Wachovia aims to unravel Pick-a-Payment problems

Amid ballooning loan losses, Wachovia Corp. is taking more steps to unwind its troubled $122 billion Pick-A-Payment mortgage portfolio. But it's not going to be a quick fix – or a cheap one.

Wachovia last month said it would stop offering a minimum payment option that causes a borrower's loan balance to increase, essentially eliminating the Pick-A-Payment product. Now it's taking more steps to refinance existing Pick-A-Pay customers into traditional loans, including reassigning 1,000 employees to contact customers.

In some cases, borrowers will be offered a reduction in their principal owed as part of a refinancing, the bank said. In other cases, troubled borrowers may be encouraged to sell their homes at a loss to avoid foreclosure.

These loans, which give customers monthly payment options, were the core product the Charlotte bank inherited in its 2006 acquisition of California-based Golden West Financial Corp. But the huge plunge in U.S. housing prices, particularly in California and Florida, has sent many of these borrowers spiraling into default.

As reported Tuesday by the Observer, Wachovia also will stop making loans through outside brokers, instead using only its own loan officers. Outside brokers, a Golden West mainstay, have emerged as a trouble spot in the nation's mortgage meltdown because they can have less incentive to properly vet loans.

One step Wachovia is not taking now: an outright sale of the Pick-A-Payment portfolio. Chief executive Bob Steel said it didn't make sense to sell the loans into a “distressed market.” Instead, the bank will let the loan book gradually “roll off.”

“It's going to be a long, slow process of working things out,” analyst Nancy Bush of NAB Research in New Jersey said.

Meanwhile, the losses emerging in the portfolio are staggering. The bank said it now expects cumulative losses of 12 percent over the lifetime of the portfolio, with most coming in the next three years. In April, the bank had estimated total losses of 7.5 percent.

Chief risk officer Don Truslow said the bank was presenting a “very realistic outlook” while acknowledging it's a “very challenging and dynamic market.”

The bank's models have it setting aside $8.7 billion in 2008 to cover Pick-A-Payment losses and expected losses, followed by another $5.6 billion in 2009. The bank's calculations are based on housing declines bottoming out in 2010.

At the end of the second quarter, about 5.8 percent of the Pick-A-Pay loan book was considered nonperforming, compared with less than 1 percent of the bank's traditional mortgages. Pick-A-Pay loans are plagued by their concentration in dismal housing markets. Borrowers also can elect to pay less than the interest owed, inflating their balances owed. About 65 percent of Pick-A-Pay customers selected this option in May.

With Pick-A-Pay curtailed and the mortgage market remaining sluggish, Wachovia plans to dramatically restructure its mortgage unit. The bank said Tuesday it plans to cut about 4,400 mortgage jobs, about 38 percent of the current mortgage work force of 11,500.

As part of the ongoing reorganization, two top mortgage executives who joined the company from Golden West, Rich Fikani and Tim Wilson, will no longer report to mortgage head David Pope, spokesman Don Vecchiarello said.

The company “hasn't reached a conclusion on what new roles they will have, if any,” he said.