Wachovia’s option ARMs being modified

Hand signing mortgage next to money and house

Homeowners with troubled Wachovia mortgages may be able to avoid foreclosure with help from Wells Fargo.

Wells Fargo, which purchased Wachovia in late 2008, is offering a new mortgage modification program to Wachovia customers whose loans are delinquent or are likely to become delinquent.

The program will be open to all Wachovia borrowers, but it's primarily intended to help those with Pick-A-Pay loans, a type of adjustable-rate mortgage that let borrowers make extremely low minimum payments.

Option ARMs, as they're called, are a particularly deceptive and dangerous type of loan.

The minimum payments borrowers were encouraged to make don't even cover the interest on the loan. Each month, the difference gets added to the mortgage balance.

Yet brokers aggressively pushed them during the housing boom. As a result, many homeowners ended up falling further into debt with every check they wrote.

Many are now facing foreclosure. Indeed, about $750 billion worth of option ARMs were written between 2004 and 2007. Experts expect more than half will wind up in default.

To help Wachovia customers -- including borrowers who obtained option ARMs through World Savings, which Wachovia purchased in 2006 -- Wells Fargo is halting foreclosures.

Customers with loans being referred to foreclosure or that are in foreclosure -- even ones in the latest stages -- will receive an extension until Feb. 28, to allow them to try to work out a more affordable mortgage.

The exact terms offered each customer will be different, according to Kevin Waetke, Wells Fargo communications manager/assistant vice president, Home & Consumer Finance Group.

But Wells Fargo's goal is to reduce monthly payments to 38% or less of the borrower's pretax income.

To accomplish that the bank will:

Reduce interest rates. Some borrowers will be given a lower interest rate, or even allowed to pay no interest on a portion of the principal for a period of time.

Extend the loan, allowing homeowners to repay their mortgage over 40 rather than 30 years.

Forgive some of the principal. A willingness to reduce debt is critical, because it's one of the best ways to permanently lower monthly payments.

Many borrowers also have seen their property values decline so much over the past couple of years that they owe tens of thousands of dollars more than their homes are worth.

That's especially true for buyers who never had any equity in their homes because they financed the entire purchase price.

If lenders won't reduce the principal and give homeowners a chance to build at least a little equity, borrowers will question the wisdom of repaying the debt, no matter how low the payments might be.

Wells Fargo plans to work with outside investors to modify loans that the lender only partially owns or simply services. Those loans can be hard to renegotiate because all investors must agree to the new terms.

"We will continue to use multiple solutions, including fast-track or working case-by-case on refinancing, developing repayment plans, modifications and, to a lesser degree, short sales and deeds-in-lieu," Waetke says. (A deed-in-lieu transaction involves voluntarily deeding the property to the lender in exchange for release from all obligations under the mortgage.)

Wachovia increased its default/home retention staff by 330% in the past year to almost 2,000 employees. Wells Fargo increased its staff by 125% to almost 6,000 in the last two years and plans to add more staff in 2009.

Because of the volatile economy, Wells Fargo says it can't identify how many Wachovia customers will participate in the modification program.

However, the lender says it has been able to reach 94% of the Wells Fargo customers who were two or more payments behind and was able to work out a solution with seven out of every 10 of those customers.

Eligible Wachovia customers are currently being contacted by mail. You can also call 1-800-642-0257 to see if you qualify for the modification program.

If you're delinquent or afraid of falling behind on your payments and are not a Wachovia or Wells Fargo customer, here's where to find our best advice on how to avoid foreclosure.