Thursday, June 19, 2008

Slow Motion Implosion

The option arms are coming. Pick a payment will soon be replaced with pick a foreclosure date. These loans are non sustainable for the current housing market. Home values are decreasing while the money owed on most option arms is increasing. While in theory it sounds great thinking that people are choosing to pay the lowest amount and socking the difference away in a higher paying account. But lets be realistic, the difference of a full payment, full interest and teaser rate level that 70% of Wachovia customers are paying is being used just to get by.

The difference in the value of what the house is worth and what is owed is becoming a larger and larger gap everyday. Yet Wachovia is aggressively notifying customers about what their pick-a-payment loan really means. A few phone calls will stop the coming implosion? Not likely, but Bloomberg news has an article regarding Wachovia Moves to Assure Borrowers Understand Loans. Lets take a look -

Wachovia is contacting people who apply through independent mortgage brokers to ensure ``the customer understands the key features of the Pick-A-Payment loan product,'' according to a June 11 memo from Tim Wilson, head of loan origination at the Charlotte, North Carolina-based company. The loans let borrowers defer part of their monthly bills.

Golden West was the market leader in option-ARM mortgages, with about $120 billion of the loans when it was acquired by Wachovia. The loans, termed Pick-a-Payment by Wachovia, allow borrowers to make lower initial payments that don't even cover the accrued interest. Almost 70 percent of Wachovia's borrowers choose to pay as little as possible.

The unpaid portion gets added to the principal of the loan. That can backfire on the bank if a borrower defaults while home prices are falling, leaving the lender unable to recover the full amount owed. U.S. single-family home prices fell at a 6.7 percent annualized rate in the first quarter, Waltham, Massachusetts- based research firm Global Insight Inc. said June 2.

Wachovia's new policy ``is far too little and far too late and indicative of how bad it is,'' said William Purdy, a Soquel, California, lawyer who concentrates on home refinancing. ``These loans are ticking time bombs and probably the worst thing the bank can say it has ever done to its customers.''

The new policy of calling borrowers applies to loans initiated by brokers, which make up 30 percent of the bank's mortgage lending, said Vecchiarello, the Wachovia spokesman. The bank began contacting would-be borrowers to verify information and improve customer service.

Do the homeowners really understand the loans? Are they pretending to realize they are getting deeper and deeper in debt everymonth hoping that by the time they reach their cap there will be some kind of program so they will not face foreclosure? Wachovia should realize that a large portion of the loans are already in trouble. People can not refinance - the debt is more than the value of the property. The only sales will be short sales.

The implosion is coming for the Option Arms - the only real question is when. The problems have been documented here and here and here. The map of misery post also shows where the fallout will be the highest.

1 comment:

Anonymous said...

Even if borrowers can understand the pick a payment plan does not mean they can afford it. Other than just making sure borrower's "understand" the loan does Wachovia make sure borrowers can "afford" the loan?