Wells Fargo reaches agreement with California to modify risky mortgages

Wells Fargo & Co. reached an agreement with the state of California to make mortgage modifications valued at as much as $2.4 billion on risky mortgages that let borrowers decide how much they would pay each month.

The bank also will pay $32 million to more than 12,000 California 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. But that does not appear to be a significant concession by Wells Fargo because it already has modified more than 50,000 so-called pick-a-payment mortgages in California, reducing the balances on those loans by a total of $2.9 billion.

The San Francisco bank inherited the loans, known generically as pay-option adjustable-rate mortgages or option ARMs, when it purchased troubled Wachovia at the end of 2008 during the financial crisis. At that time Wells Fargo 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.

“What they are doing now is more public relations,” Rochdale Securities analyst Richard Bove said. “If the only economic impact is that they are going to give roughly $2,600 to $2,700 to a few thousand people, and if that is going to cost them on the order of $32 million, that’s peanuts.”

Pick-a-payment loans proved to be problematic for many borrowers, particularly in California, where many of the loans were made. Losses on the loans were a major reason Wachovia was forced to find a healthier bank to buy it.

The option ARMs allowed homeowners to essentially choose how much they wanted to pay on their loans each month. Many borrowers opted for the smallest payment, which didn’t even cover the interest accruing each month. That meant the balance on the loan rose instead of fell. But once the balance reached a certain level, the required payment was reset automatically, often ballooning to a level that the borrower couldn’t afford.

The settlement with California follows similar agreements that Wells Fargo struck in October with nine other states: Arizona, Colorado, Kansas, Florida, Illinois, Nevada, New Jersey, Texas and Washington.

The agreement is unrelated to an investigation that all 50 state attorneys general are conducting into the foreclosure practices of major lenders. That probe was sparked by revelations that several major lenders had employed people who had legally attested to the accuracy of foreclosure documents without reading them.

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.”