Not all banks are simply shrugging as struggling mortgage borrowers complain they were deceived. Wells Fargo has agreed to aggressively modify 8,715 mortgages and thereby forgo more than $772 million in economic value through reduced interest rates, term extensions, and principal reductions. This is a pretty big move by the bank. It's notable in three key ways.

The Pricetag

First, the sheer dollar sizes here are pretty amazing. That $772 million in lost economic value will only be divided up by a mere 8,715 mortgages. That breaks down to an incredible $88,583 each, on average. That's an awful lot of money to be losing on each one of these loans.

It's a little unclear how that money will be divided up between various sorts of losses for Wells. Some will be lost fees and lost interest, but you can back into the conclusion that a fair amount will also be spent on principal reductions. Dow Jones Newswires reports that 694 Nevada homeowners will receive $78 million, more than $45 million of which will be principal forgiveness. That means these loans will average a balance reduction of nearly $65,000 each, meaning that 58% of the total aid will be used to reduce principal.

Cleaning Up a Mess It Didn't Make

It's also interesting that Wells is acting so aggressively to make good on these loans, because it didn't create this mess in the first place. The relief is aimed at loans that were payment-option adjustable-rate mortgages, which weren't originated by Wells. They were marketed and sold by Wachovia and Golden West Corp., both of which were acquired by Wells.

Of course, Wells is doing the necessary thing here. If you want the good that an acquisition might provide your firm, you also have to stomach the bad.

The Rationale

So why is Wells doing this? It isn't entirely out of the goodness of its heart. Some states are investigating the marketing of these option ARMS by Wachovia and Golden West. So really Wachovia is acting to end further legal action.

But there's a calculus at play here. Wells must ultimately believe that the legal costs of these suits plus the potential damages if it loses the suits would be greater than the remedy described above. It also must have some faith that most of these borrowers won't ultimately re-default after these modifications, or presumably it would just awarded them a cash settlement and let them foreclose.


So Wells Fargo is engaging in a pretty aggressive modification program to fix a problem that it didn't cause, but it could be forced to remedy anyway by state authorities. But this modification plan shows more than an attempt to simply stall and delay foreclosures like many other banks would prefer. The structure and magnitude of this measure by Wells shows that the bank expects these modifications to actually work.