diff --git a/lightningd/htlc_end.c b/lightningd/htlc_end.c
index 459525428..e082a1d9a 100644
--- a/lightningd/htlc_end.c
+++ b/lightningd/htlc_end.c
@@ -80,8 +80,10 @@ struct htlc_in *htlc_in_check(const struct htlc_in *hin, const char *abortstr)
 		return corrupt(hin, abortstr, "invalid state %s",
 			       htlc_state_name(hin->hstate));
 	else if (hin->failuremsg && hin->preimage)
-		return corrupt(hin, abortstr, "Both failed and succeeded");
-	else if (hin->failuremsg && hin->malformed)
+		return corrupt(hin, abortstr, "Both failuremsg and succeeded");
+	else if (hin->failcode != 0 && hin->preimage)
+		return corrupt(hin, abortstr, "Both failcode and succeeded");
+	else if (hin->failuremsg && (hin->failcode & BADONION))
 		return corrupt(hin, abortstr, "Both failed and malformed");
 
 	return cast_const(struct htlc_in *, hin);
@@ -107,8 +109,8 @@ struct htlc_in *new_htlc_in(const tal_t *ctx,
 	       sizeof(hin->onion_routing_packet));
 
 	hin->hstate = RCVD_ADD_COMMIT;
+	hin->failcode = 0;
 	hin->failuremsg = NULL;
-	hin->malformed = 0;
 	hin->preimage = NULL;
 
 	return htlc_in_check(hin, "new_htlc_in");
@@ -155,8 +157,8 @@ struct htlc_out *new_htlc_out(const tal_t *ctx,
 	       sizeof(hout->onion_routing_packet));
 
 	hout->hstate = SENT_ADD_HTLC;
+	hout->failcode = 0;
 	hout->failuremsg = NULL;
-	hout->malformed = 0;
 	hout->preimage = NULL;
 
 	hout->in = in;
diff --git a/lightningd/htlc_end.h b/lightningd/htlc_end.h
index d3e758785..7d8c497e5 100644
--- a/lightningd/htlc_end.h
+++ b/lightningd/htlc_end.h
@@ -32,11 +32,11 @@ struct htlc_in {
 	/* Shared secret for us to send any failure message. */
 	struct secret shared_secret;
 
-	/* If we failed HTLC, here's the message. */
-	const u8 *failuremsg;
+	/* If a local error, this is non-zero. */
+	enum onion_type failcode;
 
-	/* If it was malformed, here's the error. */
-	enum onion_type malformed;
+	/* Either a remote error, or local error if !(failure & BADONION). */
+	const u8 *failuremsg;
 
 	/* If they fulfilled, here's the preimage. */
 	struct preimage *preimage;
@@ -58,11 +58,11 @@ struct htlc_out {
 	/* Onion information */
 	u8 onion_routing_packet[TOTAL_PACKET_SIZE];
 
-	/* If we failed HTLC, here's the message. */
-	const u8 *failuremsg;
+	/* If a local error, this is non-zero. */
+	enum onion_type failcode;
 
-	/* If it was malformed, here's the error. */
-	enum onion_type malformed;
+	/* Either a remote error, or local error if !(failure & BADONION). */
+	const u8 *failuremsg;
 
 	/* If we fulfilled, here's the preimage. */
 	struct preimage *preimage;
diff --git a/lightningd/pay.c b/lightningd/pay.c
index 16c7161cc..3d26f5b85 100644
--- a/lightningd/pay.c
+++ b/lightningd/pay.c
@@ -79,41 +79,35 @@ void payment_failed(struct lightningd *ld, const struct htlc_out *hout,
 		    const char *localfail)
 {
 	struct pay_command *pc = hout->pay_command;
-	enum onion_type failcode;
 	struct onionreply *reply;
+	enum onion_type failcode;
 
 	wallet_payment_set_status(ld->wallet, &hout->payment_hash, PAYMENT_FAILED);
 
-	/* This gives more details than a generic failure message,
-	 * and also the failuremsg here is unencrypted */
+	/* This gives more details than a generic failure message */
 	if (localfail) {
-		size_t max = tal_len(hout->failuremsg);
-		const u8 *p = hout->failuremsg;
-		failcode = fromwire_u16(&p, &max);
-		json_pay_failed(pc, NULL, failcode, localfail);
+		json_pay_failed(pc, NULL, hout->failcode, localfail);
 		return;
 	}
 
