Wells Fargo to modify risky “pick-a-pay” ARMs originated by Wachovia

Wells Fargo is providing over $2 billion worth of loan modifications for California homeowners who took out “pick-a-pay” loans originated by World Savings and Wachovia (acquired by Wells Fargo in 2008). “Pick-a-pay” loans  are adjustable rate mortgages (ARMs) with highly flexible repayment options (sometimes also called option-ARMs) allowing borrowers to make interest-only payments without paying down the principal balance – a recipe for financial disaster.

Approximately 14,900 California borrowers will receive a loan modification, many of which will include a principal reduction. Additionally, $32 million in restitution will be paid to over 12,000 “pick-a-pay” borrowers who were foreclosed on and another $1.8 million will be paid to the state of California to reimburse it for costs associated with foreclosure. Each foreclosed homeowner is expected to receive more than $2,650.

The sting of the Great Recession left thousands of borrowers unable to make the swelling payments once the ARMs started to adjust upward, a likelihood many homebuyers did not fully contemplate before agreeing to the loan. Couple ARM resets and interest-only payments with a historic decline in property values and you have a very volatile cocktail indeed. Wells Fargo has belatedly realized the danger of these mortgages and is willing (read: forced through a settlement with the California Attorney General) to work with homeowners to make modifications.

Homeowners eligible for a Wells Fargo loan modification will receive notice by February 2011. Borrowers who experienced foreclosure will be notified of any restitution eligibility by June 2011.

Sure N EZ's take: It would be naïve to think Wells Fargo and others have had a change of heart when it comes to debt forgiveness. Wells Fargo was not acting out of charitable philanthropy; they were forced into action by the Attorney General’s office.

So what’s the moral of the story Sure N EZ readers can take away from all of this? Simply, lenders are not inclined to provide sustainable assistance to distressed borrowers who took out the zero-ability-to-pay (ZAP) loans avidly provided by the banks during the Millennium Boom unless they are required to. This clearly illustrates the need for Congress to give judicial authority to bankruptcy judges to force cramdowns as lenders are loath to act unless their hands are forced.