Mortgages: Wells Fargo pays fine on business they took over

When Wells Fargo bought World Savings Bank in 2006, part of its business included low start home loans. So did the business of Wachovia, which Wells Fargo took over to prevent its collapse in 2008.

But the loans, which allowed borrowers to pay more or less what they liked in an initial period and then capitalised and re-set the loan at the end of the period, were thrown into crisis by the mortgage mess.

Well Fargo, stuck with a rubbish loan book, has settled actions with the states of Arizona, Colorado, Florida, Illinois, Nevada, New Jersey, Texas and Washington and, now, California.

It seems that there is a presumption that the lending was in some way the fault of the banks. No one, it appears, is willing to ask the hard question: why are home-buyers who borrow more than they can afford being bailed out at the expense of depositors and shareholders.

The loans, which someone has decided should have the buzzword name of "pick-and-pay" were often never going to be viable once the figures were re-set. It is obvious that many borrowers intended to - or were sold by agents on the concept of - refinancing with another low-start mortgage as the re-set date approached.

This is a flawed idea because any penalties for early settlement are rolled up and the settlement figure will be the re-set amount. It's a way of repeatedly borrowing against the equity in a property. But the loan keeps going up and so the scheme - which arguably amounts to a scam on the banking sector - depends on property prices increasing faster than the loan requirements.

And because many of the low-start mortgages are on a low- or no-doc basis, i.e. self-certified, the borrowers keep blithely borrowing more and more without any independent checks on their ability to pay once the re-set is reached.

Worse, as unemployment grew and salaries failed to thrive, the number of people who could not afford the reset and who could not re-mortgage their homes grew - compounded by depreciating property values.

The worrying thing is that Jerry Brown, California's Attorney General, knows all of this. His office says "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."

Under the settlement, Wells Fargo will offer affordable loan modifications to an estimated 14,900 California borrowers with these 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 USD2,000 billion.

Wells Fargo is also required to pay USD32 million in restitution to more than 12,000 borrowers in California who lost their homes through foreclosure, plus approximately USD1.8 million in costs to the state. Payments to foreclosed home-owners are expected to average more than USD2,650.

Nowhere in anything Brown says recognises that borrowers have any responsibility for their own actions.

Instead of caveat emptor, it's caveat creditor.