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"Pick and Pay"......recipe for disaster or not?

Hi folks. Today, I'm posting to gather some information. Yesterday I was talking with my friendly Wachovia loan officer and she was explaining to me a new product that they have. They are offering a product called a "pick and pay" mortgage.

Have you heard of this before? From what I understand it's an 80% LTV mortgage that can be used for refinancing or for a purchase. Since it's not a Fannie Mae product they can do stated income loans with a fairly low credit score and can do full doc loans with credit scores in the low 500s.

Here's the deal. This loan allows you to "pick and pay" a payment. Every month when you get your payment coupon you can choose to pay as follows:

P&I payment based on a 30 year fixed.

P&I payment based on a 15 year fixed.

Interest only payment.

50% of the 30 year fixed payment(negative amortization) for two years max.

Now folks, I can see where this loan could be advantageous for folks in our business or other occupations where income varies month to month. I know there are months where I would welcome making a 50% payment.

But and it's a big but, how would this loan work for someone with a low 500 credit score who has already proven they don't pay their bills on time? How tempting would it be to make 50% payments for two years straight and end up eating up all of their equity? Especially now that values are declining in some markets. After two years they could very well end up owing more than the property is worth and of course now the payment, they have gotten used to paying, would double!

Am I missing something here or is this "pick and pay" mortgage a recipe for disaster? So, I'm curious, have you heard of this program? And if so, do you have some information that I'm missing? Pros? Cons? Inquiring minds need to know.

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 10/06/2007 05:04 PM

Comments (60)

pick and pay mortgage, wachovia

60 Comments on "Pick and Pay"......recipe for disaster or not?

OCT

2007

Reserved Parking For "The Lovely Wife"...TLW...ROAR!

Blog Boy...

My inquiring mind is parked :)

TLW...ROAR!

I'm sure you know the answer to this. Let's just examine again a few of the words you used:

Since it's not a Fannie Mae product they can do stated income loans with a fairly low credit score and can do full doc loans with credit scores in the low 500s.

Isn't it products like these that created the mortgage mess in the first place?

Bryant, this sounds like many of the Option ARM programs that are out there with slight variation. If the lender doesn't explain this in detail to the clients, the lender is doing themselves and the clients a real disservice. Especially those with lower credit. This does indeed seem like a recipe for disaster!

I am actually at a seminar today called Cash Flow Strategies and the guy was talking about this product. I didn't get everything he was saying because he was talking to fast. But he said this program would be a good program for someone who wants to refinance their house. But like Simon said -Isn't it products like these that created the mortgage mess in the first place? I guess I would have to call a Wachovia Loan Officer and have him/her give me more information about this product or explain something to me that I might not know. Great post.

American Home Mortgage offered this same product, and actually talked a few of my clients into using it. I talked them out. Make sure you look a the fine print...there program had some strict stipulations coupled with steep penalties. It can work for some people. I just don't know many folks I would put in that type of program. You need to have a deep understanding for how finacing and mortgages work. I just don't know that many people that have that knowledge.

Bryant,

Haven't heard of it. Seems that this product is just a variation of the option ARM that is still causing trouble among homeowners. Can you imagine how high the interest rate will be for a borrower with FICO in the 500s? Whoever invests in loans like this today will demand plenty of interest rate for the high risk.

Well, I'll voice my opinion ...... Wachovia now has these loans because they purchased World Saving which has been doing the "Pick-a-pay" loans for many years. Many years before all the other lenders started doing them. World Savings,now Wachovia, portfolio these loans. IF they were experiencing high foreclosures then I would think they would stop offering these, but they don't. As for decreasing home values, it doesn't matter if yo put 20% down or finance 100%, a home with decreasing value is going to hurt the homeowner regardless. Case in point my own house. I purchased it last years for 366k, my next door neighbor, which has a larger house, is selling his for $254k (107k less than He paid for his home in October 2006) and it has been on the market at this price since late June....Not selling...And I know the listing agent is one of the top agents in Fort Myers....Unfortunately, it is just the market we are in.

Excuse me, I digressed. The pick-a-pay loans are good for the right people. I would not recommend them to someone who plans on keeping their primary residence for an extended number of years, BUT they are excellent for investors, or for people who have come on hard times but can realistically be expected to be back on their feet in a couple years. All of these loans have a Maximum amount a negative depreciation that the note is allowed to reach, usually 112% or 115% of original loan amount. Also Wachovia/World Savings program is built to help protect the borrower. Maybe I should wrie a blog that goes into detail on the world program because it is quite complex.

