CBS 5 Investigates With Anna Werner

Bank Faces Questions Over Bay Area Home Lending

OAKLAND (CBS 5) ― They've been one of the Bay Area's biggest lenders for years: World Savings, now part of Wachovia. But some housing advocates are complaining about the way World Savings sold many of their loans during the mortgage boom.

CBS 5 Investigates obtained internal World Savings training videos produced during the height of the mortgage boom. They are videos instructing World Savings employees how to sell loans to people like Willie Bryant.

"I thought they were a very fine institution," Bryant told CBS 5 Investigates.

In 2005 when his family's home of 14 years needed repairs, Bryant refinanced with World Savings using a loan that gave four payment options.

"They suggested the Pick-a-Pay loan," he said. The Pick-a-Payment loan, with a minimum payment option that Bryant thought would lower his mortgage and leave him money to pay for repairs.

"It sounded great," Bryant said. "The minimum payment was, I think, $1,900 a month and I knew I could afford that." But he recalled just a couple payments later, "I saw that my principal went up. It's going up, not down."

Because what Bryant didn't realize was that by paying the minimum, he was actually paying less than the interest charge each month, and no principal at all. So his loan balance was actually rising: a process called negative amortization.

CBS 5 Investigates asked Bryant "What was your reaction?"

"Terrifying. Losing principal is terrifying," he said. And it was something he said World Savings representatives never explained when he got the loan and may force Bryant, retired and on a fixed income, to lose his home.

"I may have to sell," Bryant said.

"I am seeing people who were put into loans that they could not afford," said housing advocate Maeve Elise Brown. She is particularly critical of World's Pick-a-Pay loans. "They are telling me that World staff people put them into those loans."

In fact throughout the height of the mortgage boom, World, now Wachovia, was one of the dominant lenders in the Bay Area and the Pick-a-Pay loan was virtually their only product.

It's what the industry calls an option ARM or adjustable rate mortgage, and here's how it works: It allows people to select from four payment options ranging from full principal and interest, down to that minimum payment.

But housing advocates say most people just pay that minimum payment, and don't understand it won't cover their loan. It's why many of them are now getting in trouble.

"They should really go out of their way to make sure the borrower understands," said Kevin Stein with the California Reinvestment Coalition. "The reality is most people do not read their loan documents or they do not understand them. The vast majority."

Especially he said when it comes to complicated loans like the Pick-a Pay loan.

"So then you're relying on whoever you're talking to," Stein explained.

But what were World Savings employees instructed to tell these customers? The training videos obtained by CBS 5 investigates provide some clues.

For instance, in a segment called the "Blue Collar Borrower" scenario, where a supposed world loan officer describes the advantages of the Pick-a-Pay loan. "It allows you to be in control of your finances and how much you pay every month," said the broker in the video.

How? He said, by consolidating credit card debt into your mortgage. "We can pay off your credit cards, your truck, and give the money out for you to do the remodeling and lower your payments," the broker video said.

That sounds like a good idea, lowering your credit card debt. But not according to housing advocate Brown.

"This is just terrible," Brown said. "This is not sound money management conversation that I am hearing here."

But what concerns Brown even more was the way World Savings employees were instructed to answer questions about the minimum payment on those option ARM's.

"So if I'm paying that minimum payment, I'm not actually putting a dent in my principal though right? My principal and interest they're just going to keep climbing up right?" the borrower asks in the video tape. "It's optional," the broker in the video replied.

"What kind of answer is that?" said Brown after watching the video. "The answer would really be 'Yes.' That's the right answer, that to me would be the true clear straightforward truthful simple answer."

And in still another scenario, the video instructs brokers to explain those loans. "Why would I offer a loan that has a negative amortization?" the broker asked. The World Savings representative replied: "Most brokers refer to them as negative amortization, but we try to use the words a little more user friendly, 'deferred interest.'"

But Brown said, "I don't think that to call this deferred interest really tells the consumer what is going on. They don't realize that their loan principal is ballooning, bit by bit, every month."

"The one thing that this shows it that they're not really focused on making people understand the negative consequences, the potential negative consequences, of these loans," Stein said.

So what does World Savings purchaser, Wachovia, have to say? The company declined an on-camera interview.

But a Wachovia spokesman told CBS 5 Investigates that the company tries to be "upfront with customers" and that Pick-a-Pay loan statements are "self-explanatory". He says the company "has not seen evidence that indicates they've been putting people into loans they couldn't afford."

"Oh really, they told you that?" asked Bryant when he heard Wachovia's response. "That is not a true statement as far as I am concerned," He pointed out to CBS 5 Investigates he only brings home $3,000 a month, and the full payment is for more than $4,000.

On the training videos, Wachovia's only comment to CBS 5 Investigates was the videos were cleared by their legal and compliance divisions.

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