wabuffo

Wells Fargo: The Good, the (Not Too) Bad and the Ugly

Bapcha said "Has $68.2 billion in mortgage backed securities on its books [June 30, 2008], with net unrealized losses of a billion dollars. These will go down in value to $62.2 billion [with $7 billion in unrealized losses] if the interest rate increases by 200 basis points. Conversely, these will be valued at $72.4 billion with net unrealized gains of $3.2 billion if the interest rate decreased by 200 basis points."

$46B of these MBS are Fannie/Freddie paper and are held to maturity and actually have been marked up vs. cost as per Note 4. of the 10-Q.

The remainder are WFC's holdings of AAA-prime ABS bonds from non-Federally guaranteed CMOs. Defaults on prime paper are low, and it looks like WFC is holding the senior tranches which get paid first and are unlikely to default. Since WFC holds this paper to maturity, I'm not sure how relevant the mark-to-market is.

wabuffo

Wells Fargo: The Good, the (Not Too) Bad and the Ugly

Bapcha said "HELOC portfolio of $83.8 billion is defaulting at the rate of 3.46% annualized as opposed to 1.36% annualized for the remaining core portfolio."

I think you misread this in the 10-Q. Its not the total HELOC portfolio that is defaulting at 3.46% but a portion of it.

According to the 10-Q: "We segregated into a liquidating portfolio all Home Equity loans generated through the wholesale channel not behind a Wells Fargo first mortgage, and all home equity loans acquired through correspondents. While the $11.1 billion of loans in this liquidating portfolio represented about 3% of total loans outstanding at June 30, 2008, these loans experienced a significant portion of the credit losses in our $83.8 billion Home Equity portfolio, with an annualized loss rate of 3.46% for second quarter 2008, compared with 1.36% for the remaining core portfolio."

So $11.1 B of HELOC loans not originated by WFC and connected to WFC prime mortgage (such that WFC has both the first and second) are defaulting at 3.46%. The remaining $72.7B of WFC HELOCs are defaulting at just 1.36%.

Perhaps you can now move this to your "The Good" section as WFC's HELOC performance is much better than their peers.

wabuffo