In a reversal, Wachovia Corp. said Monday it would stop making option adjustable-rate mortgages, which were why the bank bought Golden West Financial Corp. but is now stuck with more than $120 billion of the rapidly souring loans.
Wachovia also said it will let option-ARM borrowers escape prepayment penalties, but loan balances likely have swelled too big for many of these borrowers to refinance.
The changes effectively mean the dismantling of the core product of Golden West, the Oakland, Calif., thrift Wachovia bought for $25 billion two years ago. Option ARMs give customers multiple payment choices, including a minimum payment that may not be enough to cover the interest due. Borrowers who elect the minimum payment on a regular basis can see their loan balance grow.
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More than 18% of the option ARMs originated in 2005 and 2006 are already at least 60 days past due, says Barclays Capital, which looked at loans that were packaged into securities. The vast majority of these borrowers have yet to see their monthly payments recast so they begin making payments of principal and full interest, at which point payments can increase by 60% or more.
Here's a chart of Wachovia Stock:
Notice the following on Wachovia's chart:
-- Prices are below the 200 day SMA
-- Prices are below all the SMAs
-- All the SMAs are headed lower
-- The shorter SMAs are below the longer SMAs
Wachovia isn't the only company having trouble:
Legg Mason Inc. agreed to contribute $240 million to support three of a unit's money-market funds. That follows $400 million in agreements in March.
The move marks the company's latest step in trying to stabilize its cash funds and shield investors from any losses in the underlying assets. And it is the most recent sign the credit crunch continues to roil financial markets.
Notice the following on Legg Mason's chart:
-- Prices are below the 200 day SMA
-- Prices are below all the SMAs
-- All the SMAs are headed lower
-- The shorter SMAs are below the longer SMAs
Anyone that is saying "buy financials" right now is an idiot. This sector has a long time to go before anyone should think about going long.
