Wells Fargo & Co. (WFC) finds themselves at the epicenter of a problem that continues to vex homeowners in this fragile economy.
At issue are tens of thousands of customers with adjustable-rate mortgages who have seen their monthly payments spike or stay high even while other homeowners are seeing their payments fall.
In some cases, homeowners using one index are paying up to 25% more than homeowners with similar loans that use a different index.
At the peak of the housing bubble, in 2006, Wachovia purchased Golden West Financial. Borrowers who received mortgage loans from Golden West were given a choice of which index would be used to calculate their mortgages.
This is where the story requires some explanation:
While acronyms like Cosi and Codi haven’t been making the headline news, they’re important to understand when looking at the disparity.
These indexes, along with the better-known Libor, effectively measure the rates that banks pay to borrow money. Banks then add about 2.5 percentage points to the rate when they lend the money to borrowers.
Cosi, the cost of savings index, is tied to a bank’s own deposits.
Codi, the certificate of deposits index, is based on the price of three-month certificates of deposit.
At the time of the Wachovia purchase, Cosi accounted for 54% of Golden West’s mortgage balance of $121 billion, or $65 billion. Codi accounted for 37% or $44 billion.
In most situations, Cosi and Codi remain closely correlated.
However, whereas Codi was based on short-term borrowing costs, which have fallen significantly, Cosi includes long-term CDs that are paying higher yields. This is keeping Cosi elevated over Codi – and causing angst among borrowers who are tied to the Cosi index.
And a larger problem is that, even financially savvy homeowners have difficulty determining their best option when presented with a choice of indexes to determine their payments.
“The lack of transparency is what is very difficult,” said Greg Tibbits, a certified public accountant whose father has a $4.5 million loan based on the Cosi for three apartment building in San Diego. Mr. Tibbits has audited the books of banks while working at Ernst & Young. But even that background makes it difficult for him to discern the reason why Cosi has made such a sharp move.
Says Tibbits, if he can’t figure it out, “I’ve got to think most people out there can’t.”
All of which is now landing in the laps of Wells Fargo. Spokeswoman Mary Eshet said, “Wells Fargo does not publish proprietary details of CD rates for competitive reasons. But the Cosi index is audited by a third party and has been approved by our regulators.”
