Wachovia Hints at What's in Store for Wells Fargo

Wachovia’s Q2’08 conference call will likely be its last before Wells Fargo (WFC) takes it over. It is useful in highlighting what Wells will have to contend with after the merger. Kenneth Phelan, Wachovia's (WB) Chief Risk Officer is the speaker:

On Alt-A mortgages: 

In our… $1.95 billion CIB [corporate and investment bank] non-branch [mortgage loan] portfolio…  NPAs [non-performing assets] were $333 million at the end of the quarter, up $71 million quarter over quarter, and charge-offs were $48 million to 9.53% of average loans. 

On home equity loans:

Traditional home equity [loan]… NPAs are up 25 basis points since the second quarter ’08… net charge-offs are up $4 million or 2 basis points.

On its portfolio of repossessed homes: 

There are nearly 2,100 REO/REJ properties with an average time to sale of 66 days and 2008 year-to-date severity is 38% including selling costs. 

On subsidiary Golden West’s liabilities [Wachovia acquired California lender Golden West for $24 billion in 2006]:

The Golden West Pick-a-Pay portfolio… consists of 438,000 loans with a large concentration in California… NPAs are up $1.9 billion and charge-offs are up $302 million since the second quarter 2008.

On $77 billion of Pick-A-Pay or Option ARM loans on their books:

…In July we began an aggressive customer outreach beta program… primarily focused on approximately $77 billion of Pick-a-Pay loans that we believe may be eligible for refinance under FHA guidelines.

[Note: It appears that the $77B is only the part of the portfolio that they think can be refinanced through FHA.]

 

On loan loss reserves:

[There’s] a $3.4 billion reserve build for [Golden West's] portfolio, reflecting an expected cumulative loss of approximately 22% over the remaining life of the portfolio…

[In] our [updated] reserve model… 30% of the increase in cumulative loss output is driven by updated actual experience in our portfolio and 70% is attributable to our views on continued home price depreciation.

On commercial real estate and rising loan loss reserves:

“Commercial NPAs, excluding REFS, were up $133 million in the quarter, reflecting four large credits tied to the consumer spending and residential construction-related sectors…  Allowance [loss reserves –Ed.] as a percentage of commercial loans increased 6 basis points quarter over quarter to 1.35%.

On residential-related commercial loans:

Our residential-related exposure [ended the] quarter at $10.9 billion. The residential component of the portfolio is certainly most at risk and was the driver of the performance in the quarter, accounting for 81% of the NPAs and 75% of the charge-offs.

We do anticipate weakness in this portfolio to escalate with worsening of the broader economy.

 

Comments

[Ishortyou:]

most of the reported write down came from run on the bank from retail and small businessese, other than that the losses came not that far off as expected. They can remediate their banking book of business by getting rid off the bad loans under the government program.

2008 Oct 23 05:19 AM

[billddrummer:]

Hi Judy,

Great job as always. Thanks!

I found a link you might be interested in. Apparently, foreclosures in the Sacramento area have declined since last month, possibly signaling a bottom in that market:

www.bizjournals.com/sa...

Now, that doesn't mean to me that everything is automatically rosy. But it points to a trend that may be developing in the harder hit states--the worst may be over.

All the best,

Bill

2008 Oct 23 06:37 PM

[billddrummer:]

Hi, Judy,

A followup comment:

As we noted previously, Las Vegas sales are skyrocketing as prices have fallen. The rate of foreclosures there hasn't slowed down yet, but I expect it to by early next year.

If the government keeps talking about saving the housing market, they might find that by the time something comes out of Capitol Hill, the market will have corrected itself.

Just a thought.

Bill

2008 Oct 23 06:39 PM

[SA Editor J...:]

Hi Bill,

Since California was one of the first to get hit, do you think it presages a bottom for all?

2008 Oct 24 02:17 AM

[MichaelZZ:]

Resolution for Distressed “Reset” Mortgages:

Concepts:
1) One size does not fit all, i.e., each situation should be tailored for the borrower.
2) Responsibility should be resolved between the lender and the borrower.
3) No taxpayers’ funds should be involved.
4) A mortgagor must sign a document, subject to perjury, whereby the mortgagor states
that he or she was unaware that the interest rate was to be reset.

