Wachovia Reigns in Pick-A-Pay?

When I saw the television ad for Wachovia's Pick-a-Payment mortgage, my jaw hit the floor. I saw the commercial at least a month ago, but couldn't formulate a coherent blog entry until now - I was that irritated.
In the midst of the fallout over shoddy lending practices, Wachovia chose to push THIS? For those who have never encountered a pick-a-pay loan, let me explain. The real name for this loan is an option ARM. Each month, the borrower gets four payment options:

1) Pay the fully amortizing principal and interest payment (basically as if you were paying on a 30 year fixed mortgage).
2) Pay a set amount higher than the amount in 1), which pays off the loan in 15 years.
3) Make an interest only payment.
4) Make a minimum payment that doesn't cover principal or interest.

Numbers 1) and 2) are beautiful things. Numbers 3) and 4) can ruin your life. Get into the habit of not making a fully amortizing payment, and your loan balance will actually go up. Combine this with the fact that for the privilege of having a ballooning loan balance, Wachovia will actually charge you a HIGHER interest rate on the loan.

Now, for the right borrower, these loans can be a useful financial tool. By right borrower, I mean someone who gets the concept of negative amortization, and uses numbers 3) and 4) as a strategy in managing their investment portfolio. For example, if a borrower wants to pump some additional funds into their stock portfolio, or they have an investment property that has a vacancy and want to use the extra money for the mortgage payment on that property. Not that they can't get the money elsewhere - they make a CHOICE to get it from this source.

But that's not who Wachovia is aiming this product at. They are targeting people that need to rob Peter to pay Paul. People that need the extra money to pay the minimum balance on their credit card bill. People that need the extra money to buy gas or pay for groceries. People who are not consistently bringing in enough money to cover their expenses. People who could easily end up using the last two options every month, instead of once in a while.

Why would Wachovia do such an irresponsible thing? A nationwide ad campaign that glosses over the risks of the product. A cutesy name that makes it sound like a game on "The Price is Right". Forcing bank employees to push this product on customers or risk losing their jobs.

Let me answer my own question. Back in 2006, Wachovia bought a company called Golden West Financial. Golden West specialized in - you guessed it - Pick-A-Payment mortgages. Wachovia spent years cultivating a conservative, by the books image centered around customer service. But in the world of super-charged creative financing, the standard 30 year mortgage didn't fly. It didn't get you noticed, it didn't pump up your stock price, it didn't make enough MONEY. So Wachovia traded for a marquee player - an exciting, creative superstar that brought it instant fame, glory, and edge.

Wachovia is not offering you this loan because it cares that you can't pay your credit card bill, or that the price of gas keeps going up. Wachovia is offering you this loan because it paid $25 billion for Golden West on the eve of the mortgage market collapse and now needs to make MONEY.

Luckily, a lot of people think Pick-A-Payment is a bad idea. Wachovia seems to be coming to its senses. It has stopped making the loans in some places, and will institute new underwriting guidelines including minimum credit scores and verification of employment.

If you want to do your part, here's a suggestion. If you are ever offered an option ARM (or Pick-A-Pay, or whatever they call it) and you are not independently wealthy, or don't at least have a investment portfolio worth six figures or more - 401(k)s don't count - run away from said offeror like your hair is on fire and your a** is catching. Not to be too blunt, but I'll sleep better at night knowing I might have saved one person from this disaster in a box mortgage.