Wachovia tightens home mortgage standards

Wachovia is adjusting underwriting guidelines for the mortgages it keeps on its balance sheet, the bank said Friday.

Effective later this month, Charlotte-based Wachovia (NYSE: WB) will require a minimum credit score from potential borrowers. It also will verify borrowers' assets and employment before making a mortgage loan that it plans to keep on its books and not sell to other investors.

The move comes amid controversy over Wachovia's "pick a payment loans," which it acquired through the 2006 purchase of California's Golden West Financial Corp. and has since been rolling out throughout the country. The loans offer borrowers flexible payment plans, but the interest rates on the adjustable-rate mortgages eventually goes up from a introductory rate, and some borrowers can pay so little every month that the balance on their loans actually increases.

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Wachovia spokesman Don Vecchiarello says the changes are driven by market conditions. About 60 percent of the legacy Golden West mortgage portfolio is in California, where housing prices have fallen dramatically, and another 10 percent is in Florida, which has also suffered significant declines in home values.

That's led to a rash of default on home mortgages, particularly adjustable-rate mortgages such as the pick a payment loans.

Previously, Golden West looked at credit history and the borrower's ability to repay before making a loan, but it had no minimum credit-score requirement as part of its underwriting process.

Wachovia also is conducting housing-market assessments and creating three tiers of markets based on home-pricing indices, housing inventory levels and absorption rate. Based on those, Wachovia will identify specific markets as "stable" markets, "watch" markets or "stressed" markets.

As conditions change, Wachovia will adjust its minimum credit scores and loan-to-value ratios for specific markets. In the past, Golden West avoided lending to borrowers whose potential loan was worth more than 80 percent of the value of the appraised property.

Wachovia was reportedly considering halting its pick-a-payment loans in certain markets in California. Some of those may fall under the "stressed" category, in which case the bank would use lower loan-to-value ratios to protect itself against the risk of housing prices falling further. But Vecchiarello says the bank is "still offering all of our products in every market in the nation."

"That never was really our plan or our policy," he says, adding that an internal memo to that effect was sent out in error. "As we've continued to evaluate what our new guidelines should be, this is where we are."

Wachovia is the No. 1 bank in the Triangle by deposits.