Washington Attorney General Rob McKenna announced today a settlement with Wells Fargo Bank that provides loan modifications for residents in Washington and seven other states who obtained problematic mortgages from Wachovia Bank and Golden West Corp., which did business as World Savings Bank. At least 400 Washington borrowers who received payment option adjustable-rate mortgages (ARM) will be eligible for loan modifications that will provide more than $29 million in mortgage relief, McKenna said. This sum includes nearly $12 million in principal forgiveness for Washington homeowners.
The agreement to be filed in Pierce County Superior Court is the latest in a series of efforts by the attorneys general to help struggling homeowners. It also includes $1.6 million for a foreclosure relief fund to be paid to the Washington Attorney General’s Office. The money could be used to provide refunds to individuals who lost homes or to assist with the state’s efforts to prevent or mitigate foreclosures. An additional $200,000 is allocated to reimburse the office for legal costs.
The Washington Attorney General’s Office served on the executive committee that negotiated the agreement with Wells Fargo, which purchased Wachovia and acquired its subsidiary, Golden West, at the end of 2008. The states claimed that “Pick-A-Pay” loans offered by Wachovia and Golden West/World Savings Bank violated consumer protection laws because they expose borrowers to substantial economic risks that weren’t adequately disclosed.
“The relief offered by this agreement with Wells Fargo comes at a critical time for borrowers who are underwater and their neighbors, whose housing prices would be adversely affected by a foreclosure next door,” Attorney General McKenna said.
McKenna noted that Wells Fargo, which acquired the unfair loans during bank takeovers, began offering assistance to consumers before the state stepped in. The bank has already completed modifications for 500 Washington residents that save those borrowers more than $31 million.
Pick-A-Pay loans offered borrowers a choice of four payment options: (1) a minimum payment that doesn’t cover the interest due; (2) an interest-only payment; (3) a 15-year amortizing payment; or (4) a 30-year amortizing payment. Most borrowers chose option 1, the minimum payment.
Pick-A-Pay loans “recast” when either the unpaid balance reached a given predetermined percentage of the original loan (usually 110 percent or 125 percent), or when 10 years elapsed. Once the trigger happens, the borrower loses the range of payment choices and must make fully amortized payments under the current – substantially higher – adjustable rate.
The states alleged the companies did not fully explain that the minimum payment due in the first years of the loan did not cover the full amount of accrued interest, resulting in negative amortization. Borrowers eventually faced higher monthly payments and larger loan balances.
“Borrowers were encouraged to believe their home values would continue to appreciate, making it easy to refinance or sell the home at a gain,” Assistant Attorney General Dave Huey explained. “As we know, the bubble burst.”
Overall, loan modifications will be offered to 8,715 eligible borrowers in the eight states: Arizona, Florida, Colorado, New Jersey, Washington, Texas, Illinois and Nevada. The agreement will save borrowers $772 million.
The agreement provides for a compliance monitor and quarterly reporting to the eight attorneys general.
The agreement provides that between Dec.1, 2010, and June 30, 2013, Wells Fargo will offer modifications to qualified borrowers who are either 60 days delinquent or facing imminent default. Borrowers will first be considered for the federal Home Affordable Modification Program (HAMP). If the borrower cannot qualify under HAMP or elects not to accept a HAMP modification, Wells Fargo will consider the borrower for its new modification program, known as MAP2R.
Modified loan terms will vary according to the circumstances of the borrower but can include principal forgiveness, loan extension, interest rate reduction and principal forbearance (which gives the borrower additional time to pay off the loan principal). Borrowers who remain current on their modified payments over three years will be able to earn additional principal forgiveness. Borrowers who qualify may also convert into a fixed-rate loan.
Under the agreement, Wells Fargo also makes a number of substantial servicing commitments for borrowers with pay option loans. These include:
►Ensuring adequately staffed help lines to serve consumers, including those who speak Spanish.
►Providing a single, primary point of contact to assist borrowers seeking modifications under the states’ agreement.
►Making decisions on modifications within 30 days of receiving a complete application.
Establishing a formal second look or appeal process for borrowers who are turned down for a modification.
►Offering other foreclosure alternatives, including short sale, deed-in-lieu and relocation assistance.
►Wells Fargo customers who originally took out mortgages through Wachovia or Golden West/World Savings Bank can call (888) 565-1422 for more information about the program.
For more information, visit www.atg.wa.gov.