Business

Wachovia moves away from Pick-a-Payment home loan

Wachovia on Monday said it's largely abandoning a type of controversial loan that has caused mounting losses and helped spur the ouster last month of chief executive Ken Thompson.

The Charlotte bank will no longer offer home loans with a minimum payment option that allows borrowers to pay less than the interest owed, causing the balance to grow rather than shrink. Consumer advocates have called the mortgages fit for only a small group of sophisticated customers.

Wachovia acquired these so-called “Pick-A-Payment” mortgages in 2006 from Golden West Financial in a $24 billion deal that came at the peak of the housing boom. The loans, with a heavy concentration in troubled California markets, have since soured faster than traditional mortgages, eating into the bank's profits and whacking its stock price.

“It's kind of a capitulation on the Golden West model,” analyst Kevin Fitzsimmons of Sandler O'Neill + Partners said of Monday's announcement.

Wachovia was one of the last major lenders still making these loans, known generally as option adjustable rate mortgages, or option ARMs. Charlotte-based Bank of America Corp. stopped making the loans last year and plans to continue that practice at lender Countrywide Financial, which it's officially buying today. Washington Mutual ended the loan feature last month.

Wachovia will still offer a loan that gives borrowers three payment choices: an interest-only option as well as options that pay the loan off in 30 or 15 years, spokesman Don Vecchiarello said. What these loans will be called is undetermined, he said. More than 300,000 existing Pick-A-Payment customers will still have the minimum payment option.

The bank also said Monday it will waive all “prepayment” fees charged to Pick-A-Payment borrowers, allowing them to refinance to other loans without paying a penalty. This fee was typically charged in the first three years of the loan and amounted to about 2 percent of the remaining balance. The move doesn't affect borrowers who have already paid prepayment penalties.

The Golden West purchase, Thompson's biggest deal, brought Wachovia more than 100 branches in coveted California as well as a $120 billion Pick-A-Payment portfolio. These loans had fared well in past downturns, but losses blossomed in the first quarter.

Wachovia, which still offers a variety of traditional home loans, has said it's reviewing its overall mortgage strategy. It also has hired investment bank Goldman Sachs to assess its portfolio, a move that could lead to a sale of all or parts of the Pick-A-Payment loan book.

Amid the mortgage unit's mounting losses, employees have said they're expecting layoffs. Wachovia hasn't disclosed details on its strategy review, but Vecchiarello has said the unit is constantly analyzing its staffing levels.

Wachovia's announcement Monday signals the “beginning of the end” for option ARMs, said Guy Cecala, publisher of Inside Mortgage Finance, which tracks the industry. Only a few small lenders still offer the loans, he said. In the first quarter, option ARM volume fell to $4 billion from $40 billion a year earlier.

The product was fueled by an effort in the mortgage industry to sell borrowers on the lowest payment, instead of the overall features of a mortgage, Cecala said. “It came back to bite them,” he said.

At Wachovia, Vecchiarello said waiving prepayment penalties was a “proactive” move to help borrowers during “an unprecedented level of depreciation in the housing market.” Over the past 12 months, the bank said it has worked with 18,000 homeowners to help them make more manageable payments and avoid foreclosure.

A Charlotte-area Pick-A-Payment customer who didn't want her name used said she was relieved by the change.

She is trying to sell her home and was expecting to pay a prepayment penalty of about $3,800. “It's a very ugly loan,” she said.

Wachovia on Monday said it's largely abandoning a type of controversial loan that has caused mounting losses and helped spur the ouster last month of chief executive Ken Thompson.

The Charlotte bank will no longer offer home loans with a minimum payment option that allows borrowers to pay less than the interest owed, causing the balance to grow rather than shrink. Consumer advocates have called the mortgages fit for only a small group of sophisticated customers.

Wachovia acquired these so-called “Pick-A-Payment” mortgages in 2006 from Golden West Financial in a $24 billion deal that came at the peak of the housing boom. The loans, with a heavy concentration in troubled California markets, have since soured faster than traditional mortgages, eating into the bank's profits and whacking its stock price.

“It's kind of a capitulation on the Golden West model,” analyst Kevin Fitzsimmons of Sandler O'Neill + Partners said of Monday's announcement.

Wachovia was one of the last major lenders still making these loans, known generally as option adjustable rate mortgages, or option ARMs. Charlotte-based Bank of America Corp. stopped making the loans last year and plans to continue that practice at lender Countrywide Financial, which it's officially buying today. Washington Mutual ended the loan feature last month.

Wachovia will still offer a loan that gives borrowers three payment choices: an interest-only option as well as options that pay the loan off in 30 or 15 years, spokesman Don Vecchiarello said. What these loans will be called is undetermined, he said. More than 300,000 existing Pick-A-Payment customers will still have the minimum payment option.

The bank also said Monday it will waive all “prepayment” fees charged to Pick-A-Payment borrowers, allowing them to refinance to other loans without paying a penalty. This fee was typically charged in the first three years of the loan and amounted to about 2 percent of the remaining balance. The move doesn't affect borrowers who have already paid prepayment penalties.

The Golden West purchase, Thompson's biggest deal, brought Wachovia more than 100 branches in coveted California as well as a $120 billion Pick-A-Payment portfolio. These loans had fared well in past downturns, but losses blossomed in the first quarter.

Wachovia, which still offers a variety of traditional home loans, has said it's reviewing its overall mortgage strategy. It also has hired investment bank Goldman Sachs to assess its portfolio, a move that could lead to a sale of all or parts of the Pick-A-Payment loan book.

Amid the mortgage unit's mounting losses, employees have said they're expecting layoffs. Wachovia hasn't disclosed details on its strategy review, but Vecchiarello has said the unit is constantly analyzing its staffing levels.

Wachovia's announcement Monday signals the “beginning of the end” for option ARMs, said Guy Cecala, publisher of Inside Mortgage Finance, which tracks the industry. Only a few small lenders still offer the loans, he said. In the first quarter, option ARM volume fell to $4 billion from $40 billion a year earlier.

The product was fueled by an effort in the mortgage industry to sell borrowers on the lowest payment, instead of the overall features of a mortgage, Cecala said. “It came back to bite them,” he said.

At Wachovia, Vecchiarello said waiving prepayment penalties was a “proactive” move to help borrowers during “an unprecedented level of depreciation in the housing market.” Over the past 12 months, the bank said it has worked with 18,000 homeowners to help them make more manageable payments and avoid foreclosure.

A Charlotte-area Pick-A-Payment customer who didn't want her name used said she was relieved by the change.

She is trying to sell her home and was expecting to pay a prepayment penalty of about $3,800. “It's a very ugly loan,” she said.

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