NEW YORK -- California's attorney general has asked 10 major banks and loan servicers to show how they plan to help homeowners facing huge payment increases on option adjustable-rate mortgages, which he called "ticking time bombs."
Jerry Brown made his request in letters on Thursday to Bank of America Corp, GMAC LLC's Residential Capital LLC unit, Goldman Sachs Group Inc's Litton Loan Servicing unit, JPMorgan Chase & Co and Wells Fargo & Co, among others. He requested responses by Nov. 23.
Option ARMs typically have low initial interest rates that jump after a few years or when homeowners have too much negative equity.
Hundreds of thousands of option ARM borrowers owe more than their homes are worth. Even if the housing crisis starts to abate soon, many economists and analysts believe the bottom for option ARMs may not be reached until around 2012.
"Homeowners with pay-option ARMs are sitting on ticking time bombs that the lending industry has the power to defuse," Brown said in a statement.
Brown said rates on about 1 million option ARMs will reset within four years, with 58 percent of these in California, resulting in higher payments and a surge in foreclosures.
In the third quarter, the state accounted for 250,054 foreclosure filings, or 27 percent of the U.S. total, despite having just 12 percent of the nation's population, according to RealtyTrac.
While some borrowers have reduced monthly payments under the federal government's Home Affordable Modification Program, Brown said the program did not let homeowners reduce principal.
The attorney general wants the 10 companies to say how many option ARMs they service in California and how many have negative amortization, how they plan to address problem loans, and when they plan to implement needed changes.
"Systematic plans to modify these loans as they recast must be in place, in order to preserve homeownership and avoid a prolonged and painful recession," Brown said in his letter.
Major option ARM providers in California once included Countrywide Financial Corp, now owned by Bank of America; Washington Mutual Inc (WAMUQ.PK: Quote, Profile, Research, Stock Buzz), now owned by JPMorgan; and Wachovia Corp, now owned by Wells Fargo.
Mary Coffin, a Wells Fargo executive vice president, said this month the bank has a program to help borrowers with negatively amortizing loans to move to "at least an interest-only, and then stepping up to a fully amortizing product."
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