Wachovia Finally Addressing Their Pay Option Portfolio

Posted on September 26th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Wachovia, who at last count owned $122bb of the most toxic loan every created (the Pay Option ARM), has taken on an aggressive initiative with mortgage brokers/bankersto help them refi their way out of their financial troubles. They hope to refi about 30% or 135k loans over the next couple of years. The Pay Option ARM, in part, just took WaMu down and many think Wachovia will be next.

Wachovia’s plan is to dole out leads to mortgage brokers/bankers and have them refinance the loans via Fannie/Freddie or FHA.  Now that the Government (US taxpayer) is the lender of last resort, why not?  They are even talking about carrying back second mortgages for those in a serious negative equity positions. However, I think FanFredFHA and the borrower may frown upon that a bit.

In my opinion, this is a great approach but I think they underestimate the severity of the negative equity in states in which they own the most Pay Options and overestimate the quality of their borrowers. Remember, I have told you many times, the nickname in the mortgage industry for World Savings was ‘The Heartbeat Lender’. That’s because anyone with a heartbeat could get a loan there.   It was Wachovia’s purchase of World Savings in CA that led to their downfall. 

I also think they overestimate the borrowers willingness to get out of their ultra-low payment Pay Option ARM into a fixed rate loan without a serious principal balance reduction. It is all about the monthly payment and having equity in the home, right!  Lastly, they will be tempted to focus on the worst borrowers first, which could prove to undermine the project.

With lending guidelines magnitudes tighter than they were when these loans were originated and values down 30-70% in the hardest in Pay Option regions, I have doubts they will be able to make a meaningful dent. However, for the ones that can’t be helped if Wachovia gets aggressive about proactive loan modifications they may be able to achieve their goal. 

For those that can’t refi through this program, if Wachovia puts them into new vintage 30-year fixed programs at market rates after waiving the neg-am, prepayment penalty and enough principal balance to get them right-side up in their homes again, they may be able to make a meaningful difference while helping out the borrower at the same time.  They also may have a saleable loan a few years down the road when all of this blows over. That’s a win.  The question is, will the bank want to make that much of a capital commitment. None have so far. -Best Mr Mortgage

Wachovia Launches Option-ARM Project – September 25, 2008
By MortgageDaily.com staff

Story Highlights

  • Wachovia Corp. is outsourcing the refinancing of its option adjustable-rate mortgages into government (FHA) and conforming (Fannie Mae & Freddie Mac) loans.
  • Wachovia hopes to restructure about 135,000 option ARMs in California.
  • In some cases, Wachovia may carry a new second mortgage for the amount above the maximum FHA or conforming limit.
  • The struggling Charlotte, N.C.-based bank reportedthat it charged of around $0.5 billion in option-ARMs during the second quarter. The loan-loss reserve build for option-ARMs was $3.3 billion.
  • California is phase one in a pilot program for the next 60 days, If the pilot period is deemed successful, the project is anticipated to run for one to two additional years.
  • Eligible borrowers must be current on their loans and occupy the properties being refinanced.

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  • 24 Responses to “Wachovia Finally Addressing Their Pay Option Portfolio”

    1. Remember the qualifying factors under the Housing and Economic Recovery Act of 2008

      Eligibility Requirements for Existing Loans (Very Important: Requires All of the Following):

       Owner-occupied principal residences only (no investors, speculators or second homes), and borrowers must certify that they do not own any other homes;
       Existing senior loan being refinanced must have been originated on or before December 31, 2007;
       To remove any incentive for borrowers to “purposely default,” the borrower must have had a mortgage debt-to-income ratio of no less than 35 percent as of March 1, 2008, and must certify that he/she has not intentionally defaulted on existing mortgage(s) and did not obtain the existing loan fraudulently;
       Participating mortgage holders/investors must waive any penalties or fees on the existing mortgage and must accept proceeds of the new loan as payment in full; and
       Existing mortgage holders/investors must accept their losses – taking substantial write-downs sufficient to: (1) establish a 3 percent loan loss reserve for the FHA; (2) pay the origination and closing costs for the new loan up to 2 percent; and (3) bring the loan-to-value ratio on the new FHA-guaranteed loan down to no greater than 90 percent of property’s current appraised value, resulting in a substantial reduction in debt service to the borrower. Accordingly, to qualify mortgage holders would need to accept a substantial write-down, accepting as payment in full no more than 85 percent of the property’s current appraised value.

