Filed under: Wachovia Corp (WB), Housing
In a rare indication that there may be some reasonably intelligent executives running things at America’s top banks, Wachovia Corp. (NYSE: WB) has decided that it will stop offering a mortgage that allows customers to pay less each month than the bank charges in interest.
Hold on. What? The “Pick-a-Payment” mortgages allowed borrowers to select one of four payment options each month — as in, “Do you want to pay off your mortgage or do you want to purchase a new TV and every season of Golden Girls on DVD?”
You can probably guess which option many people selected. The problem was that paying less than the interest each month led to negative amortization — owing progressively more on the home each month. Recently it’s been discovered that home values are not contractually obligated to go up every year and the result is that many people could end up owing more than the home is worth, trapping them in it — and leaving the bank with a hefty loss in the event of foreclosure.
Wachovia has hired Goldman Sachs (NYSE: GS) to evaluate its loan portfolio and recommend alternatives. I wonder how much they’re paying. I could have told them that letting borrowers decide whether they want to pay the interest on their mortgages was a bad idea.
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