Okay, so maybe the headlines didn’t say that, but they probably should have. With the purchase of Golden West Financial Corp., the lender has gone from dabbling in option-ARM’s (better known to the general public as “Pick-A-Payment” mortgages) after the acquisition of World Savings Bank to jumping to the #2 position in the country (Countrywide still holds the Gold). Ninety-nine percent of all mortgages sold by Golden West are option-ARM’s. Their secondary business is low-yield CD’s.
The chief administrative officer for Wachovia Mortgage, David Pope told reporters from American City Business Journal newspapers on a conference call that he “…expects loan officers at its branches and other areas of its longstanding system will make more option ARM loans as they become more familiar with the product.” How lucky for the consumer. But the news could be even worse for the 4th largest bank’s shareholders.
The CEO of Wachovia, Ken Thompson says he is confident that the $25-billion purchase is a good deal and that his shareholders will see the light shortly. I’m not so sure. Despite my obvious misgivings about the consumer use for option-ARM’s – and I don’t care what anyone else says, there is no use whatsoever for option-ARM’s that in any consumer’s plan; the only thing they do is rack up more profits for the banks (in theory) and mortgage brokers and convince people they can afford homes they have no hope of holding on to in the long run – I would seriously question the judgement of any CEO who is convinced that option-ARM’s are going to benefit his shareholders.
Why are the profits only in theory? Well, despite the fact that Golden West showed huge profits in the previous year, almost $755-million (or 59.6% of their overall profit) is from deferred interest. For those of us outside of the banking world, a better term might be “phantom profits.” In other words, the money’s made up, folks… In any other situation, we’d be screaming for the FTC or SEC to come in and crack down on executives for inflating profits and artificially driving stock prices up. But this is the banking industry.
What happens though, 2-4 years from now when the payment automatically and manditorily adjusts up to keep in line with the minimum deferred interest permitted (up to 125% of the loan amount, in some cases) and the consumer is faced with either paying a monthly payment 4-6 times higher than the one they picked or hoping they have enough equity and good credit to qualify for a refinance.
A pretty big bet, when you’re looking at a collapsing housing market, federal officials talking about suitability regulations, and a banking industry that’s considering self-regulating to prevent getting caught with their hands too far in the cookie jar when the FTC does finally talk notice.
Oddly enough, some market watchers, including Forbes columnist Liz Moyer, criticized new Citigroup CEO Charles Prince for skipping out on the deal to purchase Golden West. While I am far from Prince’s biggest fan, I’m thinking he made the right move this time around.