ALERT! Wachovia Cries ‘UNCLE’ to the Pay Option ARM

Posted on June 30th, 2008 in Daily Mortgage/Housing News - The Real Story

THIS IS HUGE, not only for Wachovia but for every bank or investor who owns Pay Option ARMs or securities derived from them.

It was just reported that Wachovia will stop doing Pay Option ARMs immediately and waive all prepayment penalties associated with these loans.

The official release says:

-WB will no longer offer products that result in negative amortization.

-WB waiving all fees associated with Pick-A-Payment loans effective immediately.

-WB is waiving all prepayment penalties associated with its Pick-A-Payment mortgage to allow customers complete flexibility in their home financing decisions.

Just a month ago they were running TV commercials with families dancing around their kitchen promoting this loan programs and its ‘low payment options’. I said for months that this was an attempt to make the street think that their Pay Option ARMs were ‘different’ from everybody else’s. It was an obvious attempt at deception.

By virtue of them dumping this program and waiving the prepayment penalties, they are admitting what many including myself have said for years; that the Pay Option ARM is the most toxic loan program ever created. It is estimated they own nearly $200 bb in this product.

The ‘waiving prepayment penalty’ decision was interesting and perhaps forward thinking for a change. Very few people know this, but if a ARM reset forces a pre-payment penalty the pre-pay is not collectible. This is something most banks don’t even know.

What does this mean for other banks holding billions of these such as Countywide, IndyMac, WAMU, Downey Savings, First Fed, Lehman, Bear Stearns (the Fed), Deutsche Bank and many other banks and investment banks who originated and still own this paper.

What does this mean for loans or securities they sold to investors who thought they were getting a prepayment penalty loan and paid a premium?

One of the big problems for banks with these loans on their books is that they are allowed to book as revenue the FULLY INDEXED payment amount of Index + Margin each month for each borrower. This can be as much or more as twice the minimum allowed payment. This is because in theory is they will get it back if they repo and sell the home or the borrower sells it or refi’s. But, now with the gross amount of negative equity out there, most borrowers can’t sell or refi and the banks are only recovering 50% though foreclosure.

In 80% of the cases, Pay Option ARM borrowers make the minimum monthly payment of 1% to 3.75% depending on the lender and program variation. The ‘deferred interest’ or negative amortization that the banks book as revenue must come back out. In the very near future, all pay option banks are likely to have to make a multi-year earnings restatement due to these programs.

This maybe why if you compare a stock chart of the banks I mentioned above, they are performing much worse than banks that never touched the Pay Option ARM. More on this story will follow, that’s for sure. -Best Mr Mortgage

Other Related Mr Mortgage Stories

The Pay Option Implosion – Subprime’s Big Brother

Look Out! Here Comes the ALT-A Implosion!

Below is a chart of the predicted resets of Pay Option ARMs. This is a great visual of the pain they will cause the Real Estate market shortly.

Pay Option Reset Schedule

50 Responses to “ALERT! Wachovia Cries ‘UNCLE’ to the Pay Option ARM”

  1. WB just paid Goldman Sachs millions to do what everyone else has been saying for a year now! Incompetent fools.

    By the way, I have gotten that prepay waived 100% of the time in the past two years by just asking. It may have been an unofficial policy before today’s announcement.

  2. good stuff Toby. Banks dont like waving ppp

  3. Back in the day I worked for IndyMac. One day one of the senior compliance folks came and talked to us about many things, but one of those was waiving of PPPs. If the loan was sold to an investor (as most should) is if IMB made the decision to waive the PPP, they would reimburse the investor the amount of the PPP out of pocket. Perhaps the same is true for Wachovia and other lenders, but obviously…they want out…but I think in order to really get out, those with ballooned balances may be taking some deferred interest write downs/offs as well…which has already been booked as earnings. oy vey…what a freaking mess!

  4. Finally. Pay Option ARMs are the one of the biggest financial mistakes in US history. The arguments for having this product are bad.

    I doubt the banks will back out of the neg-am revenue. They should, but that’s asking for too much trouble.

