Wednesday, June 18, 2008

Option ARMs: Then What?

by Tanta on 6/18/2008 09:24:00 AM

Bloomberg reports:

June 18 (Bloomberg) -- Wachovia Corp., which ousted its top executive after estimating it may lose more than $4.5 billion on adjustable-rate home loans, will start calling would-be borrowers to explain the risks of such mortgages.

Wachovia is contacting applicants through independent mortgage brokers to ensure ``the customer understands the key features of the Pick-A-Payment loan product,'' according to a June 11 memo from Tim Wilson, head of loan origination at the Charlotte, North Carolina-based company. The loans let borrowers defer part of their monthly bills.
Unfortunately, we do not find out what Wachovia is going to do if it establishes that, in fact, the customer does not understand the key features of the product. Refuse to make the loan? Fire the broker? Keep explaining the difference between scheduled recast and balance cap, or uncapped rate with capped payment, until the borrower finally claims to understand you just to get you off the phone? How will success here be documented in the loan file? Does the borrower have to get at least 6 out of 10 on a Pick-A-Payment Quiz? Or will Wachovia grade on a curve?

Furthermore, how, exactly, does Wachovia intend to run a profitable wholesale mortgage business by duplicating more and more of the broker's functions? Will borrowers end up paying more fees to cover the broker's "counseling" labor and then the wholesaler's "counseling" labor on top of that? Is there some incentive for brokers to fully explain this product, or will they simply start relying on the wholesaler to cover the "mechanics of the loan" part? And who are these folks in Wachovia's back room who are talking to these borrowers? The sacred cow myth in the business is that only professional salespeople with Professional Sales People Skills can work with customers at the point of sale, which is what justifies their big commissions. You can't let back-room weenies (like me) talk to the marks prospects, because we lack "people skills." How can any wholesaler afford to have Highly Skilled People re-doing the work of other Highly Skilled People without creeping into Highly Redundant Origination Fees?

Let me guess. Wachovia is going to find out eventually that the Option ARM is valid only as a boutique product for a very highly selected group of financial sophisticates and private banking clients, all of whom are going to be found in your retail channel, not your broker channel, and that its "natural" volume is probably around 1.00% or less of your mortgage business. Funny, isn't it, that six or seven years ago we already knew that?