Wachovia Finally Addressing Their Pay Option Portfolio

Wachovia (WB), 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/bankers to 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 (WM) 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 (FNM)/Freddie (FRE) 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.

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 reported that 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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