The mortgage market turns a corner - Wachovia retires Pick-a-Pay

Wachovia announced today that they are no longer offering the pick-a-pay, negative amortization mortgage loan. Additionally, they’ve announced that the bank will assist current pick-a-pay loan holders by waiving all pre-payment penalty fees for those looking to refinance out of the loan.

Here’s the details:

Effectively immediately, Wachovia is waiving all prepayment fees associated with its Pick-A-Pay mortgage to allow customers complete flexibility in their home financing decisions.
. . .
Additionally, for all new loan originations, Wachovia is discontinuing offering products that include payment options resulting in negative amortization.

While this has been covered extensively elsewhere with various regard I think we’ve reached a very important part in the mortgage market correction.  The return of sensible underwriting is finally getting back to basics.  The elimination of exotic mortgages like the pick-a-pay is exactly what the housing and mortgage markets need to return to normalcy and sustainable, responsible growth.

The elimination of financial engineering from the mortgage market is one of the key pieces to the recovery puzzle.  I am happy to see this loan go as it has been responsible for a major portion of the housing bubble and explosion of mortgage market greed which fueled fraud, borrower deception and risky lending practices.

An Important Milestone on the return to mortgage sanity

This is an important milestone for the market as it will force home prices back in to traditional multiples of income ranges rather than the inflated multiples that were common in the worst bubble areas including California, Vegas and Florida.  This change will insure that housing prices don’t explode in to the stratosphere again.

Additionally it will precipitate the continued fall of housing prices as voodoo financing options disappear.  The combination of sound underwriting and reduced housing prices are exactly what is needed to bring stability to the mortgage market.

More pain to come in housing market

Of course this means that more pain is sure to come in the housing markets.  Option ARM holders that were banking on refinancing in to another pick-a-pay mortgage to maintain their homes are suddenly looking at no feasible affordable mortgage and will lose their homes without some sort of bail out or debt forgiveness program from the government and lenders that made these loans.

The wave of upcoming pick-a-pay loans now truly have no place to go (as if disappearing equity wasn’t enough, the markets that have been somewhat stable are now going to feel more of the pick-a-pay foreclosure blight).  This harsh reality will push more foreclosures on to the market over the next 3 years.

Wachovia tries to limit liability

Of course, this has nothing to do with anything other than Wachovia looking to limit its already massive liability to these pick-a-pay loans.  They know that they are just ticking time bombs, and they want to refinance as many people out of those loans as possible to save their company from the sure to be eye-popping losses.

No matter the arguments about “conservative collateral valuations” by World Savings (the bank that Wachovia bought) - it is clear that the option arms made by World are a dangerous liability to the bank.  So much so that the bank is willing to waive all pre-payment fees in a last-ditch effort to get the loans off the books.  But as we all know the home price declines have probably made this option a pipe dream to many of those it’s supposed to help.

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