Wells Fargo will spend $772M modifying loans
Wells Fargo has agreed to spend an estimated $772 million modifying loans for borrowers across the country after allegations that deceptive marketing was used to sell complex mortgages with adjustable rates.
The deal announced Wednesday covers 8,715 borrowers in eight states, including several that were hit hardest by the housing crisis. The states are Arizona, Colorado, Florida, Illinois, New Jersey, Nevada, Texas and Washington. Wells Fargo is spending an additional $24 million to help states get in touch with borrowers.
The investigation by the states focused on an exotic type of mortgage 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 on their mortgages. The rest would be added to the principal amount, resulting in the loan balance growing bigger as the borrower made payments.
The allegations are targeted at two companies that were acquired by Wells
Fargo: Wachovia and Golden West, which itself was bought by Wachovia in 2006. Wachovia retired the pick-a-pay product in 2008, before Wells Fargo bought the company. Wells Fargo does not offer that option to customers.
Arizona's attorney general, Terry Goddard, spearheaded the investigation into the banks' marketing practices.
"Wells is taking the lead by this agreement," Goddard said. "I believe it will be very hard for others not to follow."
He added that the agreement was notable because it compels Wells Fargo to not only reduce some borrowers' interest rates but forgive a portion of the principal, too. Out of the estimated $772 million the company will spend on modifications, $402 million will be used to reduce borrowers' principals. This goes further than the state's 2009 agreement with Countrywide that was also over allegations of misleading marketing.
Borrowers who qualify for the modifications have to occupy the properties in question. They also have to be 60 days delinquent on their loans or face imminent default.
Wells Fargo, which services one in six mortgage loans in the nation, said it welcomed the agreement.
"We think this is a far more productive way to work together to help borrowers than some other alternative," said Franklin Codel, chief financial officer of Wells Fargo Mortgage. "We think it's a win for the states and for the borrowers, and I'm very excited about the agreements and some of the changes we're making."
Jia Lynn Yang
| October 6, 2010; 3:40 PM ET
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