Anyway, they do have their good qualities for the right borrower and bad qualities for the wrong borrower and unfortunately, it is up to an Honest Mortgage Professional to explain the details to the borrower...Unfortunately, as we all know, there are many dishonest people in the mortgage industry just like every other industry which deals with the public.

Sean Allen

Mmmmm. Absolutely nothing new here. The "pay option" has been around for many years and I've been doing them since the 1980s. I started doing them with the Great Western company and they were absolutely wonderful.

BUT, and it's a big but. with 20% down and good credit scores.

All I can say about the description of the Wahovia criteria is "The more things change, the more they stay the same".

Did you suggest you hope you don't see lender letters with that description with offers on your listings?

Sounds like a fixed version of an Option ARM. The problem is that people will look at the 50% payment, maximize the purchase based on this monthly payment, counting on only staying in the house 2 years...then selling. The problem is they will eat up their equity, and in our market Brian, prices are still going DOWN. I would use some serious discretion with this one. The only people I can see this being benificial for are the VERY RESPONSIBLE with higher credit score sales types, making serious money, but having some slim months now and then. Wait...I just described someone who would have savings in the bank to see them through the slim months. I don't think it sounds very good.

BB, I have heard of them, yes, but I have never had a client actually go through with it. My gut feeling is that people with credit scores in the 500's would buy a car, shoes and say to themselves, next month I will make it up.

I say that lie to myself all the time when I'm trying to lose weight. I will eat the bread now and work out an extra 15 minutes next week. Yea, right.

Bryant I read an article in my local paper a day or two ago that stated the loans we were thought were dead were creeping back in. It still seems to make sense that people be cautious. I'm encouraging my clients to go with conservative lenders. We'll see how that goes lol. All I know is i am talking loans to people like I never have before. Peace Out

Lenn, I guess since I don't work with buyers very often I have been in the dark about these things. It does sound like it could be useful for the right situation and deadly for the wrong situation.

Sean, I would be very interested in that post. If you write it please come back and post a link in the comments for me. Thanks. I do remember her mentioning World bank and the fact that it's a portfolio loan. Can yo do cash out on a refinancing using this product?

Esko, The difference is this a fixed rate instead of an ARM. But other than that it does sound similar.

Brandon, AHM...yikes!!! I wonder how much effect this product had on their demise?

Lanre, It is certainly prudent to do a lot of research on these types of products, hence...this post.

Brian, I am surprised they wouldn't limit these types of loans to experienced buyers with better than average credit scores. It really doesn't sound like something I would want an inexperienced buyer using.

Simon, It sure sounds that way to me.

The Pick a Pay is a World Savings term.

When Wachovia bought them they also inherited the program.

The usual underlying note rate on a POA is usually an ARM. This particular product (all world POA' are called Pick a Pay) has an underlying rate that is fixed.

The rate is higher than a typical 30 yr fixed but at least you can run a scenario out 30 yrs and no exactly what the Neg Am will be.

I have a .xls available for anyone who wants it. I built it to better play with the loan and what if situations for investment property.

Enter

Loan amount
Home Value
Appreciation Rate
Rental Income
Interest Rate
Min Rate
and Recast %

It'll then graph out the Loan Balance, the equity, and the home value. You can easily see if and when you'll recast. To answer your question BB - It's nothing new.

Anyone can drop me an email and I'll send you the .xls

Yeah...just another version of:

Pick-a-pay
Option ARM
Neg Am
Deferred Interest
Secure Option (the fixed version)
Hybrid Option ARM (like the secure)

I wrote a blog post on this type of loan, the pros and cons.

My list of cons is growing. It appears that people with great income, lots of equity and good credit are STILL in danger of getting in the habit of minimum payments.

Yes it's a powerful cash-flow tool for the right person, but that person is more rare than the 33% of folks that were getting this loan two years ago. I'll sell it...but I'll be VERY careful to whom.

Wait a second!

Here's a caveat...because the interest rate is fixed, you can precisely calculate how their payments and principal would change in two years if they DID make the minijmum payment. That makes it safer and easier to disclose, but the temptation is still there to take the savings and invest not in paying off debt or a solid investment...but as a bigger car payment and a boat.

Interesting.....

About a year ago,Joe Blow came to me and said he wanted to list his house. His credit wasn't good, and he couldn't afford his house anymore, so wanted to sell it before he "lost it". OK, so he lists it, and it doesn't sell. He takes it off the market.

Six months ago or so, Joe Blow comes to me and says he is buying a house......What, what happened to your current house. He had someone else buy it in their name, and gave it back to them. I couldn't understand how he was going to get a loan........He closed, saying he had this "perfect loan....pick-a-payment."

