Wednesday, July 2, 2008

Wachovia pulls the plug on Pick A Payment

AZCentral.com published a story yesterday titled "Wachovia quits offering risky mortgage loans."

I almost feel bad picking up this story, as if banks haven't had enough bad press, and I'm simply piling on. Then I think "are you kidding me?", so I'll keep writing.

Here are the basics:

There is one type of mortgage out there which has as much to do with our current real estate woes as any other single item: the Pick A Payment Loan. In almost every situation, when people write/talk about loans resetting their interest rate, and borrowers unsure about how much they owed/borrowed - this is the loan they're referring to.

Lenders made these loans, and each month the borrower received a statement in the mail, with the option to Pick A Payment. The borrower could mail a check in one of 4 different amounts:

15-Year Amortization: Send in this amount, and your loan will be fully paid off on a 15-year time table.

30-Year Amortization: Send in this amount, and your loan will be fully paid off on a 30-year time table.

Interest Only: Send in this amount, and you will be making an interest-only payment, with no reduction in principal.

Minimum Payment: Send in this amount, which is less than the interest rate, and the difference will be added to your mortgage balance to be paid back later.

Guess which payment most people made...

Then, after a certain amount of time, the interest rate adjusts upward, and in most cases the minimum payment option is no longer offered. This is when the borrowers realize they cannot afford their home, the home is now worth significantly less than their mortgage balance, and another bank-owned listing is not too far away.

On top of all that, the banks who made these loans consistently lowered the credit & equity requirements, and made them available to investors with little or no money down.

So now, almost 3 years after the market's peak, and about 2 years after the common sense realization that the market was going to get a lot worse, Wachovia has decided that these aren't very good loans.

Kudos to you, Wachovia. No one's going to pull the wool over your eyes...

Your still bearish on banks Realtor,

Chris Butterworth

[tags] Wachovia, pick a payment [/tags]