Wells Fargo to lower some mortgage balances - East Valley Tribune: Business

Wells Fargo to lower some mortgage balances

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Posted: Wednesday, October 6, 2010 3:05 pm | Updated: 12:57 pm, Thu Oct 7, 2010.

More than 1,700 Arizona homeowners who agreed to a particular type of adjustable-rate mortgage will get some financial help.

In a deal announced Wednesday, Attorney General Terry Goddard said his office got a commitment from Wells Fargo Bank to lower the balance owed to the actual value of the house. He said that immediately provides $86 million in relief.

Some homeowners also will get reductions in the interest rates on what remains. All totaled, Goddard put the benefit at $153 million.

But that help is available only to those who agreed to a "payment option adjustable-rate mortgage,'' and only those who obtained one of these through Wachovia Corp. or Golden West Corp., both of which were subsequently acquired by Wells Fargo.

Goddard said this type of mortgage is not really designed for unsophisticated investors, as it includes a "negative amortization,'' where the unpaid balance actually increases with time. But what made these particularly offensive -- and he believes illegal -- is that they were marketed in a fraudulent way.

"We believe that a great many Arizonans were deceived, defrauded, fooled into taking out a loan that ultimately was a trap,'' he said.

Wells Fargo, in agreeing to the deal, admitted no wrongdoing.

He said efforts are underway to get other banks holding such mortgages to agree to similar relief.

Goddard said these unusual mortgages originally were marketed to investors who sought to move quickly in and out of properties. One key is a very low initial interest rate which would reset after five years.

What made this different than other adjustable-rate mortgages is it was paired with a very low minimum monthly payment. At the same time, though, what wasn't being paid to cover the principal was added to the balance of the loan.

Goddard said that was fine as long as the real estate market was booming and values were going up. What borrowers were not told was the risk of the market going the other way.

He said they were "marketed in manners that we believe were deceptive, that our investigation proved were deceptive.''

Goddard said others who obtained different types of adjustable-rate mortgages may feel they, too, were misled. But he said the laws he used to pursue Wells Fargo are limited to situations where actual fraud can be shown.

"We believe very strongly that in this case, most homeowners, if not all, who got this type of loan did not understand the consequence of choosing the lowest payment option,'' he said. "They, therefore, got burned by it.''

Goddard stressed that there is nothing inherently fraudulent about adjustable-rate mortgages, saying he has one on his own home.

"I don't believe I was deceived,'' he said. "I knew exactly what was going to happen and when it was going to happen.''

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