Virtual Open Houses

When Wachovia bought Golden West Financial two years ago, executives at the Charlotte-based bank gushed about how they could take the “Pick-A-Pay” mortgage that was Golden West’s signature product and expand it to the rest of its customer base nationwide. The product was a mortgage that gave borrowers several choices each month on how much to pay—a regular payment (the kind you’d make on a 30-year mortgage), a payment covering only interest, and a minimum payment that only covered a portion of the interest due and lumped the rest back on top of the principal amount. That created a situation called “negative amortization,” in which the loan balance could actually grow if borrowers only made the minimum payment.

The “Pick-A-Pay” mortgage – coupled with Golden West’s vaunted underwriting process – created an aura around Golden West that Wachovia couldn’t resist. The bank loved to crow about how during the 1990 recession, its losses from mortgages-gone-sour was less than 0.20% -- a fraction of that traditionally suffered by mortgage lenders during a downturn. While much of Wall Street was in shock that Wachovia would acquire a big California mortgage lender at the top of the housing bubble, Wachovia execs acted as though they’d found the finance equivalent of Indiana Jones’ Crystal Skull. Buying Golden West not only gave CEO Ken Thompson the beachhead into California he’d long coveted, but also gave the bank a product and capability that would allow it to emerge from any housing correction unscathed. Or so they convinced themselves.

You know how this movie ends, right? The foreclosure rate at Golden West soared past the historical norms, the losses mounted, and last month Wachovia’s board forced Thompson to walk the plank—making him one of the highest-profile casualties of the housing bust. Wachovia recently told Wall Street that by the end of the housing bust, it could suffer losses on as much as 7% to 8% of the value of all Golden West mortgages. Just look at this chart from Credit Suisse showing the coming wave of option ARM mortgages that are scheduled to reset and you see the problems that are about to hit lenders like Wachovia.

And earlier today Wachovia announced it was suspending the prepayment penalties in Pick-A-Pay mortgages – and would strip out the “minimum” payment feature that resulted in negative amortization...

Check out this week's BusinessWeek cover story, The Home Price Abyss: Why the threat of a free fall is growing. I and Mara Der Hovanesian wrote the story with help from a bunch of other BW staffers.
Our core argument is that price declines could potentially feed on themselves. Big price declines make people unable to keep paying their mortgages (because their ARMs are resetting and the banks won't refinance) or unwilling to keep paying their mortgages (because they see no point in throwing good money after bad). That drives up the foreclosure rate, which drives the prices of neighboring homes, adding to the downward spiral.
We're already seeing this happening in some of the markets with the worst price declines such as southern California, Nevada, Arizona, and southern Florida. The question is whether it could spread to more areas and become a national problem.
One person we quote in the story says that the taboo on walking away from your home and leaving the keys behind could be diminishing. He says that in commercial real estate it's business as usual. I would like to know what Hot Property readers think about the pros, cons, rights, and wrongs of walking out on a mortgage.

Very belated correction: A year ago I Here's a link to the letter in the Times. Hat tip to Dave Johnson, a reader of Hot Property who pointed out the NYT letter a couple of days ago.

StarPoint Properties L.L.C. announces the sale of an 83-unit apartment building located at 737 S. Kingley Drive in Los Angeles, Calif.

The first Starwood aloft Hotel by W in the United States has opened at HavenPark, a $60 million master planned mixed use development in Rancho Cucamonga, Calif.

Savanna, a New York City-based investment and development fund, and a New York City-based hedge fund have originated a $46 million full-recourse senior loan on a 150,622-square-foot office building at 63 West 38th Street in Manhattan.

Behringer Harvard bought Crossroads Office Park, a seven-story office building in Mission Valley, a submarket two miles northeast of San Diego International Airport and five miles north of downtown.

Shorenstein Properties L.L.C. has purchased a $250 million senior mezzanine loan backed by 450 Lexington Avenue, a 910,000-square-foot office building located in the Grand Central submarket of Manhattan, N.Y.

Construction has commenced on the first phase of The Campus at Playa Vista, a new $1.2 billion, 1.6 million-square-foot office complex in West Los Angeles that is being developed by Tishman Speyer on behalf of its joint venture with Walton Street Capital L.L.C.

Kennedy Wilson has agreed to purchase a 16-story office tower in Los Angeles. The building, 6100 Wilshire, is located adjacent to Beverly Hills at the southwest corner for Wilshire and Fairfax.