The negative amortization loans, which were acquired via its merger with Wachovia, have carried a serious delinquency rate triple that of standard loans, making them a high priority for the San Francisco-based bank.
The company has gone above and beyond offering simple repayment plans and mortgage rate cuts by agreeing to reduce principal balances, a necessity because most option arms are underwater thanks to continuing home price depreciation.
Wells Fargo has forgiven principal by an average of 15 percent, or $46,000, on 43,500 option arms modified this year through September.
In certain situations, principal was reduced by as much as 30 percent, though the ceiling is typically capped at 20 percent.
In total, about $2 billion in pay-option loan balances have been reduced, resulting in $13.7 billion in modified mortgages that no longer qualify as option arms.
Wells Fargo is also employing the standard loss mitigation efforts, such as interest-rate reductions, term extensions, and the use of interest-only loans.
Pay option arms were very popular during the housing boom because homeowners could make payments below the actual interest rate tied to the loan, relying on the promise of home price appreciation to mask any associated risk.
But when home prices turned, borrowers who made the ultra-low mortgage payments quickly found that their loan balances exceeded the value of their homes.