Principal Reductions: Wachovia takes the Lead

Even before the Obama administration rolled out its loan modification guidelines in early March 2009, Wachovia Mortgage had been churning out modifications that consistently offered principal reductions of up to 20%. While all of the major servicers are offering below market interest rates and extending loan terms to make mortgage payments more affordable, most stop short of reducing principal. The Home Affordable Modification Program provides incentives to mortgage servicers when they modify mortgage terms and reduce payments to within 31 - 38% of the borrower's gross monthly income. Interest rate reduction, term extension and principal reduction are the three mortgage components which are adjusted to lower mortgage payments.

Wachovia's Option ARM portfolio in 2008 was nearly $122 billion, or 73% of mortgage assets. Many of those loans were acquired in the 2007 purchase of Golden West Financial Group (World Savings). Option ARMs are negative amortization mortgages which give borrowers the option of making artificially low mortgage payments that don't cover the lender's required interest. Wells Fargo purchased Wachovia in late 2008 and its management quickly indicated it would be working out these option ARMs with principal reductions.

At Velocity Loss Mitigation, we have witnessed how eagerly Wachovia reduces principal on almost all of the loans we have modified. Seven of eight Wachovia loans we have negotiated since last March have included principal reductions. During the same period, less than 10% of non-Wachovia modified loans received reductions to principal.