Posted on June 18th, 2008 in Daily Mortgage/Housing News - The Real Story
11:45am EST Update –Of course, as Wachovia’s share price tumbles to about $16, rumors are hitting about Warren Buffet buying the firm. This has sent the stock price up considerably from it’s lows. You know that bubblevision will pick this up shortly. Why are rumors like this acceptable but when a stock price falls due to rumors, everyone gets up in arms with the SEC and Fed issuing statements in cases such as Lehman recently? This rumor is bogus…Buffet already owns enough toxins with US Bank and Wells Fargo.
9am EST –You have got to be kidding me. While Pay Options are a lead anchor around the neck of every bank who ever touched them, Wachovia continues to insist that theirs are different.
**A little freebee from my paid-service. As of June 15th year-to-date, Wachovia’s CA defaulted loans taken back (REO) is approx 100% larger than in all of 2007. As of 5/15/08, the total CA REO across all banks was equal to all of 2007 so Wachovia is performing at a greatly accelerated pace when compared to the overall REO market. Wachovia hit their 2007 total by March 2008.
If you remember, for months they ran Pay Option commercials with families dancing around their houses, singing, because they could pay the minimum monthly payment if they want to. I found that insulting and absolutely ignorant on their part.
Now, Wachovia is calling broker-originated borrowers, making sure they understand what they got themselves into. Don’t ya love how they still try to blame it on the mortgage broker. Hey Wachovia, this is your loan program, not the brokers! Many borrowers may understand, but few will have a good enough grasp on the loan to understand how it WILL perform under various market or economic scenarios or stresses, if underlying index values soar or if values plummet, as they are now. This loan was never meant to hold for any period of time and absolutely never meant to hold in a period of declining house prices.
While the Pay Option ARM maybe a perfect loan for someone such as an investor with a large amount of equity in a property who is waiting for the purchase market to improve before selling and wants to cash-flow, my guess is that 90% of Pay Option borrrowers are in it because they only could afford the home by paying the minimum monthly, negatively amortizing payment. These loans are the ultimate toxins, even more so than subprime 2/28’s. At least with subprime loans, the principal balanced owed doesn’t grow every month.
“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’s clients fall in line with other published numbers with 70% of borrowers choosing to make the minimum monthly payment. Below is a graphic showing an recently update recast schedule for Pay Option ARMs. This is a disaster that will surely keep the foreclosure issue on the front pages for a long time.
“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. “
The truth is Wachovia’s Pay Options are different and in my opinion, probably worse.The primary differences are that they did not do 100% loans in any size and they did a good job validating appraisals by a variety of means. As a matter of fact, over the years World/Golden West/Wachovia has been known to be ‘tough on appraisals’ meaning they always tried to cut the value. In the risk-management game, this is a good thing for the bank.
But, with values down in CA on the median by 28% in the past 11-months and much further in many areas, not doing 100% loans doesn’t really matter too much. Borrowers across the state are sitting in massive negative-equity positions and once you get upside down, does it really matter if you are upside down by 20%, 30% or 50%?
Once the borrower gets a hard-recast letter saying “you have reached your maximum allowable negative amortization for this loan program, so now you must either a) refinance or b) pay a minimum of the fully-indexed payment so as not to accrue any more negative amortization and pay off the loan within it’s term (this could easily double the payment)”, borrowers default. First, you can’t refi in most cases. Second, why in the world would you want to pay twice the monthly payment or more for a home that has dropped 30% in value and in which you have accrued 15 to 25% negative amortization depending on the lender? By the time they get this letter, a borrower could be upside down 50%!
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.
Where World/Golden West/Wachovia went easy was on borrower strength and credit. For years, those in the mortgage industry called them ‘The Heartbeat Lender’because anyone with a little equity and a heartbeat could get a loan there. In essence, they were ok with working with subprime borrowers, if they had a little skin in the game.
So, now that values have been trashed, what do they have left? Bad borrowers significantly underwater vs. better borrowers significantly underwater. For these reasons, I would argue that World/Golden West/Wachovia’s Pay Option portfolio is worse than most other’s, despite never doing a 100% loan and being ‘tight’ on appraisals.
The mounting losses will add to the $392 billion in asset write-downs 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.”
“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.”
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