      Requirements for New FHA-Insured Loans:

       New FHA loans must be properly underwritten and must be based on current appraised value of the house and borrower’s documented income (borrowers with higher – but not disqualifying – debt levels would need to make six months of timely payments at the new payment level to qualify for the guarantee);
       New FHA loan must extinguish all existing liens and substantially reduce the borrower’s mortgage debt service;
       New FHA loans under this program must be within the FHA loan limits now in effect under the stimulus for the duration of this program;
       Oversight Board will set reasonable limits on loan fees and interest rates; and
       To reduce costs to the government – and avoid inappropriate enrichment to the borrower – the government will retain a share of the borrower’s future profits. When the borrower sells the home or refinances the loan, the borrower will pay from any profits the higher of (1) an ongoing exit fee equal to 3 percent of the original FHA loan balance; or (2) a declining percentage of any net proceeds attributable to home appreciation (i.e., from 100 percent in year one to 50 percent in year four and thereafter minus the fees the borrower has paid into FHA).

    2. What happens with this plan if Wachovia goes under?

    3. Here is the killer:
      To remove any incentive for borrowers to “purposely default,” the borrower must have had a mortgage debt-to-income ratio of no less than 35 percent as of March 1, 2008
      Most Californians are paying over 50% of what the they make on their mortgage. Wachovia will have to reduce the principle 50% in order for these people to stay in their home. It’s the only way it will work and I just don’t see it happening.

    4. “did not obtain the existing loan fraudulently;” lol.. there goes 90% of the stated income loans!

    5. Mr. M,

      What if this govt bailout went directly to the homeowners? Take the 11,000,000 who have negative equity, or will have it soon, and paid off their loan (slowing down all the credit events of derivatives), issued a new loan at 80% LTV. Underwriting the loans based upon ability to repay and considering credit history going back 7 years, before many started intentionally defaulting to get out from under the neg eq position.

      If they qualify to repay, issue a 30 year fixed at 6.00%. Government holds the loans for all 30 years, and potentially would recoup all the money spent up front to pay off the negative equity of today.

      The bailout money will probably go down the drain, if it’s anything like the S&L bailout. I’m wondering if the homeowners were given affordable loans, had debt forgiven, all for the good of the America’s economic health (sorry to all of you with homes free and clear – something good will happen for you down the road), would that really work?

      Your thoughts….

    6. As a person who has rented during this whole time of artificial inflation of home prices 2001-now), damn, I can’t stop laughing about this huge mess! I knew there was a reason why didn’t buy a house. LOL Now, I get to buy a house that is 50% off! LOL!

    7. dafox, they just have to *say* they didn’t obtain the loan fraudulently. C’mon, doesn’t the government realize if they lied to get one loan they may lie to get another?! LOL!

      Oh wait, that’s right, these are poor, guileless “working families” who just want a better life. They don’t lie; they are only lied to.

    8. That is where the bailout money will go. To Wachovia, They will cover there ass before loaning out another dime as will all lenders or banks that get any money at all from the government. They are in survival mode and not concerned about the consumer. I guess Wachovia will not be sponsoring a golf tourney next year …

    9. Have you read Mortgagee letter 2008 – 13 ?
      The government is permitting FHA to allow
      banks to take negative equity seconds !

    10. Are you kidding me?
      How will any of this work when 99% of borrowers in these states with the 135,000 loans were all STATED INCOME/NINJA loans. How can they refi if the loan officers/borrowers “lied” about their income to qualify in the first place and now must prove income documentation? I worked in a high income/high value area and even 99% of my borrowers were stated income loans so think about Stockton/Antioch, etc…

      Say goodbye to Wachovia…

    11. My CD with Wachovia matured about twenty
      days ago. When I requested a cashiers check,
      the bank officer asked if I was getting a
      higher rate elsewhere. I bluntly answered no.
      The bank officer didn’t even try to talk me
      into keeping my money with Wachovia.
      Enough said, Wachovia did it to themselves.

    12. Future Home Buyer – there is where you are wrong. Nothing right now is ’50% off’. That’s because without the loan programs that existed when homes were ‘that price’ you have to absolutely discount and throw out what home used to cost. Those using ‘what homes were priced at’ as any sort of benchmark will get their heads handed to them. I have had two funds call me for help with packages of REO they bought in the past 6 months and they are looking at $10s of millions in losses. They can’t believe they bought so far from the ‘top’ and were so far off. That is because the ‘top’ was a mirrage. You better be careful or that LOL come back to bite ya.

    13. Art Vandalay – you nailed it.

    14. WaMu was purchased by JP Morgan (who’s tailfin has been circling them for weeks). Wachovia is *almost* facing reality with their toxic mortgages and is in talks to merge with Citibank.

      Mr M – Doesn’t this mean that the free market is working? The big boys are starting to work out this mess amongst themselves since no bailout came to the rescue this week. Do you think that if they have to face reality on their own they might be more aggressive in getting some realistic loan workouts done as quickly as possible to save their Armani clad behinds?

    15. the free market has always been working, people just don’t like its pricing.

    16. No Bail Out! No BAIL OUT!

    17. Admin,
      Sorry, I meant 50% off in 6 to 9 months.

    18. URGENT ACTION NEEDED! — Contact the courageous Indiana Congressman who is standing up to the Fed !

      Right now senior Indiana Congressman Mike Pence (R) and others are at Capitol Hill holding their ground against The Fed, Bush, Paulson, and Bernacke. Time is of the essence because Bush continues to feed the message to the media that our world will melt on Monday if they don’t get their $700+ billion bailout regardless of what America’s taxpayers want. This is not true. America will still be here on Tuesday.

