Wells Fargo To Make $772 Million In Mortgage Adjustments Following Investigation

Wells Fargo has reached a nearly $800 million settlement with Attorneys General in eight states where the company — more precisely, Wachovia, which was acquired by Wells Fargo after it failed — was under investigation for allegedly deceiving some borrowers into taking out loans they could never pay back.

The largest chunk of the settlement is the $772 million in adjustments Wells Fargo will make in mortgages to a total of 8,715 borrowers in Arizona, Colorado, Florida, Illinois, Nevada, New Jersey, Texas and Washington.

From the Washington Post:

The investigation, led by Arizona Attorney General Terry Goddard, centered on an exotic type of loan that came into vogue during the peak of the housing boom: the “pick a pay” mortgage, which allowed borrowers to pay only a portion of the interest due. The rest would be added to the principal amount, resulting in a situation where the loan balance would actually get bigger as the borrower made payments.

According to the Arizona AG, about half of the adjustment money is being used to forgive a portion of borrowers’ principals. This is important, since most — if not all — of the mortgages involved are “underwater” loans, where the value of the mortgage is significantly higher than the actual value of the property.

In addition to the $772 million in adjustments, Wells Fargo, which services about 17% of the mortgages in the U.S., has agreed to pay $24 million to the eight states involved in the investigation.

Says the CFO for Wells Fargo:

We think this is a far more productive way to work together to help borrowers than some other alternative… We think it’s a win for the states and for the borrowers

.

Wells Fargo agrees to modify mortgages [Washington Post]

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  1. Loias supports harsher punishments against corporations says:

    Choosing a mortgage that by design gets bigger as you pay it.

    I really, really hate the banks for all this crap. But really… when you choose this option you sort of deserve your fate.

    • TuxthePenguin says:

      Somewhere, some moron signed on the dotted line. At some point, doesn’t caveat emptor come in?

      • womynist says:

        Agreed. I have a hard time imagining what kind of person would think that’s a good idea. It’s obviously setting the homeowner up for failure.

        • Loias supports harsher punishments against corporations says:

          ARM loans are betting on the market. It’s risky, but at least you can blame poor market conditions and the fact you didn’t get a raise for 5 years.

          But when the mortgage grows as you pay it, there’s really nothing to blame but your own blind desire for home ownership.

        • madanthony says:

          It actually could make sense for a very small group of borrowers, such as people who work primarily on commission and get paid a small weekly salary and a large commission quarterly. Pay a small amount the 8 months of the year that you don’t get a commission and a large payment the 4 months that you do.

          The problem is that the loans were sold to people who weren’t in the very small group it made sense for.

      • peebozi says:

        No, caveaet emptor is not a law. why do you hate america? How about they use sharia law, would that be good with you? (side note, I’d prefer sharia law in this case because it would probably involve some sort of middle ages torture device…or stones) it appears that what they did was illegal (and definitely immoral, unethical), though I’m sure they won’t have to admit wrongdoing.

      • BBBB says:

        “Somewhere, some moron signed on the dotted line. At some point, doesn’t caveat emptor come in?”

        Except for the part where the loan broker, acting as if they care about the borrower, lies about the details (or just omits explaining the nasty bits) of the loan.

        The borrower is relying on the broker to explain the confusing language in the contract and then the borrower acts in good faith based on the incorrect information and recommendations. Then it becomes a breach of fiduciary duty (or misrepresenting the fact that the broker is really a sales agent for the bank has no fiduciary duty to the borrower).

    • danmac says:

      I agree with you to a point. People should be more diligent in protecting themselves from predatory lenders.

      However, it’s important to keep in mind that the lenders who were signing people to these ridiculous mortgages were turning around and selling the debt to other investors and making a killing in the process. Consequently, individuals approving the applications (who often received significant commission for doing so) had an incentive to deceive, if not lie outright to, applicants who believed they were getting much better deals than they actually were.

      Let’s also not forget that many of these applicants were poorly educated and/or non-native English speakers, who probably couldn’t understand the terms and conditions even if they read them.

      I imagine interactions like this:

      Borrower: What does pick a pay mean?

      Lender Rep: It means pay whatever you want! If you can afford to pay more one month, great, and if you can’t afford to pay as much, that’s fine as well!

      Borrower: So what happens with the mortgage?

      Lender Rep: Don’t worry about it! During this time, you’ll own a home, be building equity, getting promotions at work. You’ll be living your dream!