-	if (hout->malformed)
-		failcode = hout->malformed;
-	else {
-		reply = unwrap_onionreply(pc, pc->path_secrets,
-					  tal_count(pc->path_secrets),
-					  hout->failuremsg);
-		if (!reply) {
-			log_info(hout->key.peer->log,
-				 "htlc %"PRIu64" failed with bad reply (%s)",
-				 hout->key.id,
-				 tal_hex(pc, hout->failuremsg));
-			failcode = WIRE_PERMANENT_NODE_FAILURE;
-		} else {
-			failcode = fromwire_peektype(reply->msg);
-			log_info(hout->key.peer->log,
-				 "htlc %"PRIu64" failed from %ith node with code 0x%04x (%s)",
-				 hout->key.id,
-				 reply->origin_index,
-				 failcode, onion_type_name(failcode));
-		}
+	/* Must be remote fail. */
+	assert(!hout->failcode);
+	reply = unwrap_onionreply(pc, pc->path_secrets,
+				  tal_count(pc->path_secrets),
+				  hout->failuremsg);
+	if (!reply) {
+		log_info(hout->key.peer->log,
+			 "htlc %"PRIu64" failed with bad reply (%s)",
+			 hout->key.id,
+			 tal_hex(pc, hout->failuremsg));
+		failcode = WIRE_PERMANENT_NODE_FAILURE;
+	} else {
+		failcode = fromwire_peektype(reply->msg);
+		log_info(hout->key.peer->log,
+			 "htlc %"PRIu64" failed from %ith node with code 0x%04x (%s)",
+			 hout->key.id,
+			 reply->origin_index,
+			 failcode, onion_type_name(failcode));
 	}
 
 	/* FIXME: save ids we can turn reply->origin_index into sender. */
diff --git a/lightningd/peer_htlcs.c b/lightningd/peer_htlcs.c
index 777d02d39..14161830b 100644
--- a/lightningd/peer_htlcs.c
+++ b/lightningd/peer_htlcs.c
@@ -78,16 +78,13 @@ static bool htlc_out_update_state(struct peer *peer,
 }
 
 static void fail_in_htlc(struct htlc_in *hin,
-			 enum onion_type malformed,
+			 enum onion_type failcode,
 			 const u8 *failuremsg)
 {
 	assert(!hin->preimage);
-	if (malformed)
-		assert(!failuremsg);
-	else
-		assert(failuremsg);
 
-	hin->malformed = malformed;
+	assert(failcode || failuremsg);
+	hin->failcode = failcode;
 	if (failuremsg)
 		hin->failuremsg = tal_dup_arr(hin, u8, failuremsg, tal_len(failuremsg), 0);
 
@@ -98,11 +95,11 @@ static void fail_in_htlc(struct htlc_in *hin,
 	if (!hin->key.peer->owner)
 		return;
 
-	if (hin->malformed) {
+	if (!hin->failuremsg) {
 		subd_send_msg(hin->key.peer->owner,
 			      take(towire_channel_fail_htlc(hin,
 							    hin->key.id,
-							    hin->malformed,
+							    hin->failcode,
 							    NULL)));
 	} else {
 		u8 *reply;
@@ -167,7 +164,8 @@ static u8 *make_failmsg(const tal_t *ctx,
 	case WIRE_INVALID_ONION_VERSION:
 	case WIRE_INVALID_ONION_HMAC:
 	case WIRE_INVALID_ONION_KEY:
-		fatal("Bad failmsg for %s", onion_type_name(failcode));
+		/* We don't have anything to add for these; code is enough */
+		return NULL;
 	}
 
 	log_broken(log, "Asked to create unknown failmsg %u:"
@@ -178,33 +176,26 @@ static u8 *make_failmsg(const tal_t *ctx,
 /* This is used for cases where we can immediately fail the HTLC. */
 static void local_fail_htlc(struct htlc_in *hin, enum onion_type failcode)
 {
+	u8 *msg;
+
 	log_info(hin->key.peer->log, "failed htlc %"PRIu64" code 0x%04x (%s)",
 		 hin->key.id, failcode, onion_type_name(failcode));
 
-	if (failcode & BADONION)
-		fail_in_htlc(hin, failcode, NULL);
-	else {
-		u8 *msg;
+	/* FIXME: Get update! */
+	msg = make_failmsg(hin, hin->key.peer->log,
+			   hin->msatoshi, failcode, NULL);
 
-		if (failcode & UPDATE) {
-			/* FIXME: Ask gossip daemon for channel_update. */
-		}
-
-		msg = make_failmsg(hin, hin->key.peer->log,
-				   hin->msatoshi, failcode, NULL);
-		fail_in_htlc(hin, 0, take(create_onionreply(hin, &hin->shared_secret, msg)));
-		tal_free(msg);
-	}
+	fail_in_htlc(hin, failcode, msg);
+	tal_free(msg);
 }
 