A month ago, Joe Blow comes to me and says he needs to sell his house.....he can't afford it.

What do I think of pick-a-payment? I think Joe Blow and others in his situation should RENT :) :)

BB,

First of all I have an equity line with them and had no problem. But of course it is a totally different subject. Getting back to it ...I do not like it and you are right....how will someone with the 500's score be able to make the payment...but I guess lenders are trying to figure out a way to stop the wound from bleeding. Same results:)

BB, we haven't heard of this one yet. but sounds interesting. Like what Joey said above.

Joey and Mike summed it up well.....here is the difference with this 'allegedly' new program.

If fixes the deferred interest component.....that's it.....

It does not offer any other incentive, nor does it change behavior....in the absence of double digit appreciation, you find yourself in trouble within a 37-48 month period when the loan resets because of the deferred interest. If this friendly Wachovia officer is a friend, I'd ask them why they think the program is of benefit given the credit requirements, etc......

Like my grandmother used to say, I feel the lender should get a big kick in the Fannie (Mae) ... This loan will only work with someone with a lot of assets and infrequent income. That may give the lender an opportunity to protect their investment, should the buyer default.

"Active Rain members are not qualified to give legal or tax advice and Active Rain does not guarantee the accuracy of its members' information. All readers/clients are strongly urged to contact a real estate attorney or certified public accountant to obtain legal or tax advice specific to their personal situation."

What if.......my seller has decided to rent his house out and go a head and purchase a new home now. If he refinanced now with the "pick and pay"(keeping LTV at 80%) it would give him more flexibility in the payment while he is carrying two houses. Even though the intent would be to rent there would still be some gaps in the rental and having the ability to make 50% payments would help in getting over the hump while trying to procure a tenant. The goal would be to sell in 2 or 3 years when the market is a little better. Would there be any advantages in a "pick and pay" over just getting an ARM? The anticipated rent will not cover the current payment.

By the way, GREAT info you guys are providing here. Thank you!!!

Maybe they are just throwing something against the wall and see if it sticks.

I would never allow a transaction of mine to include this type of loan, no matter how well educated and disciplined the client(s). Do they stop to read the language in the loan that states that if they reach a particular loan to value ratio the lender can call in the loan balance? This can happen within a few (say six or so ) months of paying the lowest option. It's just way too easy to ruin your credit with this.

On the other hand, I think all forms of debauchery should be legal ;-)

Jennifer, You're cracking me up here!!!!! I too am a big fan of debauchery. "Pick and pay"? Not so much:)

Debauchery? Did I hear someone say debauchery? I'M IN!!!

Jen: To be fair, what you're describing is not quite accurate. The lender wouldn't 'call' the loan...where it becomes due and payable immediately. They 'recast' the loan. In English, this means that you don't get to 'pick your payment' any more...you just have to make the fully amortized payment, no options.

Typically this recasting happens when the loan balance grows to 115% of the original loan balance. With the parameters Broker Bryant is describing, I don't think the loan would recast within 2 years unless they had an INSANELY high interest rate.

BB: If your client has reserves, walks into this eyes wide open, and knows exactly what payment they'll be paying after the initial period, than maybe it's a worthwhile risk. But it raises the question: If they can afford to make the payments if they're home doesn't sell in two years, why do they need this loan in the first place? And you can bet the rate on this one is going to be higher than your typical fixed rate. I'm guessing they can get a 5 year fixed at a much lower rate...wish I was doing biz in Fla, buddy...I love this stuff!

Hold on everybody. the Pick A Pay loan was the original World Savings product (World was gobbled by Wachovia last year).

Nobody, I repeat, nobody understands neg-am loans better than World Savings. They have the lowest default rates in the industry and one of the highest retention rates because of their sound underwriting decisions.

They are a portfolio lender with a federal bank charter so they're extra careful about putting loans on the books. Loan originators who use World hardley ever refinance anyone out of that loan. The customers are the most informed.

World has been originating, funding, and servicing that product sine the early 80s. Through recessions, wars, stock market crashes and three real estate declines. This product rarely gets into the hands of a clueless customer.

BB - This type of loan has been around in So Cal for quite some time. It's the old World Savings model. World was a family run bank for many years---just bought out by wachovia:-( Sure hate to see the small, well-run banks get gobbled up by the big fish.

