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