Wells Fargo reached an agreement with the state of California to make mortgage modifications valued as much as $2.4 billion on risky mortgages, mortgages that let the borrower decide how much they would pay each month , which is called an option ARMs.
Many borrowers opted for the smallest payment, which didn’t cover the interest accruing each month, making the balance on the loan rise instead of fall. However, once the balance reached a certain level, the required payment was reset automatically, often ballooning to a level that the borrower couldn’t afford.
WF will also pay $32 million to more than 12,000 CA borrowers who had such loans and lost their homes to foreclosure, according to the accord, announced Monday with Atty. Gen. Jerry Brown’s office.
The $32 million works out to an average of about $2,650 for each former homeowner.
Some of the promised modifications, to be made over the next three years, are expected to include reductions in the balances owed by borrowers. That does not appear to be a significant concession by WF because it already has modified more than 50,000 so-called pick-a-payment mortgages in CA, reducing the balances on those loans by a total of $2.9 billion.
The San Francisco bank inherited these option ARM loans when it purchased Wachovia at the end of 2008. At that time WF wrote down the value of the Wachovia portfolio before taking it onto its own books.
As a result, the loan modifications haven’t generated painful losses for Wells Fargo. The company indicated Monday that it didn’t expect the newly promised modifications to force it to further write down the portfolio.
The settlement with CA follows similar agreements that WF struck in October with nine other states: Arizona, Colorado, Kansas, Florida, Illinois, Nevada, New Jersey, Texas and Washington.
The bank also will pay the attorney general’s office $1.8 million “for the investigation and prosecution of consumer protection matters, for consumer education and outreach, and to pay any costs incurred to distribute payments to eligible foreclosed borrowers.”
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