Loan Modification Alternatives: Wells Fargo Interest Only Loans

14 11 2009

Loan Modification Alternatives: Wells Fargo Interest Only Loans

Posted by: admin in mortgage industry

Big Banks are in trouble as more and more families are unable to pay their mortgages. The problem is that troubled homeowners are no longer the “typical” borrower with subprime loans with high interest rates. High unemployment is creating a whole new demographic of troubled borrower with “good” loans they can simply not afford anymore.

Another problem is the existence of billions of dollars in option-adjustable rate mortgages which are a totally different ball game to subprime mortgages or prime mortgages.

Wells Fargo & Co. the fourth largest U.S bank is a good representative of this situation with over $107 billion in option adjustable mortgages. This loan product is as typical as it gets in housing boom “crazy” products. Option adjustable mortgages allow (or allowed, not many are sold anymore funnily enough) borrowers to make small monthly payments in return for increasing their mortgage balance. This effectively allowed borrowers to choose how much to pay as their monthly mortgage payment. The result was that many of us fell for the belief that the housing boom would never end and that our homes would continue to increase in value offsetting any increase in mortgage balance due to small monthly payments below the cost of interest.

The problem now, of course, is that many Pick-A-Pay borrowers own homes that are worth much less than what they owe in mortgage debt and just about as many can’t afford a monthly payment that will pay off any of the mortgage principal.

What can banks do? Wells Fargo is taking one big gamble by issuing interest only loans in the thousands. These interest only loans will defer borrower’s balances for up to 10 years. The gamble is that housing prices and consumers income will rise, especially in the hardest hit parts of the country, and cover the billions of dollars in underwater debt.

Although borrowers that are struggling to pay their mortgages and fear losing their homes will probably be happy to take anything that will keep them afloat during these hard times it is hard not to see this measure as a very high risk one. One newspaper compared this “solution” as a game of kick the can down the road where the “problem” is kicked into the future hoping it will disappear. However with loan modifications hardly making a dent into the number of homeowners facing foreclosures it is hard to see many better alternatives to these extreme measures.

If you own a Pick-A-Pay mortgage and are struggling to pay enough to reduce your mortgage principal it is paramount that you get good personalized advice. The best advice comes from the government and they have a vested interest in your success. You can call HUD for approved housing counseling at 239 434-2397 or visit www.hud.gov.

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