  5. More than anything, this screams that bank bigwigs are finally figuring out that the housing market still has a loooooong way to fall. The dopes at the CNBC and the liars at the N.A.R. can not and should not be believed.

    Wachovia was PUSHING these things a month ago…what changed so dramatically that they would not only drop them, but forego thousands per deal in prepays just to get them off the books.

    BTW, if memory serves, they were only doing them to 70% LTV, so I guess Wachovia thinks the market has at least another 30% drop in there.

  6. […] Full Article Here […]

  7. I want to say, I am NOT in the mortgage or banking business, but I deal with money every workday of the week, and I know all about risk, including ADVERSE SELECTION and RISK MANAGEMENT!

    With that said; I have a hard time understanding how a CEO of a large bank, with the blessing of the Board of Directors, would knowingly place the firms long-term sustainability at risk, just to please Wall Street in the short-term.

    I realize there were crazy things happening on Wall Street … I know investors were searching for greater yields … I know the world economy was flush with liquidity, but I have a very hard time reconciling the fact that these guys/gals had no clue as to the risk of this game.

  8. Broke, broke again!!! Chinese stocks pierced through 2700support again, 2500, 2100 is not far away…

    In the meantime, Chinese Dollar keeps rising another day…

    US top executives beat China so hard reminding everyone 20years ago how exactly they beat Japan to death and made Japnese 10years’ hard working to be nothing…

  9. 2671 NOW….


    Proud to be US citizen…

  10. Dude, from 6124 to 2666 in only 8months…

  11. Neg Arms were simply a ticking bomb… we all knew it, I myself stayed away from offering this product to my customers… (this is why I can sleep at night). I have no idea why WB, a huge bank, would have made the mistake of their life by buying World Savings which was plagued with this portfolio.

  12. Toby, show me the HUD’s and then I’ll believe you, they were out for blood, and money, the only way they’d waive something is if the borrower was already in arrears.

    Mr. Mortgage, it’s only $70billion, for what that’s worth…and you think Goldman could come up with an answer that quick, they were only hired, what, 10 days ago? If they had something that quickly they couldn’t justify their fee, come on folks, get real.

  13. Shang, they have more than $70bb. They borrowed more than that from the FHLB of Atlanta on ther option arm portfolio. perhaps if loans are used as collateral they dont have to count them in the totals anymore…who the hell knows with gaap and bank accounting.

    Once thing is for sure, WB is going the way of WM and every other bank who every originated any of the most toxic loan programs every in existence.

  14. China will get a rebound before the Oly’s I think. They can’t have a collapsing stock market take away from the publicity. They will do anything to prevent it if only for a month.

  15. Very few people know this, but if a ARM reset forces a pre-payment penalty the pre-pay is not collectible.

    Mr. M, can you please explain the whys and the wherefores of that?

  16. Shang,
    A Hud-1 would not show that no prepay was paid. You should know that. These were good borrowers with just enough equity to refi out of the option arms. As I stated it “may have” been their unofficial policy. Since I too am in a declining market (Florida), it is likely they made the decision to dump as many of these as they could. You can only ask.

    As to Goldman Sachs, this is likely the low hanging fruit re their consultation fees with WB. I am sure that Goldman is just getting started figuring out where all the bodies lay.

  17. Mr. Mortgage,
    I have always been a firm believer that the neg am catastrophe will leave blood in the streets. What is your outlook on B of A’s exposure to the toxicity of CFC’s portfolio and do they have any “outs” to what is inevitable? I never imagined that “straight as an arrow” B of A would go through with the deal largely in part of the neg am stockpile. Also, WF never touched them. I know they have incredible exposure to HELOC’s I would think zero neg am exposure makes them the best ticket in town for years and years to come. Just my two pennies, what say you?

  18. I really think that people in finance need a brain. How in the hell can we make a living with these people ? These things happened and not one damn politician or banker is responsible. What the hell was going on in their sick reptilian brain ? Even on a rationnal basis, these things made no sense. I can’t figure out the economics of all this. I still can’t and never will.

