from MarketWatch:
Wachovia shares fall after WaMu failureBy Greg Morcroft, MarketWatch
NEW YORK (MarketWatch) -- Shares of North Carolina's Wachovia Corp fell more 25% in early trading Friday following the failure of Washington Mutual.
Wachovia , which is the largest originator of mortgages called "option ARMs", came under pressure after the late Thursday failure of Washington Mutual, the second largest originator of option ARMs.
In the largest bank failure in U.S. history, Washington Mutual Inc., with about $310 billion in assets, succumbed Thursday to the fallout from the subprime mortgage crisis, was seized by federal regulators and rapidly acquired by J.P. Morgan Chase for $1.9 billion.
Option ARMs were marketed to borrowers via low introductory rates and included various payment options.
Those loans often included the option to pay only interest, which caused the borrowers debt to grow with each payment, becoming negative amortization loans.
When housing prices began to fall just at the time rates were adjusting higher on those loans, borrowers began defaulting at alarming rates, leading to big losses for WaMu and others who had extended the credit or purchased securities based on the credits.
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