Wells Fargo to aid pick-a-pay mortgage borrowers

Wells Fargo & Co. agreed to provide about $67 million in mortgage relief to up to 900 New Jersey homeowners who have so-called pick-a-pay adjustable-rate mortgages, New Jersey Attorney General Paula T. Dow said Wednesday.

The pick-a-pay loans with short-term teaser rates exploded in popularity during the housing boom because they allowed borrowers to buy a more expensive house than they could afford. That is because they could choose small monthly mortgage payments that did not cover the interest due.

The downside was that unpaid interest was added to the principal until the principal reached 125 percent of the original loan amount. At that point, borrowers had to make a traditional payment, including some principal and all the interest. Thousands of people could not afford it.

The agreement, which covers seven other states as well, also requires Wells Fargo to pay New Jersey $3.98 million to settle the allegations that Wachovia Corp., which it bought amid the financial chaos of 2008, failed to warn borrowers of the perils of the minimum payment.

"In many cases, those who seek out these 'minimum payment' option mortgages are the very people who have the most limited financial resources," Dow said. "Signing them up for loan terms that sound attractive without warning them of the potential financial pitfalls is wrong, and we intend to hold companies that engage in such conduct accountable."

Wells Fargo said that, through August, it had already forgiven $3.4 billion in principal owed by at-risk borrowers who had Wachovia pick-a-pay loans.

"In light of the unprecedented changes in our economy, Wells Fargo will continue to work with leaders across the nation on steps to help stabilize communities," said Mike Heid, co-president of Wells Fargo Home Mortgage.

A Philadelphia consumer-law expert said the deal was not earthshaking and would likely help only a disappointing number of people, as have federal loan-modification efforts. "The people who are going to get relief here are people whose mortgage payments are really high relative to their income," said Irv Ackelsberg, of Langer Grogan & Diver P.C.

The settlement calls for Wells Fargo to provide "across-the-board forgiveness of accrued interest and late fees for eligible delinquent borrowers who live in the homes" bought with pick-a-pay loans, the state said.

Starting Dec. 18, Wells Fargo will also modify some of the loans to make them more affordable under a program that extends through June 2013, the Attorney General's Office said. The deal requires the waiver of all modification fees and prepayment penalties. Principal forgiveness is possible for borrowers who make on-time payments for three years.

New Jersey helped lead a multistate group. The other states were Arizona, Florida, Texas, Colorado, Washington, Illinois, and Nevada. Altogether, Wells Fargo will pay the eight states $24 million to help borrowers. Nevada's attorney general estimated that 8,715 borrowers in the eight states would be offered modifications and that the total value of those modifications would be $772 million.

Wells Fargo still had $100 billion worth of pick-a-pay mortgages on its books as of March.

New Jersey was a major market for the loans, with $5.66 billion in Wachovia pick-a-pay loans in March 2008, ranking the state third behind California and Florida. Borrowers were defaulting on the loans at a rate three times higher than on traditional mortgages, Wachovia said at the time.

Wachovia entered the market for pick-a-pay loans when it paid $24.2 billion in 2006 for mortgage lender Golden West Financial Corp., which owned a company that pioneered the loans in the 1980s. When the housing market collapsed, Wachovia logged billions in losses from those risky loans and was driven into the arms Wells Fargo.

New Jersey consumers who believe they qualify for the restitution program should contact the New Jersey Division of Consumer Affairs via http://go.philly.com/mortgage.

Wells Fargo borrowers who have pick-a-pay mortgages can get information about possible modifications by calling the company at 1-888- 565-1422.