      • Loias supports harsher punishments against corporations says:

        Which is why you get an agent. The great thing, in my state at least, is that the seller pays both agents, so as a buyer you don’t have much reason not to get one.

        Your agent has, by law, your interest in mind and not the seller’s or the bank’s. And by law, I mean just that: they are required to be your advocate, and face harsh penalties if they are found to have led you into a poor choice.

        • danmac says:

          Again, in principle, a mortgage broker should be acting in the best interest of his client, but there are methods of payment, most specifically the Yield Spread Premium comes to mind, that sometimes steer unethical brokers toward lending institutions that give them additional kickbacks for referring clients to less-than-ideal loans. Here’s a paper on the subject:

          http://www.law.harvard.edu/faculty/hjackson/pdfs/january_draft.pdf

    • duxup says:

      I agree, however when done by banks in large volume, and then those banks offload much of the risk on the garbage loans and then it hits the fan… we all pay with an economy that tanks and hits good and bad credit folks, businesses, and such.

  2. TuxthePenguin says:

    I’m going to change what I think we should do – we need a federal law to force all high school students to take a class in basics of finance. You will be forced to learn how interest works, how to build an amortization table… all those basic finance tools you need in life.

    I mean… if “pick a pay” mortgage was too complicated for people to understand – that by not paying the full interest due that your principal would go up – we’re running out of possibilities to help them. Or maybe force anyone wanting to get a loan of greater than… 50k to take a “financial literacy” test before they can get approved.

    Mortgages, whether people want to admit it or not, are rather simply creatures. Each month, there is a certain amount of interest that accrues based on the current interest rate. If you pay it and nothing else, the balance of the loan does not go down. If you pay less, the balance of the loan goes up. If you pay more, the balance goes down.

    Seriously? That’s so complicated? Ugg… Banks are making so much money because, as a whole, we’re morons. That’s what I think this whole debacle has shown.

    • humphrmi says:

      Well, banks *were* making money, until the whole thing fell apart. The glue that held these types of mortgages together was rising home values allowing easy refinancing. When that bubble blew, nobody was making any money off of them anymore.

    • BBBB says:

      “- we need a federal law to force all high school students to take a class in basics of finance. “

      One math teacher in my high school tried to do this. He taught the lowest level math class and he told me that his one goal was to give the students the ability to survive in the world. He taught things like balancing a checkbook, making change, relative quantities/units, etc.

  3. Blackadar says:

    There were quotas at Wachovia for the pick-a-pay mortgages – they wanted 45% of all mortgages to be of this type. Wachovia saw these as extremely profitable, partially because their literature on these was grossly misleading to the consumers. In many of the brochures, no where did it tell the consumer that paying anything but the maximum amount did not go to paying the principal on the loan and often this was not disclosed whatsoever. Since these mortgages were often pushed to the less-informed customers, people had no idea that the mortgage payments they were making were interest-only and often they were actually getting deeper and deeper in debt with every payment.

    Consumer’s fault for not knowing? Yeah. Wachovia’s fault for misleading customers (and sometimes outright lying)? Hell yeah.

  4. Blueskylaw says:

    Wait a second, how could they possibly have done anything wrong when they specifically said that they never “knowingly” gave someone a mortgage who couldn’t afford it?

    Rather than sully the good name of these monolithic monster banks, we must get to the bottom of why they are being blamed in order to keep false or made up mis-representations out of the limelight.

  5. Mecharine says:

    Im glad they decided not to apologize but to spin this as a win for all sides. I mean, think of the shareholders!

  6. AngryK9 says:

    “deceiving some borrowers into taking out loans they could never pay back”

    Sounds like most uducation loansharks too…

  7. The cake is a lie! says:

    Man, now I regret being responsible and getting a mortgage I could afford. If I knew what I know now back when I bought my house, I would have gotten a much better one and just waited for someone else to fix all my problems for me. There is no benefit to being responsible these days…

    • flbas says:

      i am with you.

      my friend just bought a house (in my opinion) is twice as nice. it has a pool, much larger parcel of land, but is 200 sqft smaller.

      and $150k LESS.

      my big question now is – do I keep my house and wait for the market to rebound, or suck up the 10 years of financial hardship (of a foreclosure) and make some real money by getting a “nicer” house for 1/2 as much as i am paying now?

