Wachovia to scale back option ARM focus

By Jonathan Stempel

NEW YORK (Reuters) - Admitting that its plunge into adjustable-rate mortgages has failed, Wachovia Corp said on Monday it will scale back its emphasis on the home loans and instead focus on providing a wider array of loan products.

The fourth-largest U.S. bank became a dominant provider of "option" adjustable-rate mortgages when it paid $24.2 billion in October 2006 for Golden West Financial Corp, an Oakland, California-based lender and thrift.

Ninety-nine percent of Golden West's mortgage loans were option ARMs, which give borrowers a variety of payment options, including payment of less than the interest and principal due.

Wachovia preserved that percentage of so-called "Pick-a- Pay" mortgages after the merger and tried to maintain Golden West's standards for conservative underwriting. The nation's housing crisis got in the way.

"We're trying to tinker with the model to get it just right," Thompson said on a conference call with reporters. "It's clear to me that we will move to a mortgage company with a balanced product line."

He said the option ARM "will certainly be one of those products," and that Wachovia will be a "player" in a mortgage industry dominated by a few large banks. It was the seventh- largest U.S. mortgage lender in 2007, according to the newsletter Inside Mortgage Finance.

Pick-a-Pay mortgages were a big reason Wachovia posted a $350 million first-quarter loss, surprising analysts who on average expected a $900 million-plus profit. Wachovia set aside $2.83 billion for credit losses, including $1.1 billion for Pick-a-Pay mortgages.

The Charlotte, North Carolina-based bank is one of many U.S. mortgage providers to change its lending practices as home prices tumble and defaults soar.