  19. Toby,
    Actually what Shang should have been asking you to produce would be the World/Wachovia PrePay Waiver form, which would have been in your closing package. If you can’t produce this you are PATENTLY full of shit. I work for them – and I know the protocol. You are just speculating – poorly.

  20. ALERT ! JP Morgan is crashing today. Rumours circulatig that a mega loss is in the air. The stock is downgraded. And the price of oil is exploding because ….. war is coming soon in Iran. Nice ! Not enough of Irak.

  21. Bloomberg still talking today that most of the crisis is finished. I really love it when they use the “past tense” with the verbs. So it has passed and now everything is finished again. It’s fantastic this stuff with verbs. No conditionnal. And if it is really messy, use the past tense. Use the present tense if you want to make believe. “The “core” inflation rate is 0,1%.” Have you noticed ? These TV journalists are really one of kind.

    Of the 200 billion of these loans, how many will default ?
    100 % ? You always do everything in a big way in the US.
    It can be a quality, but not in this case.

  22. Jimmy, BofA will be a mess with $78 bil of heloc, subprime and pay options. Their stock price reflects the risk. On WF, they have significant heloc exposure; more than their shreholder equity by 30%. Also, they have about $30 bb subprime exp.

  23. Love this fiction called shareholder equity. Can you really talk in 2008, about shareholder equity in a bank ? Shareholder without equity. What you are implying, is that Bank of America is worth less than zero.

  24. […] the bank is admitting what the rest of us seemed to know in 2006, that the deal made no sense. But the rusting of Golden West, will leave ripples in the credit crunch that are […]

  25. […] Or more on mortgages blowing up (this further contracts capital and lending) HERE. […]

  26. I think this has more to do with Wachovia than world savings. WS has been doing these loans longer than anyone and was smart in not selling these (as MBS) on the market. There profolio is the slowest neg am with the lowest LTV cutoff, with more neg am tolerance (125%)
    This is another knee jerk reaction to what is fast becoming a which hunt in the mortgage industry. Neg Am Loans are considered bad because the negative amortization is considered consumption -when in fact the borrower should NOT be consuming the equity, rather saving or investing it.

    Another big problem is that Home Equity loans are sold AS equity consumption tools, and no one is warning people about those.

    So is the problem really with the loan product? An inanimate financial tool? Or in the borrowers that demanded it and the loan officers that did not understand it?

    Is there any difference in a neg am loan and a borrower that refinances every two years to pay off consumer debt?

    I don’t really think so. For the record Although I am a fan of Option Arm loans, I understand them completely. I also explain them very well to my clients in relation to their financial goals AND their risk tolerance.

    Therefore I have not done many of these loans- another example that the problem lies not within the loan product.

  27. When the sh** hits the fan remember that Bank of America was added to the Dow February of this year. With the addition of BofA the Dow 30 is now comprised of 10% banks. Remember they elected to make this kind of “change” fully aware of the banking crisis. I also like the fact that in October, I believe, they removed program trading halts. Tell me this is not a setup.

  28. […] ALERT! Wachovia Cries ‘UNCLE’ to the Pay Option ARM – THIS IS HUGE, not only for Wachovia but for every bank or investor who owns Pay Option ARMs or securities derived from them. It was just reported that Wachovia will stop doing Pay Option ARMs immediately and waive all prepayment penalties associated with these loans. – lots more – MR MORTGAGE […]

  29. Yeah this one on Bank of America in the DOW is really funny. That way the P/E ratio of the Dow Jones will jumps to 400. 🙂 🙂 🙂 🙂

  30. Yeah this one on Bank of America in the DOW is really funny. That way the P/E ratio of the Dow Jones will jump to 400. 🙂 Presently I think with the autos included, the DOW is at at 87 ?

  31. I will buy these two stocks next week…
    PWE, PGH

    What the heck, afer I sold SKF@152.5, it even hit 164 today, I knew it, whenever I sold/bought, it will went up/down…

    I still have bunch of FXP/EEV, and gonna add some more position…

    Let me short Communism country for fun…

    Yet, isnt US gonna to be the world second largest Communism economic country someday soon?


