Wells Fargo to Pay for Pick-A-Pay Loans

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Call it the “drip-drip-drip” before the flood, as Wells Fargo (Stock Quote: WFC) is the first major bank to offer compensation to homeowners who bought those quirky “pick-a-payment” mortgages that, more often than not, wound up costing borrowers a bundle.

Wells Fargo is busy on the mortgage document repair front these days. Aside from the “pick-a-pay” issue, the bank just announced it would re-file documents for some 55,000 foreclosed mortgage cases. Only a few weeks ago, Bank of America (Stock Quote: BAC) and JP Morgan Chase (JPM) announced they would suspend foreclosure proceedings nationwide in the aftermath of the “robo-signing” scandal. But Wells Fargo’s foreclosure processes were supposed to be unaffected by the scandal, as it kept its foreclosure pipeline flowing.

With the announcement that it would re-file these documents, Wells Fargo has cast a cloud over its mortgage documentation practices. Ohio Attorney General Richard Cordray, who recently filed a lawsuit against Ally Bank over the robo-signing scandal, said he was “pretty unhappy” over the Wells Fargo flip-flop.

"We had talked to them and they assured us they didn't have any of these problems," Cordray told Reuters. “[It] makes it hard to believe any of the big financial firms in terms of what their process has been."

Wells Fargo also announced this week that it would pay $23.7 billion to eight U.S. states to help modify and reduce mortgages for bank customers who may have been hoodwinked into buying those “pick-a-pay” mortgages. Most of the loans originated with Wells’ subsidiary Wachovia Bank.

Those mortgages gave homeowners the option to make their payments in several ways:

  • Make full principal and interest payments.
  • Pay interest and nothing more.
  • Make a “minimum” payment that didn’t even cover the loan interest.
  • Make a 15-year or 30-year amortizing payment.

Attorney generals in eight states filed complaints against Wells Fargo, saying that such options represented a high risk for homeowners, which were not properly disclosed by the bank.

While admitting no wrongdoing, Wells agreed to the near-$24 million payment, which the states are expected to use to pay restitution to borrowers who bought their homes under these conditions.

If the mortgage holder opted for the lowest monthly payment option, he was setting the table for higher payments down the road, state attorney generals charged.

When the housing bubble popped, many pick-a-pay mortgage holders lost their homes as they couldn’t keep up with their payments, and couldn’t sell for a profit because home values crashed across the country.

"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 said in a statement. "As we know, the bubble burst."

If you’re a pick-a-pay Wells Fargo mortgage holder who lost your home, or if you own a home but are having trouble making payments, call Wells Fargo at (888) 565-1422. The bank plans on launching a new loan modification program starting Dec. 18, and you might qualify for some help.

No doubt, other banks will take note of Wells Fargo’s actions, as “pick-a-pay” loans were a huge factor in the unraveling of the U.S housing sector back in 2005 and 2006. With that victory in their back pockets, expect state attorney general offices around the country to go after other offending banks.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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