Back on topic. Yes, pick and pay is a good way for folks like us who have fluctuating income. I have this loan on my home. And, yes it can be a recipe for disaster with sloppy underwriting. World had their own appraisers and you had to have some pretty strong equity or great credit to get this loan in the past, I haven't looked at Wachovia's guidelines.

Okay Joey... I'm just an idiot Real Estate Broker so don't bust my chops too hard here ;-) And besides, English is NOT my first language. I feel, well, discriminated against! Dabauchery pour chacun !

Oh..another great feature- this loan is assumable.

I haven't looked at Wachovia's guidelines.

They're letting World operate as they did...for now

OCT

2007

BB - I think it's a case of "Uh oh, the feds won't let us do this anymore, so we need to think up something else to get around that loophole and keep handing out cash like candy."

Just my opinion, of course. (Can you tell I'm bitter???)

Sounds like a great program to stave-off the crash for a few more months.... Interesting program, I haven't heard about it yet in our market, but I'm sure it is there.

You have already gotten great feedback. I appreciate you letting us know so we are prepared if one of our buyers refers to this program!

Hey Bryant,

I posted two Blogs this morning on Option Arms and Hybrid Option Arms, please check them out and let me know what you think.

Sean Allen
The Mortgage Professionals

I think I'll short Wachovia on Tuesday.

That 4th option (pay 50%) seems a little scary. I am all for helping someone buy a home but don't set them up for failure, please!

Well this is very interesting. Assumable? WOW! I didn't know that animal still existed.

So I'm hearing some differences in opinion here. I have to say when I fist heard the details on this my initial thought was this sounds like a loan I would want. I'm all for flexibility on my personal properties. I'm an investor as well as real estate Broker and I like to be able to control my cash flow. There are months where business may be down and I also have to carry a few empty rentals. Having the option of making a reduced payment for a short period of time appeals to me.

I guess I need to do some more research on this product. It certainly sounds like it's not something for the faint of heart.

BB - IMO there is a very small percentage of folks in this country that would have the true discipline to make this work in the positive for them. It sounds tempting, but on second read it's a true recipe for reruns of the The Rise and Fall of the Housing Market in America.

Even those with the best intentions could wind up enticed to abuse this type of loan. And the end result would be less than profitable for them - but very profitable for the bank. Until the loan is in default and the wolf is at the door.

Great post - Thanks!

BB,

I have disliked this product forever, unless your an investor. I believe that if you give someone the option of paying the lowest payment available, then thats what they are going to pay! but keeping in mind that this is a ARM and Negative Amortization.. it is a Recipe for Disaster I think! Why would a broker say otherwise, this product offers the most Money to be made, and it has the low payment as a Selling point. I will do these for an investor, because they are not gambling the actual roof over their head.

Thomas Weiss

Bryant-I know that most loan programs are with good intentions BUT I do believe guidelines needs to be stricter. If you give people too many options they opt for the easiest and not always the best.

Bryant, "Pick and pay" is a version of the Option ARM. It's old wine in new bottles. Any negative amortization option is a potential time bomb.

Now just to clarify, it is my understanding that the World Savings "pick and pay" being offered by Wachovia is NOT an ARM. It's a fixed rate. Plus you can only pay the minimum payment for a maximum 2 years. Am I wrong about this?

Bryant, you're absolutely right that it's not an Adjustable Rate program, but it is designed along the same lines. The Pay Option programs offered a variety of options which may have encouraged some to go the route of making "minimum payments" with negative amortization.

Even in two years, wouldn't you agree that a consumer could get into trouble?

Eric, I certainly agree that an inexperienced buyer would get into trouble real quick with this type of loan. It's why I was surprised to see they wrote them for folks with low credit scores. I believe they have the capabilities of limiting the pay options though.

Bryant - I have heard of this and I'm not sure of Wachovia's specific parameters, but these programs (to my knowledge) have pretty strict credit qualifications. So, the borrower you lay out here probably wouldn't qualify. That said, these programs are designed for a rather unique and financially savvy borrower.

Bryant- I love this option for self employed people, business owners, attorneys and new doctors just starting out in business. I have many clients who have used the World Savings program and none of them have defaulted or been irresponsible. I am a firm believer that if there is full disclosure that the individual borrower should make their own decision and that they should be held responsible for their decisions and be accountable. Katerina

BB - Guess I don't get it. Seems like for SOME folks this can work well, buit the idea of offering it to people who have not demosntrated they are very responsible about paying their bills seems foolish, unless the standards for credit worthiness are fairly strict.

