrywide Financial Corp., officials have said. Downey Financial Corp., another seller of option-ARMs, plunged more than 10 percent this week after saying it wasn't receiving payments on 14.3 percent of its loans. Wachovia's loan performance outpaces industry averages, Vecchiarello said. ``I'm not saying there hasn't been an increase in delinquencies, but compared with Countrywide and Downey Savings and some others, we've significantly outperformed,'' he said. Credit Losses Wachovia set aside $2.8 billion for credit losses in the three months ended March 31, mostly because of deteriorating housing markets in California and Florida. The bank wasn't collecting payments on $8.4 billion of loans, or 1.7 percent of its total loans, quadruple the level a year earlier. Through February about 14 percent of the bank's option-ARM portfolio had loan-to-value rates of 100 percent or more, with 85 percent of those loans in California and Florida. When loan amounts exceed the value of a home, borrowers may stop paying, said Keith Gumbinger, vice president of HSH Associates, a Pompton Plains, New Jersey-based publisher of mortgage data. Wachovia expects California housing prices to fall by an average of 14 percent from their peak through mid-2009, the bank said in April. The decline has accelerated since then, prompting Goldman Sachs Group Inc. analyst Brian Foran and others to raise their estimates on likely losses from Wachovia's option-ARMs. Wachovia fell 97 cents to $17.16 yesterday in New York Stock Exchange composite trading. The stock has dropped 55 percent this year.

[olive5630]

Lots of thanks for the information.