Accusing Wells Fargo & Co. of reneging on a sweeping mortgage-modification deal, a lawyer for troubled homeowners is trying to reopen a case involving risky “pick-a-pay” loans written during the housing bubble.
Legal filings last week claimed Wells Fargo failed to provide wide-ranging reductions of loan balances to delinquent borrowers as it had promised two years ago when it settled a combined national class-action suit. A bank spokeswoman strongly disputed the claim, saying it was riddled with errors.
The litigation illustrates how lawsuits continue to dog major home lenders more than five years after the mortgage industry imploded, including recent challenges to certain cases the banks thought had been put to rest.
The original lawsuits over pick-a-pay, or pay-option, mortgages contended that the loans were issued with inadequate notice to borrowers that the amount owed would rise if they chose the lowest payment among four options. The loans were made by banks later acquired by Wells Fargo.
“Hundreds of thousands of homeowners were suffering the effects of undisclosed negative amortization for their Pick-a-Payment loans, while the declining U.S. housing market was sucking the remaining equity out of their homes,” plaintiffs attorney Jeffrey K. Berns said in a filing Friday.
The settlement was reached in December 2010 before U.S. District Judge Jeremy Fogel in San Jose. At the time, the San Francisco-based bank said it would provide at least $50 million and as much as $600 million in modification benefits to troubled borrowers with the pay-option loans, the Reuters news service reported. Berns, of Woodland Hills, had calculated the number might reach $2 billion.
Of the 66,000 requests for loan modifications made in the 18 months ending September 30, Wells Fargo granted 1,746, or 2.6%, Berns alleged. “Thousands of people have been denied loan modifications — people who, in our opinion, should not have been denied,” Berns said in an interview Monday.
His filings included a new lawsuit accusing Wells Fargo of breaching the settlement, acting in bad faith and violating a state unfair competition law. In a separate filing, Berns asked the court to order the bank to stop all foreclosures on the loans to allow him to investigate the situation.
The pay-option loans were made by a large Oakland savings and loan, World Savings, which was acquired in 2006 by Wachovia Corp. of Charlotte, N.C. Wachovia continued to make the mortgages and was near collapse in 2008 when it was acquired by Wells Fargo.
In a statement, Wells Fargo said it would “immediately and forcefully” defend the new lawsuit, which it said “maligns a very effective consumer loan settlement program.” Wells Fargo didn’t break out how many borrowers covered by the settlement had received reductions in the principal on their loans. But it said its overall efforts on behalf of people with the tricky loans had been extensive, including many loan modifications that included principal reduction in the two years leading up to the settlement. “We have provided modifications for nearly 110,000 borrowers with Pick-a-Pay loans and principal reductions of more than $5 billion for those borrowers,” Wells said. “That means that more than a third of all Pick-a-Pay loans — including those covered by the settlement and those not included — have been modified since the beginning of 2009.”