Well, when a lender waives prepayment penalties on “pick-a-pay” option-ARM, things must be pretty bad. And it wants out of the whole neg-am loan business. And here’s the proof:

Effectively immediately, Wachovia is waiving all prepayment fees associated with its Pick-A-Pay mortgage to allow customers complete flexibility in their home financing decisions. This includes all Pick-A-Pay mortgages on 1-4 unit residences.

Additionally, for all new loan originations, Wachovia is discontinuing offering products that include payment options resulting in negative amortization.

“I think they’ve come to the stark realization that the product was risky,” said Kevin Stein, associate director of the California Reinvestment Coalition. “They’re bleeding.”

Wachovia shares fell 3.9% to $15.58 during afternoon trading on Monday. The stock has lost 70% of its value in the past year.