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The mortgage market turns a corner – Wachovia retires Pick-a-Pay

by Morgan on June 30, 2008

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Wachovia announced today that they are no longer offering the pick-a-pay, negative amortization mortgage loan. Additionally, they’ve announced that the bank will assist current pick-a-pay loan holders by waiving all pre-payment penalty fees for those looking to refinance out of the loan.

Here’s the details:

Effectively immediately, Wachovia is waiving all prepayment fees associated with its Pick-A-Pay mortgage to allow customers complete flexibility in their home financing decisions.
. . .
Additionally, for all new loan originations, Wachovia is discontinuing offering products that include payment options resulting in negative amortization.

While this has been covered extensively elsewhere with various regard I think we’ve reached a very important part in the mortgage market correction.  The return of sensible underwriting is finally getting back to basics.  The elimination of exotic mortgages like the pick-a-pay is exactly what the housing and mortgage markets need to return to normalcy and sustainable, responsible growth.

The elimination of financial engineering from the mortgage market is one of the key pieces to the recovery puzzle.  I am happy to see this loan go as it has been responsible for a major portion of the housing bubble and explosion of mortgage market greed which fueled fraud, borrower deception and risky lending practices.

An Important Milestone on the return to mortgage sanity

This is an important milestone for the market as it will force home prices back in to traditional multiples of income ranges rather than the inflated multiples that were common in the worst bubble areas including California, Vegas and Florida.  This change will insure that housing prices don’t explode in to the stratosphere again.

Additionally it will precipitate the continued fall of housing prices as voodoo financing options disappear.  The combination of sound underwriting and reduced housing prices are exactly what is needed to bring stability to the mortgage market.

More pain to come in housing market

Of course this means that more pain is sure to come in the housing markets.  Option ARM holders that were banking on refinancing in to another pick-a-pay mortgage to maintain their homes are suddenly looking at no feasible affordable mortgage and will lose their homes without some sort of bail out or debt forgiveness program from the government and lenders that made these loans.

The wave of upcoming pick-a-pay loans now truly have no place to go (as if disappearing equity wasn’t enough, the markets that have been somewhat stable are now going to feel more of the pick-a-pay foreclosure blight).  This harsh reality will push more foreclosures on to the market over the next 3 years.

Wachovia tries to limit liability

Of course, this has nothing to do with anything other than Wachovia looking to limit its already massive liability to these pick-a-pay loans.  They know that they are just ticking time bombs, and they want to refinance as many people out of those loans as possible to save their company from the sure to be eye-popping losses.

No matter the arguments about “conservative collateral valuations” by World Savings (the bank that Wachovia bought) – it is clear that the option arms made by World are a dangerous liability to the bank.  So much so that the bank is willing to waive all pre-payment fees in a last-ditch effort to get the loans off the books.  But as we all know the home price declines have probably made this option a pipe dream to many of those it’s supposed to help.

Last 3 posts by Morgan

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  5. Analyst Whitney calls Wachovia prospects ‘bleak’

  • Nike
    This article contains really useful information. Now i see the reasons for refinancing quite clear. First of all it may take long to find the best mortgage type for you especially if your credit score is not too high. I think it is better to compare several mortgage types before choosing this or that loan option. Probably with the help of this service http://www.fizber.com/sale-by-owner-home-servic... you may find a low interest lender.
  • Don
    Thanks for sharing Morgan. This is good news. WAMU should have cut this off early last year, but their Option Arm may be their undoing. When I sat on their lock desk, I'd say half the loans I locked were option arms.

    Maybe I read this on blownmortgage, I can't remember, but Option Arms were initially set up for people who would be holding on to a home for the short term, while they could rehab it and flip it. This program was NOT set up for long term buyers who used the home as their primary residence. What a friggin' mess!
  • mtg
    What abou companies like IndyMac that had their call centers solicit borrowers into higher cash out loans using option arms?
  • H8ting Wachovia
    Too (expletive) late! I was in a World P-A-P product. I saw this coming. I tried to refinance out of it while I still had some value in my home. All I needed was the forgiveness of the prepayment penalty. I had the opportunity to re-fi into a VA loan with a good interest rate, but Wachovia refused to waive the pre-pay. Now I sit on a home that is negative by about $120,000, and nowhere to go. In an attempt to stop the bleeding of the combination of negative amortization and decreasing home value, I entered into a fixed payment modification for 12 months. I paid full PI at 5.9%. When I came out of the modification, the loan was supposed to revert back to the original terms and conditions (read pick-a-pay options). But Wachovia has unscrupulously taken those payment options away from me. Now they expect me to make a minimum payment of full PI based on a locked rate of 7.25%. They locked in that rate which was supposed to be based on July's CODI but used June's rate. This of course means that they can lock in a higher rate as the CODI is continuing to drop quickly. Mortgage X anticipates that with my margin added, my interest rate should be in the low 5% range as of December.

    It is as if no matter what I have done to try to be responsible and try to stay in my home, Wachovia has been working against me.
  • Tony
    I wondered why I keep getting registered, fed ex letters from Wachovia offering to refinance my lpick a pay loan. I'm holding out until rates drop.
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