 /* localfail are for handing to the local payer if it's local. */
 static void fail_out_htlc(struct htlc_out *hout, const char *localfail)
 {
 	htlc_out_check(hout, __func__);
-	assert(hout->malformed || hout->failuremsg);
-	assert(!hout->malformed || !hout->failuremsg);
+	assert(hout->failcode || hout->failuremsg);
 	if (hout->in) {
-		fail_in_htlc(hout->in, hout->malformed, hout->failuremsg);
+		fail_in_htlc(hout->in, hout->failcode, hout->failuremsg);
 	} else {
 		payment_failed(hout->key.peer->ld, hout, localfail);
 	}
@@ -796,13 +787,16 @@ static bool peer_failed_our_htlc(struct peer *peer,
 	if (!htlc_out_update_state(peer, hout, RCVD_REMOVE_COMMIT))
 		return false;
 
-	log_debug(peer->log, "Our HTLC %"PRIu64" failed (%u)", failed->id,
-		  failed->malformed);
-	if (failed->malformed)
-		hout->malformed = failed->malformed;
-	else
+	hout->failcode = failed->malformed;
+	if (!failed->malformed)
 		hout->failuremsg = tal_dup_arr(hout, u8, failed->failreason,
 					       tal_len(failed->failreason), 0);
+
+	else
+		hout->failuremsg = NULL;
+
+	log_debug(peer->log, "Our HTLC %"PRIu64" failed (%u)", failed->id,
+		  hout->failcode);
 	htlc_out_check(hout, __func__);
 	return true;
 }
@@ -857,13 +851,13 @@ void onchain_failed_our_htlc(const struct peer *peer,
 static void remove_htlc_in(struct peer *peer, struct htlc_in *hin)
 {
 	htlc_in_check(hin, __func__);
-	assert(hin->failuremsg || hin->preimage || hin->malformed);
+	assert(hin->failuremsg || hin->preimage || hin->failcode);
 
 	log_debug(peer->log, "Removing in HTLC %"PRIu64" state %s %s",
 		  hin->key.id, htlc_state_name(hin->hstate),
-		  hin->failuremsg ? "FAILED"
-		  : hin->malformed ? "MALFORMED"
-		  : "FULFILLED");
+		  hin->preimage ? "FULFILLED"
+		  : hin->failcode ? onion_type_name(hin->failcode)
+		  : "REMOTEFAIL");
 
 	/* If we fulfilled their HTLC, credit us. */
 	if (hin->preimage) {
@@ -879,12 +873,12 @@ static void remove_htlc_in(struct peer *peer, struct htlc_in *hin)
 static void remove_htlc_out(struct peer *peer, struct htlc_out *hout)
 {
 	htlc_out_check(hout, __func__);
-	assert(hout->failuremsg || hout->preimage || hout->malformed);
+	assert(hout->failuremsg || hout->preimage || hout->failcode);
 	log_debug(peer->log, "Removing out HTLC %"PRIu64" state %s %s",
 		  hout->key.id, htlc_state_name(hout->hstate),
-		  hout->failuremsg ? "FAILED"
-		  : hout->malformed ? "MALFORMED"
-		  : "FULFILLED");
+		  hout->preimage ? "FULFILLED"
+		  : hout->failcode ? onion_type_name(hout->failcode)
+		  : "REMOTEFAIL");
 
 	/* If it's failed, now we can forward since it's completely locked-in */
 	if (!hout->preimage) {
diff --git a/wallet/wallet.c b/wallet/wallet.c
index 70619cd92..2a5cc68ac 100644
--- a/wallet/wallet.c
+++ b/wallet/wallet.c
@@ -901,8 +901,9 @@ static bool wallet_stmt2htlc_in(const struct wallet_channel *channel,
 	memcpy(&in->onion_routing_packet, sqlite3_column_blob(stmt, 8),
 	       sizeof(in->onion_routing_packet));
 
+	/* FIXME: These need to be saved in db! */
 	in->failuremsg = NULL;
-	in->malformed = 0;
+	in->failcode = 0;
 
 	return ok;
 }
@@ -936,7 +937,7 @@ static bool wallet_stmt2htlc_out(const struct wallet_channel *channel,
 	       sizeof(out->onion_routing_packet));
 
 	out->failuremsg = NULL;
-	out->malformed = 0;
+	out->failcode = 0;
 
 	/* Need to defer wiring until we can look up all incoming
 	 * htlcs, will wire using origin_htlc_id */