Extend and pretend. Kicking the can. Fake it till you make it. Band-aided.
Any one of those expressions could be used to describe the latest loan modification technique from Wells Fargo.
Dow Jones, via the Wall Street Journal, has the story:NEW YORK (Dow Jones)–Wells Fargo & Co.’s (WFC) strategy for modifying its billions in troubled Pick-A-Pay mortgages looks a lot like a game of kick-the-can-down-the-road.
Wells Fargo, the fourth-largest U.S. bank by assets, holds more than $107 billion in debt tied to option-adjustable rate mortgages, a quintessential loan product from the housing boom that allowed borrowers to make small monthly payments in return for increasing their mortgage balance. Now, many Pick-A-Pay borrowers own homes worth far less than they owe in mortgage debt, even as many of them can afford a full monthly payment that pays down principal.
To solve that conundrum, Wells Fargo is taking a gamble: The bank is issuing thousands of interest-only loans that will defer borrowers’ balances for as long as six to 10 years. Wells Fargo is wagering that an eventual rise in housing prices in the country’s worst-hit regions, along with a rise in consumers’ income, will eventually combine to cover the bank’s billions in underwater Pick-A-Pay debt.
“We’re banking on the fact the economy will improve and recover over time,” Michael Heid, co-president of Wells Fargo Home Mortgage, said in an interview.
Wells Fargo isn’t alone in this particular gamble. The commercial real estate loan workouts announced by the FDIC and the Fed earlier this week look very similar. Crucially, such programmes rely on future rises in property values to make the gamble successful.
Wells Fargo’s Pick-A-Pay strategy, like the US government’s Home Affordable Modification Plan, also means having faith that underwater homeowners will actually accept the modified loan applications and not just walk away from their properties. Here’s Dow Jones again:
Heid, who runs Wells Fargo’s mortgage-servicing unit, says most borrowers are motivated to pay their mortgages, even if they owe far more in mortgage debt than their houses are actually worth. One motivation driving borrowers is “kids and schools” having “a very strong play in why do people try and stay in their homes when they’re under water,” Heid said.
And how’s that working out so far?
According to the article the bank has written $2bn off Pick-A-Pay balances for borrowers, or nearly $46,000 per modified loan. That works out to about 43,500 Pick-A-Pays modified in the first nine months of the year.
Who’s taking up these modifications?
People like the very astute Danny Annan:
One borrower, Danny Annan, an Orange County, Calif., engineer, just finished weighing one of Wells Fargo’s loan modifications. The bank offered to reduce his loan balance by $100,000 and transfer the remaining balance to a six-year interest-only loan with an initial interest rate of about 4.9%, Annan said. The offer will still leave Annan more than $100,000 under water on his home.
“It looks like a Band-aid,” Annan said. “It’s not like we’re not being appreciative,” added Annan, citing he’s left with little alternative but to sign the bank’s offer by the deadline. He said two homes on his block have been empty for more than a year after his neighbors turned in the keys and walked away.Related links:
Option ARMageddon rears its ugly head – FT Alphaville
More than you probably ever wanted to know about the Hamp – FT Alphaville