Wells Fargo agrees to modify mortgages
Thursday, October 7, 2010
Wells Fargo has agreed to spend an estimated $772 million modifying mortgages for borrowers in eight states to settle claims that it used deceptive marketing to sell loans that were too complicated to understand and left customers with crippling debt.
The settlement announced Wednesday with a group of state attorneys general covers 8,715 borrowers who owe more than their homes are worth, a situation known as being "underwater." The affected homeowners live in states that have been hit hard by the plunge in housing prices, including Arizona, Florida and Nevada.
The effort to help underwater borrowers comes as banks face growing scrutiny of the accuracy of their foreclosure filings. Unlike competitors such as Bank of America and J.P. Morgan Chase that have stopped foreclosures, Wells Fargo is proceeding with evictions.
The investigation, led by Arizona Attorney General Terry Goddard, centered on an exotic type of loan that came into vogue during the peak of the housing boom: the "pick a pay" mortgage, which allowed borrowers to pay only a portion of the interest due. The rest would be added to the principal amount, resulting in a situation where the loan balance would actually get bigger as the borrower made payments.
The probe targeted two companies that were acquired by Wells Fargo: Wachovia and Golden West, which itself was acquired by Wachovia in 2006. Wachovia retired the "pick a pay" loan in 2008, before Wells Fargo bought the company, and Wells Fargo does not offer this kind of mortgage to customers.
Goddard said the agreement was notable because it compels Wells Fargo to not only reduce some borrowers' interest rates but also forgive a portion of their principals. Close to half the money pledged by the bank will be used to reduce borrowers' principals. Wells Fargo is also giving states an additional $24 million to help them contact borrowers who qualify for modifications. "Wells is taking the lead by this agreement," Goddard said. "I believe it will be very hard for others not to follow."
Wells Fargo, which services one of every six mortgage loans in the country, said it welcomed the agreement. "We think this is a far more productive way to work together to help borrowers than some other alternative," said Franklin Codel, chief financial officer of Wells Fargo Mortgage. "We think it's a win for the states and for the borrowers."