Wells Fargo to Reduce Mortgages for AZ Borrowers

In a deal that could mean about $86 million in mortgage relief for Arizona homeowners, Wells Fargo has decided to lower the mortgage balances of about 1,700 people who signed up for a particular ARM.

The state’s attorney general, Terry Goddard, announced that Wells Fargo will also be reducing the interest rates on many more mortgages throughout the state. The overall financial benefit for homeowners in Arizona will be more than $150 million when it is all said and done.

But not everybody in Arizona will be able to benefit from these actions. Actually, only the borrowers who signed up for a “payment option adjustable rate mortgage” will be able to get some mortgage relief. And of those people, only the ones who got their mortgage through Golden West Corporation or Wachovia will be able to take advantage of the reductions.

According to Goddard, these types of mortgages are too complicated and sophisticated for the average homebuyer. Yet they were sold to many Arizona residents without their complete knowledge of how they work. One aspect of this type of mortgage loan has a “negative amortization,” which means that the unpaid balance of the mortgage will actually get larger during the term of the loan. The borrowers who chose this type of loan were sold a fraudulent product that was misrepresented. As such, many AZ mortgage borrowers were deceived and that is why Wells Fargo is now trying to make things right even though officials with the bank say they did nothing wrong.

Here’s how these type of mortgage loans worked: The initial interest rate was very low to begin with. After five years, the rate would increase. The minimum monthly payments were also low to start out. But if the homeowner wasn’t paying toward the principle balance, the remainder was added to the loan balance. This increased the overall cost and made it so that borrowers would end up owing more than they originally borrowed once the rates reset. These types of loans are designed for investors who buy houses and quickly resell them before any of the balances add up.

Goddard believes that the homeowners who chose this option “did not understand the consequence of choosing the lowest payment option.” As a result, they signed up for a loan that they did not fully understand. Although the type of mortgage loan in question is a specific type of adjustable-rate mortgage loan, Goddard says that there is nothing wrong with a normal ARM. In fact, he says, he has one himself. With the current mortgage rates where they are right now, he’s probably enjoying his adjustable-rate mortgage, too.