Wells Fargo Attempts Loan Mods With Option ARMs

I will give Wells Fargo bonus points for trying to make the best out of a rather dicey loan portfolio. Known as a conservative lender through most of the insane lending of the housing boom, Wells Fargo inherited a the toxic portfolio of option ARMs when it chose to purchase Wachovia in a fire sale last year. The bank is being proactive by introducing loan mods to deal with the pesky problem underlying most option ARMs: borrowers used them to purchase homes they couldn't actually afford and once the minimum payment resets higher, the borrowers will default. Wells Fargo is attempting to solve the problem by converting option ARMs into interest only loans that will defer balances for as long as six to 10 years. The bank is essentially extending the minimum payment period on the option ARM because it knows that the borrower would otherwise default if the payment were allowed to adjust to the fully amortizing amount. Also known as "kicking the can down the road" this strategy clings to the hope that either housing prices will stage a miraculous recovery in the next few years, or that the borrower's financial situation will improve dramatically so that he can meet higher mortgage payments in the future. In reality it is just delaying the inevitable and allowing Wells to take smaller writedowns in the present against the souring portfolio. Wells Fargo claims that it is keeping borrowers in their homes, which, I suppose is slightly better than having to deal with yet another foreclosure. However, the fundamental problem of borrowers being upside down on their mortgages and having a rather large financial incentive to walk away remains.