The mortgagor has the option of the following alternatives:
The mortgagor will be allowed to wind the clock back to the time prior to the purchase
with the information that the mortgage will be reset at the end of five years at a rate to
be determined and explained that the rate may be significantly higher than the rate
offered at the time of purchase.
1) Can agree to the purchase and will remain with the current situation.
2) Can refuse the 5/25 loan as offered and opt for a conventional fixed rate loan
at a rate of the then-current rate, e.g., 7.25% and will have all payments adjusted to reflect that loan.
3) Can terminate the potential purchase.
4) Can remain in the property, while making the same payments. The lender or agent thereof will be given a lien on the property that will be equal to the accumulation of the difference between the contractual payments and the payments being made. Further, interest will accrue on this differential at the contractual rate.

If the mortgagor opts for option 3), and there is no significant evidence reflecting that the
rate reset information was given prior to entering into the mortgage, the mortgagor will
vacate the premises and the mortgage will be cancelled, with no further obligation.
Any other encumbrance upon the property will be the responsibility of the mortgagor.
Further, the mortgagor will be responsible for any damages done to the property.


One of the most critical factors is the business model of a CountryWide negotiating mortgages, and then having them bundled and sold as securities. That "model" stimulated the numbers, since the negotiators were no longer involved with these mortgages.
The logistics of my idea would be to have the funds consisting of two pieces (one, the payment from the mortgagor, and the second, the augmented payment from the "negotiator", who will hold the 2nd) and the total would be paid to the "security" as a whole payment.
This would place the responsibilities where they should be, on the mortgagor and on a "CountryWide", i.e., the negotiator.
I would have argued this concept during the negotiations between the various AG's and Bank of America regarding the CountryWide resolution. I think the cost would be much less than the eight billion dollar settlement
If these logistics require some tweaking, so be it.

Michael Z.
[e-mail]

2008 Oct 24 08:29 AM

[billddrummer:]

Hi Judy,

Thanks for reading my posts. I appreciate the opportunity to share my opinions with you, and with others.

I believe that's absolutely right. There have been signs of recovery in the Inland Empire (Riverside County and its environs) over the past 2 months, as prices have fallen to the point where median homeowners can purchase. Now, in my view, there's still an inventory overhang, but the good news is that fewer homes are coming on the market than are being sold. As the inventory gets worked off, prices will stabilize.

As we've seen, the 'bottom' is defined differently, based on where you're looking. Las Vegas and Phoenix seem to be closer to it than southern CA. However, the signs are encouraging there as well.

But I am concerned about the volume of Option ARMs written in those areas, which may result in a 'double-dip' of new foreclosures as rates reset and borrowers find they can't afford the new payments or refinance out of them (because values have dropped so much).

If the government wanted to keep that from happening, it could target Option ARM borrowers who could afford fixed rate payments, but not the newly indexed ones. Issue guarantees on the overadvanced portion of the loans, and rewrite the mortgages at fixed rates. That way, those borrowers could remain in their homes and continue with affordable mortgage payments while the market recovers.

Otherwise, there will be another glut of neglected, abandoned properties, foreclosures, and more homes entering the market, just when inventories get 'balanced.'

More pain for another 2-3 years.

All the best,

Bill

2008 Oct 24 01:29 PM

[sickofthehype:]

The actual amount of Option ARMs is not as large as most people might think. The media portray these as yet 'another wave' of foreclosures - however, these borrowers are much more creditworthy than 'subprime' ones, and the wave might just be a small one.

2008 Oct 25 01:17 AM

[billddrummer:]

To sickofthehype,

The amount of Option ARMs isn't the problem, in my view. It's the amount of leverage created when those loans were made (typically at much higher leverage multiples than subprime). The securities issuers liked to bundle Option ARMs with lower quality credits to equalize the risk profile for the newly issued securities, figuring that the loss profile would be much less than on subprime loans. And then, the entire issue would be graded AAA.

Trouble is, with just a small number of ARMs in the mix, if those began to default at higher-than-expected rates, the impact would be magnified because of the increased leverage.

Sort of like the rotten apple spoiling the whole barrel.

2008 Oct 28 11:50 AM