Attorney General Edmund G. Brown Jr. announced today that Wells Fargo has agreed to provide loan modifications worth more than $2 billion to thousands of California homeowners with “pick-a-pay” loans and to pay an additional $32 million to thousands of borrowers who lost their homes through foreclosure.
None of the loans were made by Wells Fargo. All were originated by World Savings and Wachovia, banks Wells Fargo acquired.
“Customers were offered adjustable-rate loans with payments that mushroomed to amounts that ultimately thousands of borrowers could not afford,” Brown said. “Recognizing the harm caused by these loans, Wells Fargo accepted responsibility and entered into this settlement with my office.”
The pick-a-pay, or pay option adjustable-rate, mortgage loans allowed borrowers to make payments at various levels. The highest level fully covered the monthly interest and principal due. Another level covered interest only. At the minimum level, payment was insufficient to cover the monthly interest owed, and the unpaid interest was added to the loan balance.
Ultimately, the loans would reset, increasing the monthly payments dramatically.
Faced with unemployment, dramatic declines in home prices, and the sharp escalation of the monthly payments, thousands of borrowers were unable to meet their mortgage payments.
The settlement with Wells Fargo covers loans made by World Savings Bank, a subsidiary of Golden West Financial Corp., and Wachovia Bank. Wachovia purchased World Savings in 2006, and Wells Fargo then acquired Wachovia in 2008.
Under the settlement, Wells Fargo will offer affordable loan modifications to an estimated 14,900 California borrowers with pick-a-pay loans made by World Savings or Wachovia. Many of the modifications will include significant principal forgiveness. The total value of the modifications mandated by the settlement is projected to be more than $2 billion.
Wells Fargo is also required to pay $32 million in restitution to more than 12,000 pick-a-pay borrowers in California who lost their homes through foreclosure, plus approximately $1.8 million in costs to the state. Payments to foreclosed homeowners are expected to average more than $2,650.
Wells Fargo has reached settlements over pick-a-pay loans with attorneys general of several other states, including Arizona, Colorado, Florida, Illinois, Nevada, New Jersey, Texas and Washington.
California borrowers eligible for loan modifications should get a notice from Wells Fargo within the next two months. Borrowers who suffered foreclosures should be notified during the first six months of 2011. For further information and updates, check the Attorney General’s website at ag.ca.gov.