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Wells Fargo is betting that improving home prices and an increase in consumer income will make their new loan modification strategy a success. The nation’s fourth-largest bank (in terms of assets) has introduced a new, and frankly quite interesting, strategy to modify their large portion of Payment Option adjustable-rate mortgages (ARMs).

If you recall the latest mortgage metrics report, Payment Option ARMs are failing at a rate of three times more than the other products in the marketplace, causing trouble to lender and borrower alike.

The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervison’s (OTS) Mortgage Metric Report for the second quarter of 2009 has been released (rather quietly might we add), and while many aspects of the report were widely expected, there was one new inclusion that particularly caught our attention.

In early September we warned that the pending resets of interest-only adjustable-rate mortages (ARMs) posed a significant threat to the long-term recovery of the housing market. It just so happens, that a new addition to the Metrics report includes data on Payment Option ARMs — a loan product that allows borrowers to put off paying down the loan’s principal for five, seven, or even 10 years by making interest-only payments. According to the OCC and OTS’s joint release: