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A blog about the economy and the Sacramento-area real estate market.

October 30, 2009
Calif. AG to banks: how will you avert Option ARM armageddon?

 California Attorney General Jerry Brown's office has picked up on paranoia that a round of resetting Option ARM loans is going to derail a fragile housing recovery.Yesterday, he asked 10 big banks and loan servicers to tell him their plans to avoid a new round of widespread defaults.

Here's a news story out of New York about it from Reuters.

The AG's link has the letter to servicers from Deputy AG Bejamin Diehl. And he wants details from banks in three weeks. It also has a number and link to register complaints about your pay-option loan. Those are the ones with four payment options each month. Most people make the minimum payment, which makes the size of the loan grow even as the borrower is trying to pay it down. They were really popular in California - and especially popular in the Sacramento region as housing prices skyrocketed in 2004-2005 and remained high through much of 2006.

Here is what Diehl wants to know from Bank of America Home Loans & Insurance; Wells Fargo & Company; JP Morgan Chase & Co.; Litton Loan Servicing; ResCap, LLC; Ocwen Financial Corporation; OneWest Bank; American Home Mortgage Servicing; Saxon Mortgage Services, Inc.; and Select Portfolio Servicing.

1. The number of Pay Option ARM loans secured by residential real property
located in California that you are servicing (regardless of whether you own the loans).

2. Of the number of Pay Option ARM loans identified above, the number that have negatively amortized, and the average dollar amount of that negative amortization.

3. A detailed explanation of all efforts you have taken to handle customer service concerns of borrowers with Pay Option ARM loans, including any increased staffing and a description of any notices you send or are planning to send to borrowers whose loans are about to reset. For advance notices sent to borrowers, please specify how far in advance of the reset date you send, or plan to send, those notices.

4. A detailed explanation of the loan modification plans you have developed for Pay Option ARM loans. Please state the circumstances under which your plans allow for the reduction of principal, and the possible amounts of principal reduction. If you are not willing to consider principal reduction as part of your plan, please explain why. Please also specify whether you have already implemented your modification plans for Pay Option ARMs or, if not, the time frame within which you expect to do so.

5. To the extent your approach for considering whether and how to modify Pay Option ARM loans has changed since the beginning of the foreclosure crisis, please explain the changes and the reasons for those changes.

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