Beleaguered consumer bank Wachovia Corp. said Monday it will quit offering a mortgage payment option that allows borrowers to pay less each month than the bank charges in interest.
The choice to pay less was one of the options of Wachovia’s controversial Pick-A-Payment mortgages, which offer customers four different payment options each month. Wachovia said it will no longer offer the less-than-full interest payment option on all new home loans.
Wachovia also said it is waiving all prepayment fees associated with its Pick-A-Payment mortgages.
Critics have said paying less than the amount of interest charged can lead to negative amortization. That means the borrower owes more than the value of their home, increasing the chance of foreclosure.
“I think in a difficult time, a lot of people are looking to find ways to avoid foreclosure and we want to make sure our customers have the right products to meet their needs,” said Wachovia spokesman Don Vecchiarello.
The move is a major pullback for the nation’s fourth-largest bank, which started offering the loan after it purchased California-based mortgage specialist Golden West Financial Corp. in 2006. The portfolio of Pick-A-Payment loans is currently worth $120 billion.
Wachovia said it plans to continue offering a loan with three different payment options for customers: one for the full amount of interest accrued, and payments of principal and interest on a 15-and 30-year repayment schedule. Whether the bank retains the “Pick-A-Payment” name, has yet to be determined, Vecchiarello said.
“They are taking the riskiest component out, as they should,” said Tony Plath, an associate professor of finance at the University of North Carolina at Charlotte. “There is no one in this market that should be in a loan like that, not right now.”
Like many of the nation’s leading financial institutions, Wachovia has been hit hard by a widespread slump in the nation’s housing market and ongoing credit crunch. The bank forced out Chief Executive Ken Thompson amid rising loan losses and a series of miscues, including the decision to buy Golden West for roughly $25 billion at the height of the nation’s housing boom.
The bank’s battered stock tumbled further Monday, falling 67 cents, for more than 4 percent, to $15.55 in late afternoon trading. Wachovia shares fell as low as $14.70, a 16-year low, earlier in the day.
In April, before Wachovia slashed its dividend 41 percent and reported what was to become a $707 million first-quarter loss, the bank said it would revise the underwriting policies in its mortgage loan business — a step that could make it harder to take out a loan at the bank.
The bank had said earlier that month it was considering halting Pick-A-Payment mortgage loans in 17 California counties that have been hit hard by falling home prices and rising foreclosures.
Last week, Wachovia said it has hired Wall Street Investment firm Goldman Sachs Group to analyze its loan portfolio and evaluate various alternatives.