  33. The ‘waiving prepayment penalty’ decision was interesting and perhaps forward thinking for a change.

    Is it also possible they are doing this to position these loans for government insured refinancing should provisions for that be included in a housing bill?

  34. PS Credit Cards are also traps – set by the same ‘people’.

  35. PPS Could sheeple live ‘beyond their means’ unless these traps existed? Did people live and prosper before ‘indiscriminate credit’ became ‘available’ and tempted them to behave like the trappers wanted them to behave? Think about it – before you blame the sheeple for the mortgage mess! (not that the sheeple are totally innocent – they have been intentionally weakened by the Tempter!).

  36. No problem Eternal Optimist. It’s not the first time that the USA will refuse to pay its debts. They won’t and oil is going to 300$, 400$.

    Today it’s hitting 144$ ! You can kiss goodbye to General Motors, Ford and Chrysler. But don’r worry however. Goldman Sachs will be thriving as usual. They always thrive because they always pass the buck either up or either down to others. Expect a complete debasing of the currency and maybe depressionnary inflation. Your bums in Washington desserve a Weimar Republic. This was a fantastic country but It ain’t today. It ain’t.

    79,000 jobs lost in june. These are objectives stats by ADP, not the crap of the Labor Department. ADP expects 100,000 or even more for july. What a fantastic way of celabrating the 4th of july ! Raw raw raw ! It’t time to buy real estate and JP Morgan stock !

  37. *looks for ‘block annoying poster’ button on website*

  38. Well you know democracy is sometimes very tiresone Michael.

    Oil is at 144$ and going certainly to 300$ a barrel.
    Irak was there for something. It was there for the taking. Why not say it honestly ? Good place for Exxon, BP and Royal Dutch Shell, for quickly replacing depleting reserves. Naturally you cannot say the truth to people.

    “Listen boys and girls. We did this war for our buddies at Haliburton, BP, Exxon etc….” You have to find a sad and horrible bearded fanatical joker living in a cave and financed since the beginning by the CIA, that justifies everything.

    This being said, oil is still going to 300$ and the US in a hyperinflationnary depression as all of us in the G7.
    Hasta la vista GM, Ford and Chrysler. The mean and bad Frenchman have a solution. It’s called nuclear power, high speed trains, urbanism and small cars.

  39. EternalOptimist – Why don’t you start your own conspiracy website where you can dish out your 2nd hand conspiracy teachings to those who are interested in the nonsense you have accepted as knowledge?

    As regards your bible – ‘The Protocols of the Learned Elders of Zion’, a group of Zionists still exist today, and indeed as a very conservative grouping which drives Zionism.

    With this it deals with a designation which was first coined in 1893, therefore around 10 years before the point in time when in Russia, in the Newspaper ‘Znamja’ (The Banner), the slanderous and inflammatory text ‘The Protocols of the Learned Elders of Zion’ – an unbelievably idiotic falsification which has nothing in any shape or form to do with the truth – was first published by a certain Pavolatchi Kruchevan, an evil anti-Semite.

    Presenting the entire history of this idiotic and dim-witted inflammatory text against the Jews would, however, lead too far.

    Please take your bigotry elsewhere.

  40. You have your history right John. Now can we talk about the matte. I am a little bit surprised that the interest rates aren’t much more higher presently. It’s sort of a mystery for me. Oil is at 144$. The dollar is crashing. Inflation is exploding, are interest rates given to bondholders and buyers of US treasuries are still way negative. What is going on ? Do the markets are expecting a enormous deflationnary spiral in the near future ? or is it simply central banker manipulation ? December 2008 oil 200$ have increased 800% and today they have started negociating december 300$ 2008. This should not be good for rates, and stil I find them too low.

  41. The reason there will be an ‘enormous deflationary spiral’ (that’s commonly called a Depression) in the near future is because the Central Banks (run by Zionists) and the Fed (run by Zionists) have indeed manipulated interest rates (among other things) over the last few years to make certain there is a Depression. The mortgage mess, subprime and Alt-A disasters, oil spike, etc. are just FF (Financial Foreplay). The FBB (Financial Big Bang) is just around the corner.