      The question is actually if i want to risk a rebound in 10 years; or if i want to risk that a rebound wont happen for 10 years, and take my financial lumps now (and get a better reward).

      if, after 15 years, my current home value is no longer upside down, but now @ $0, that means, that in 15 years, if i dump my current home and buy a new one, i will have gone thru the financial pains of a foreclosure, but will have MADE $150k as the new house increased in value.
      And i don’t think i am the only one pondering this.

      However, if they bail out people like me by lowering my principle by $100k/$150k/right side up, and i don’t make a move, then i will be smarter to stay where i am.

      what to do – what to do? will they bail out us responsible people also?

      • peebozi says:

        goldman, citi and BoA were responsible for all sorts of things and they got a bailout. i’d say, take your chances with the bailout.

  8. TuxthePenguin says:

    I didn’t see it in the article, but does anyone know whether this principal reduction is going to be tax-free?

    If not, that’s going to be a nasty surprise come tax time…

    • Loias supports harsher punishments against corporations says:

      I’ll take paying taxes on a mortgage reduction and getting a lower mortgage payment.

      I wish they did this for those of us who were responsible with their mortgages : – (

      • TuxthePenguin says:

        Really? You’ll looking at an average write-down of 88k per person (772 million / 8715). That puts you easily into the 28% tax bracket… so you’re looking at a bill of $24.8k in April… good luck getting that saved up in six months – that’s $4.1k per month. Considering most won’t be able, they’ll be establishing a payment plan. I guaranatee that the IRS won’t take a 30-year note in exchange.

        Your lower mortgage payment, assuming switching to a 30-year fixed at 5%… would be $475. To break even with your IRS payment plan at 4% (I think that’s their current rate), the term of the payment plan would at least have to be 58 months. So you’re basically going to have a five-year note to the IRS… and that breaks even. No more cash each month.

        Oh… I also forgot that your normal income is going to be more taxable too…

        • Loias supports harsher punishments against corporations says:

          80k would pay off my mortgage. And I know as fact, since I’m involved in the industry, that the IRS has no difficulties making payment plans for you. 24k over 15 years would be a small fraction of my current 30-year mortgage.

          But even if I got a Tax Levy and they garnished my wages – which only leaves you ~$700/month if you’re single – that would be more difficult but I still wouldn’t be paying a mortgage!

  9. peebozi says:

    For them to agree to $800,000,000 means they must have made a lot more than that on that deceptive loan.

    too bad they’re still in business.

    I’m going to let them take one of my rental properties back (the one that’s cash flow even right now). I feel like a responsible business person utilizing this option in my contract with another distinct entity and allowing it to work itself out in the free market!

    • Firethorn says:

      That’s the thing. They’re aren’t actually still in business. They(Wachovia) went bankrupt partially due to practices like this. Wells Fargo, who by and large didn’t engage in these practices, took the opportunity to buy Wachovia.

      Some of the liabilities followed.

  10. TasteyCat says:

    People didn’t need to be deceived into purchasing homes they could not pay back. They were perfectly willing to do so. Home ownership was more important than making sure they could afford it. The banks may have been shameless, but they were just flowing with the demands of the market and the government’s “affirmative action loans” that people otherwise could not (and should not) have gotten.

  11. ja8669 says:

    Letter to Wells Fargo after making multiple “Trial Payments” and finally having them tell me they postponed the sale date set for Nov. 24 until Feb 22, 2011 only to find out today they still plan to sell it in four days

    To: Mark C. Oman, Chairman and CEO, Norwest Mortgage, Inc

    Re: TRUSTEE SALE NO. 20099007080104

    What is wrong with you people? I have a letter from Jeremy Norton from the Presidential Office, whoopy, that states that a Special Forbearance Agreement was approve on November 8 and I was also told the trustee sale date was postponed from November 24, 2010 until February 22, 2010. I was told this repeatedly.

    Now after calling First American Title, today, I find out that the sale is still scheduled for Nov. 24, 2010. In four days. You heartless soulless people. You profit from selling my loan and now you will profit when you foreclose on my home when it is sold at a loss.

    I have a letter from your company stating that an agreement was approved. You are making me a desperate individual

  12. glpur1 says:

    I woiuldn’t do business with Wells Fargo on a bet. I’ve had horrible experience with them. And try to talk to a real live person. They don’t exist! Work with a local bank…you’ll be a lot better off in the long run.