On the heels of the news that Arizona and Nevada have sued Bank of America, Wells Fargo (NYSE: WFC) and the attorney general of California have announced a settlement that calls for the bank to provide relief of up to 2.4 billion to California homeowners who chose so-called pick-a-payment loans. The bank said it has reached similar agreements with nine other states: Arizona, Colorado, Kansas, Florida, Illinois, Nevada, New Jersey, Texas and Washington.

These payment option ARMs were popular when home values were rising and rates were falling. Too many chose to make minimal payments and saw their principal rise. After rates reset and homeowners could no longer keep refinancing easily, the defaults soared.

The mortgages contested by the California AG Jerry Brown originated at World Savings Bank, a unit of Golden West Financial, which was bought by Wachovia, before it merged with Wells Fargo.

The bank says that the relief will come in the form of various options, including rate reduction, principal forgiveness, mortgage term lengthening and the like. Wells Fargo is also required to pay $32 million in restitution to more than 12,000 pick-a-pay borrowers in California who lost their homes as well as $1.8 million in costs to the state. Payments to foreclosed homeowners are expected to average more than $2,650.

For more:
- here's the press release
- here's an Los Angeles Times article

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