Wells Fargo is providing over $2 billion worth of loan modifications for California homeowners who took out “pick-a-pay” loans originated by World Savings and Wachovia (acquired by Wells Fargo in 2008). “Pick-a-pay” loans are adjustable rate mortgages (ARMs) with highly flexible repayment options (sometimes also called option-ARMs) allowing borrowers to make interest-only payments without paying down the principal balance – a recipe for financial disaster.
Approximately 14,900 California borrowers will receive a loan modification, many of which will include a principal reduction. Additionally, $32 million in restitution will be paid to over 12,000 “pick-a-pay” borrowers who were foreclosed on and another $1.8 million will be paid to the state of California to reimburse it for costs associated with foreclosure. Each foreclosed homeowner is expected to receive more than $2,650.
The sting of the Great Recession left thousands of borrowers unable to make the swelling payments once the ARMs started to adjust upward, a likelihood many homebuyers did not fully contemplate before agreeing to the loan. Couple ARM resets and interest-only payments with a historic decline in property values and you have a very volatile cocktail indeed. Wells Fargo has belatedly realized the danger of these mortgages and is willing (read: forced through a settlement with the California Attorney General) to work with homeowners to make modifications.
Homeowners eligible for a Wells Fargo loan modification will receive notice by February 2011. Borrowers who experienced foreclosure will be notified of any restitution eligibility by June 2011.
first tuesday take: It would be naïve to think Wells Fargo and others have had a change of heart when it comes to debt forgiveness. Wells Fargo was not acting out of charitable philanthropy; they were forced into action by the Attorney General’s office. [For more information regarding ARMs, see the January 2011 first tuesday article, The iron grip of ARMs of California real estate.]
So what’s the moral of the story first tuesday readers can take away from all of this? Simply, lenders are not inclined to provide sustainable assistance to distressed borrowers who took out the zero-ability-to-pay (ZAP) loans avidly provided by the banks during the Millennium Boom unless they are required to. This clearly illustrates the need for Congress to give judicial authority to bankruptcy judges to force cramdowns as lenders are loath to act unless their hands are forced.
Re: “Brown reaches settlement with Wells Fargo worth more than $2 billion to Californians with risky adjustable-rate mortgages” from the Office of the Attorney General
You want to see what little credit that is available DRY UP?
Just keep blaming and penalizing, and reverse punishing the banks.
Everyone was hurt by a gov’t push to house the financially incapable. The market snapped because it was forced to work against logical rules of extending credit. The new rules this author wants more of, include retroactive punishment for lending. Since this adds an unpredictable expense element to lending, we will all reap the resulting difficulty in obtaining credit. Which ironically is what credit should have been for the financially incapable in the first place – impossible to get!!!
How about all the other lenders that did those option arms such as countrywide and in my case Washington Mutual now Chase. What the state legislature do about those lenders.