It seems like they are just creating another potential situation for people to easily get into trouble. Even if all is disclosed and explained, I think it will not work for a good number of folks. But maybe I am just being pessimistic. Perhaps there need to be limits on how long you can go and just make 50% payments. I agree that it seems to make sense for investors (who, if there don't manage their money well and pay their bills won't be long term investors anyhow).,

Jeff

I have heard of them - but not had anyone use them - this has been a great thought provoking and learning post to me - thanks Bryant and everyone else too

OCT

2007

Thesa, I agree. Lots of good info in the comment thread. That's why I wrote this. I needed to learn and it worked great! Gotta love this place!!!!

I stay away from bad credit scores, I instead try to get the people hooked up with the lender to repair their credit, for at least 6 months, build a relationship, then try to help them, often some of the lenders I work with show them how and why credit is important.

Wow BB - You do have some good info here and then you also have some not so good mis-information here.

The POA, The Hybrid POA, and this 30 yr Fixed POA all are not bad loan programs. They are bad loan programs when applied the wrong person for the wrong reasons.

Brian Brady knows this. Joey nailed it when he said "you can precisely calculate how their payments and principal would change in two years if they DID make the minimum payment."

With this loan you can take that out all the way to 30 yrs if you like. You cannot do that with a ARM - You'll have to run a worst case scenario. With this loan you can precisely figure the amount of deferred interest through the entire term of the loan.

On the other side we have loan officers and others who have bought into the common media hype that says all POA varieties are evil. This is an incorrect stereotype. The POA is a product, it's a tool. Like a hammer or an axe, it can be used for good or it can be used for evil. Unfortunately so many evil LO's picked up the tool and used it for evil.

You wouldn't place Brian Brady into that category would you? More than anyone in this thread - he understands the proper use of the tool. I will disagree with him on one point however - "This product rarely gets into the hands of a clueless customer."

I've seem plenty of the clueless homeowners with the loan. Clueless Loan Officers sold it to them.

Joey - This POA has a 125% recast. It will not recast in 2 yrs.

Here's a chart view of one scenario I ran recently:

I'm not a fan of the program. I'm just dispelling the mis-information. It still has to be the right program for the right borrower. Like Brian maintains - It's more about the Margin.

Just my .02

Great info Mike. Thanks for sharing this with us.

Brian.. this is a good product for a specific market that will wind up being used by the general public and it will be a disaster for a lot of people..

OCT

2007

I actually heard the other day of a company trying what the car companies are doing. You get two skip a payments coupons that you can use any time during the life of your loan and you can't use more than one per year. It just extends your loan by two months because of the way the interest is calculated. But, if you have lost your job, it could save you from losing your house. I just see it being used when it shouldn't be, like at Christmas time.

OCT

2007

Never heard of it. Sounds good!

I leave the decision of risk up to the lender and purchaser.

This can be very good for responsible people who's scored dropped due to special circumstances and still want to get into the market right now.

BROKER BRYANT!!

This program is a GREAT TOOL for the wealthy. People who have the cash in the benk, investments, etc., and want the flexibility of using this product to manage their cash flow. It is also known as an OPTION ARM . This product also has a very UNSTABLE component to it that can sink borrowers who don't have assets to manage in the first place.

When I worked as a loan officer I used this product often with propel who owned MULTIPLE investment properties, because if a building went empty for a month or so, they could make that MINIMUM (but also NEGATIVE AMORTIZATION) payment instead of taking cash out of the bank, investments, or lines of credit.

The fact of the matter is... many people used (and still use) these products to buy houses they can't afford.

Good Luck

OCT

2007

Bryant, Sorry I did not see this post earlier. Great post. Just to let you know this is a World Savings loan. They also are the ones who invented the Option Arm. While the loan officer told you that they can do this loan in the low 500's that really is not true. They do not use FICO score's per say however you still have to show the ability to repay the loan through your credit history. If you have low FICO's because of high debt but show a good payment history than yes you would be approved. But if you have poor credit history they will not approve it. When this Loan Officer told you the low 500's that is not high debt that is bad credit and they would not be approved..

JAN

2008

As an employee of Wachovia who deals with the PAP on a daily bases, I would have to say that this loan is a great product if used in the right situation. Wachovia mortgage loan councilors are trained to offer this product to customers that will benefit from the product. By making a lesser payment, it enables a borrower to invest the remaining money in something that will earn more money than they would have paid. Also, with a customer that has high credit card debt, they could apply that extra money to pay down those credit cards which have an incredibly higher interest rate than their mortgage loan. If used in the right situation, this product is very valuable. If anyone would like more information on this loan or any other products, you may contact Nancy at 704-427-9679.

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