    Mike Whitney calls it ‘The Greenspan Depression’. Mike Morgan calls it a plain Depression. Mike Hudson is still thinking of a name. The Mogambo Guru calls it the ‘unmentionable’ Depression. Bush calls it ‘The economy is strong’. I call it the ‘Zionist Grand Depression’. Peter Schiff has been calling it for about 10 years. Kurt Richebacher and other Austrian School economists have been calling it for a long time. OK, Mr. Mortgage – it’s your turn! 😉

  42. Anyone interested in my recent Comment to which John responded (since deleted by our host), you can find it here:

    Scroll to the end of the article and click on Comments. It’s close to the end and easily recognized by its eloquence and impeccable logic. 🙂

  43. MA – Mon commentaire n’a pas été dirigé à vous, je suis désolé.

  44. Je sais. J’approuvais votre commentaire Michael. Ce terrible document a fait des dégâts épouvantables en Europe. C’est un des plus horribles documents de propagande de l’histoire russe.

  45. Well, admin – that was the fastest deletion of any of my Comments (a link to the Protocols). I must be getting dangerously close to the carotid artery of Zionism, huh?!

    No matter, the text to the Protocols can be easily found on the Web by anyone interested in finding out what’s REALLY happening in the world! And don’t forget, the Protocols are all about Macro Economics! (including Mortgages).

  46. GM capitalisation is now equivalent to Barbie’s and G.I. Joe’s Mattel stock. This is incredible. A major car manufacturer capitalized as a plastic toy manufacturer !
    Boy this is bad, real bad. Zions Bankcorp is litterally crashihg today. You see Eternal Optimist ? It has nothing to do with it. 🙂 Mental illness can be cured Eternal Optimist. The 3 biggest banks in the world are not even based in the USA or controlled by you know who. They are chineese and the bosses speak mandarin. Wall Street too is losing it. Eternal Optimist, learn chineese mandarin.

  47. MA: I prefer to eat Chinese food and Mandarin oranges! To whom are the Chinese gonna sell all their junk after America has been sucked into the black hole, courtesy of their Zionist ‘friends’? What are those Chinese banks gonna buy with all their (worthless) US$$$? – convert them to Shekels? Where will the Chinese send their children to get a cheap education? Why are they all learning English? You have NO idea who controls the banking world and how easily it will collapse after the Zionists have pulled the plug on America. The whole world will follow. Actually, the UK could well collapse first. When the Chinese (bank bosses) realize what’s happening, they will exclaim, in universal American English: “Oh, shit!” They will be able to paper the entire Great Wall of China with their American $Trillions.

  48. Dear Eternal Optimist if you were chineese, are say what you say in China against the Generals and commies, all good friends by the way of Wall Mart and Costco, you would be shot in the head and your organs would be sold on the organ market for rich dudes. Very nice country this China. They kill the political prisoners and sell their organs to “type like” very old Bill Gates. You know nothing about the Chineesse bosses. Not a nice gang.

  49. Dear Eternal Optimist if you were chineese, and say what you say now in the USA, in China against the Generals and commies, all good friends by the way of Wall Mart and Costco, you would be shot in the head and your organs would be sold on the organ market for rich dudes. Very nice country this China. They kill the political prisoners and sell their organs to “type like” very old Bill Gates. You know nothing about the Chineesse bosses. Not a nice gang.

  50. World Savings had requirements to waive prepay,and every time I had a current customer that was coming back to us, had the prepay waived. Wachovia doesn’t want World customers in the books. that’s it. The neg arm’s image was damaged by other banks offering similar products with more volatile indexes. World didn’t even have an reo dept until recently, and even now our % of reo property is lower than our competition.
    Nobody realizes through tough economic times, World made it. Our portfolio product works, but yes, it is not for everybody.
    I have to say Wachovia just wants to kill World’s legacy and make profits someplace else. They are very greedy

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