      Currently, Congressman Pence is wisely calling for a suspension of the capital gains tax on investments in order to encourage the millions of Americans without debt to invest in the markets. Here is the Congressman’s plan.

      Call Congressman Pence from Indiana, tell him America has his back, and ask him to co-sponsor HR 2755, The Act to Abolish the Federal Reserve Bank, the culprits who want to steal our wealth and leave generations in debt to their private consortium of bankers. The Congressman’s office is receptive to your message!

      PLEASE FORWARD THE MESSAGE BELOW TO YOUR LISTS:

      “We are helping the Indiana tax activists with HOOSIERS FOR FAIR TAXATION in Congressman Mike Pence’s home state of Indiana. They have a solid verifiable track record of successes and political network that includes elected officials on the right side.

      Mike Pence, a courageous Senior Congressman from Indiana, was first to stand down the Fed against the bailout. Please call and fax his Indiana Office. Tell him we are grateful for his courage, tell him America has his back, and ask him to co-sponsor HR 2755, the Act to Abolish The Federal Reserve Bank and return America’s wealth to her own Treasury! There is unbelievable ground support and the Congressman is getting calls from high places to co-sponsor the Act to Abolish the Federal Reserve, HR2755.

      Be polite, enthusiastic, and be sure to thank him for his courage!

      The numbers below are for his campaign office. There will likely be staff in his office this weekend. If no answer, send a fax and leave voicemails with your name, city, state. It doesn’t matter if you are not from Indiana.

      REP MIKE PENCE INDIANA OFFICE
      PHONE: 765-643-9503
      FAX: 765-643-9514

      P.s. Then don’t forget to call your own local Congressperson and tell them her or him to stand with Representative Mike Pence and with the American People.”

    19. Art Vandalay is full of crap. There are 145 million people with jobs in this county. 45 million of those are ultimately parasite jobs for the government of the remaining, only 50% pay income taxes. Why should these people who pay all the freight for everything. be forced, at the point of a gun, to become mortgage lenders to a bunch of whiners, losers and deadbeats, like I suspect, Vanderlay himself

    20. And if we bailout ordinary homedebtors just like with Wall St, I WANT to share an upside, I’m absolutely against doling out free money. Future earning streams MUST be tapped, there should be some sort of options on house price appreciations, etc. That’s why it just won’t work, there are no securities mechanism to squeeze homedebtors future earnings or capital gains.

    21. Bilejones, thanks for the feedback. I understand where you’re coming from, since I’ve also had Arm-Chair Republican tendencies before and have to remember that not everyone has had the financial independence and good fortune I’ve had so far in my life and career as a broker.

      We can complain about lazy government workers, high taxes, and bailing out “whiners, losers, and deadbeats” all day long, but we’re dealing with individual lives, families, and millions of potential job losses if the CAUSE (foreclosures) isn’t halted immediately, which is triggering the EFFECT ($67+Trillion of Unregulated Derivative’s, CDO’s, and CDS’s) which is the real threat to the banks and other financial institutions.

      Gretchen Morgensen’s article about AIG in this morning’s NY Times shares how a 377 employee unit in London brought down a stable, 116,000 employee company by diving deep into Derivatives, CDO’s, and CDS’s.

      I believe the banks and investors could probably handle the wave of foreclosures, if that’s all that it was. But it’s not. Unfortunately, for every $1,000,000 in loans, there’s $3,000,000 in Derivative products attached (that we know about)that can potentially trigger a “credit event.”

      Banks hold lots of Derivatives. Private Equity and Hedge Funds borrowed money from these same banks to buy and sell derivatives as well. Someone’s winning big and someones losing big in these credit events. Banks may never see that Hedge Fund or PE money ever again. More losses, more need to raise capital from somewhere. Undercapitalized banks don’t lend money. They hoard it.

      All of this starts with homeowners and ends with homeowners. The more that intentionally default on their upside down mortgage cause more credit events and more losses for banks, who in turn shut off credit to each other, to small, medium, and big business. Jobs are lost and the cycle just spins further and further down the rabbit hole.

      Let’s hope Paulson can both capitalize the banks and find a fast and effective solution for 11,000,000 potentially upside down homes. People are hoping for the best and are willing to do whatever it takes to keep their family in their homes and community in tact. Let’s hope the government finds a mutually beneficial program to make this happen.

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    23. [...] Finally Addressing Their Pay Option Portfolio (22) Posted on September 26, 2008 11:26 [...]

    24. [...] work. These will be continual problems when they try to fit a square borrower into a round hole.  Click HERE for my Wachovia write-up.  This is another reason why the ‘free mortgage payment bailout’ may be the only [...]

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