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When Wachovia bought Golden West Financial two years ago, executives at the Charlotte-based bank gushed about how they could take the “Pick-A-Pay” mortgage that was Golden West’s signature product and expand it to the rest of its customer base nationwide. The product was a mortgage that gave borrowers several choices each month on how much to pay—a regular payment (the kind you’d make on a 30-year mortgage), a payment covering only interest, and a minimum payment that only covered a portion of the interest due and lumped the rest back on top of the principal amount. That created a situation called “negative amortization,” in which the loan balance could actually grow if borrowers only made the minimum payment.

The “Pick-A-Pay” mortgage – coupled with Golden West’s vaunted underwriting process – created an aura around Golden West that Wachovia couldn’t resist. The bank loved to crow about how during the 1990 recession, its losses from mortgages-gone-sour was less than 0.20% -- a fraction of that traditionally suffered by mortgage lenders during a downturn. While much of Wall Street was in shock that Wachovia would acquire a big California mortgage lender at the top of the housing bubble, Wachovia execs acted as though they’d found the finance equivalent of Indiana Jones’ Crystal Skull. Buying Golden West not only gave CEO Ken Thompson the beachhead into California he’d long coveted, but also gave the bank a product and capability that would allow it to emerge from any housing correction unscathed. Or so they convinced themselves.

You know how this movie ends, right? The foreclosure rate at Golden West soared past the historical norms, the losses mounted, and last month Wachovia’s board forced Thompson to walk the plank—making him one of the highest-profile casualties of the housing bust. Wachovia recently told Wall Street that by the end of the housing bust, it could suffer losses on as much as 7% to 8% of the value of all Golden West mortgages. Just look at this chart from Credit Suisse showing the coming wave of option ARM mortgages that are scheduled to reset and you see the problems that are about to hit lenders like Wachovia.

And earlier today Wachovia announced it was suspending the prepayment penalties in Pick-A-Pay mortgages – and would strip out the “minimum” payment feature that resulted in negative amortization...

Check out this week's BusinessWeek cover story, The Home Price Abyss: Why the threat of a free fall is growing. I and Mara Der Hovanesian wrote the story with help from a bunch of other BW staffers.
Our core argument is that price declines could potentially feed on themselves. Big price declines make people unable to keep paying their mortgages (because their ARMs are resetting and the banks won't refinance) or unwilling to keep paying their mortgages (because they see no point in throwing good money after bad). That drives up the foreclosure rate, which drives the prices of neighboring homes, adding to the downward spiral.
We're already seeing this happening in some of the markets with the worst price declines such as southern California, Nevada, Arizona, and southern Florida. The question is whether it could spread to more areas and become a national problem.
One person we quote in the story says that the taboo on walking away from your home and leaving the keys behind could be diminishing. He says that in commercial real estate it's business as usual. I would like to know what Hot Property readers think about the pros, cons, rights, and wrongs of walking out on a mortgage.

Very belated correction: A year ago I Here's a link to the letter in the Times. Hat tip to Dave Johnson, a reader of Hot Property who pointed out the NYT letter a couple of days ago.

StarPoint Properties L.L.C. announces the sale of an 83-unit apartment building located at 737 S. Kingley Drive in Los Angeles, Calif.

On behalf of the landlord, Statuto Group, CB Richard Ellis arranged a 10-year, 8,844-square-foot lease at 960 Avenue of the Americas in New York City.

Taking the next big step in the development of a new corporate headquarters for Canon Americas, leading imaging solutions provider Canon U.S.A. has revealed that it will file site plans with the Long Island town of Huntington, N.Y., for the project tomorrow.

Voit Commercial Brokerage has directed six lease transactions totaling in Orange County, Calif., the company said today.

Written by Kristin Dispenza, courtest of GreenBuildingElements.com Residential applications for solar panels have been reaching news for several years. But as uprising fuel prices goad consumers to look for substitute energy sources, another uncontaminating power source is seting about to arrest attention: wind energy. Yet though the residential wind power sector has taken in enormous [...]

Is that a swimming pool in front of the Pentagon? Nope. It’s boxer Evander Holyfield’s old Atlanta estate and it has joined the growing list of celebrity homes going into foreclosure.

Thanks once again to the financial trade publication Investment News for this story. We’ve all heard about Countrywide starting foreclose proceedings on its $4.8 million loan on Ed McMahon’s house. The Beverly Hills estate is still listed at $6.5 million.

Other celebrity homes in foreclosure include Holyfield’s $10 million property which he lost in May. Baseball slugger Jose Canseco’s $2.5 million house in suburban Los Angeles. And homes owned by Rep. Laura Richardson and football player Adam “Pacman” Jones.

Actor Dustin Diamond, best known for playing “Screech” on Saved by the Bell sold T-shirts on his Web site and made a pitch to fans for money on the Howard Stern show. That saved his home.

Then there’s the saga of Michael Jackson who avoided foreclosure on the Neverland Ranch only because distressed debt investor Tom Barrack bought the $24 million loan. Barrack is now negotiating to feature Jackson in one of his casinos as part of a restructuring plan.

Savanna, a New York City-based investment and development fund, and a New York City-based hedge fund have originated a $46 million full-recourse senior loan on a 150,622-square-foot office building at 63 West 38th Street in Manhattan.