Wachovia Corp. signaled that it may no longer offer some Californians the controversial "option ARM" mortgages that give borrowers the choice of paying so little that their balances actually rise.
In a memo Monday, Wachovia's top California managers told employees that the loans would no longer be offered in 17 California counties where property values have declined the most, including Riverside, San Bernardino and San Diego, plus the Central Valley.
However, the bank said Wednesday that the memo had been sent prematurely and that it had not decided whether it would stop making the loans.
"Because it's under consideration we can't comment about it," said Don Vecchiarello, a spokesman for the Charlotte, N.C., bank, the nation's seventh-largest mortgage originator.
Wachovia's Pick-a-Payment loans give borrowers four payment choices -- a tricky situation for consumers to manage, especially during a period of declining home prices and record foreclosures.
Wachovia paid $24 billion in 2006 for California adjustable-mortgage specialist Golden West Financial Corp. Golden West's savings and loan, World Savings Bank of Oakland, pioneered the option ARMs.
Yet World and Wachovia earned generally high marks for managing the risks of these loans better than aggressive competitors that flooded the market with option ARMs at the height of the housing boom.
If Wachovia cuts back, it could further disrupt distressed housing markets where the recent tightening of credit has compounded the problems caused by easy-money lending earlier this decade.
"This product was the last remaining hope for the sub-prime borrower," said broker John Diamond of Bancorp Funding in Chino.
According to Diamond, Wachovia managed its risk by relying more on conservative appraisals even as it gave less weight than many lenders did to credit scores. With the tightening of loan standards by the government-sponsored mortgage buyers Fannie Mae and Freddie Mac, and other lenders afraid or unable to lend, "this could be the 'straw that breaks the camel's back,' " Diamond said.
The potential backing-away from what had long been World Savings' signature product is part of a broad retrenchment among lenders as home values decline and defaults mount. Many lenders have cut off credit lines to homeowners who may be exemplary borrowers in other ways but no longer have much home equity to borrow against.
