Brian posted this on SDLookup and I had to post it here in case some of you haven’t read/seen it. Funny.
NEW YORK -(Dow Jones)- Wachovia Corp.’s (WB) controversial Pick-a-Payment mortgage program lets borrowers choose between four monthly payment amounts. Unfortunately for Wachovia, these “Pick-a-Pay” borrowers are increasingly inventing a fifth choice: Not making mortgage payments at all.
The Charlotte bank reported on Monday a $350 million loss during this year’s first quarter, due in large part to stunningly high losses within its $121 billion-plus book of flexible-payment, or Pick-a-Payment, mortgages – a legacy of Wachovia’s ill-conceived 2006 purchase of Golden West Financial.
On Monday, Wachovia conceded total losses from Pick-A-Pay loans could eventually amount to a staggering 7% to 8% of the loans’ combined value, a range of $8.5 billion to $9.7 billion – meaning the bank, and its shareholders, will likely be coping with Pick-a-Pay losses for years to come.
Among Wachovia’s book of Pick-a-Pay loans, “nonperforming assets” – or soured loans – “grew 309.8% year-over-year,” compared with an annual bad-loan growth rate of 119.7% for Wachovia’s traditional mortgages, said Byron MacLeod, an analyst with Gradient Analytics, in a note to investors.
“To be sure, neither figure is good,” wrote MacLeod, “but the Pick-a-Payment loan portfolio appears to carry substantially greater risk.”
Losses from Pick-a-Pay loans totaled $1.1 billion in the first quarter alone, said Wachovia, accounting for more than one-fourth of the $4.1 billion in asset write-downs and loan-loss provisions that Wachovia reported.
In its earnings report, Wachovia announced it would raise $7 billion from the sale of common and preferred stock in order to offset present and future losses that Wachovia says will continue racking up through 2009.
Almost 60% of Wachovia’s current Pick-a-Pay mortgages were written in the now- tanking California housing market, which is also the former stomping grounds of Golden West Financial Corp., the lender that Wachovia acquired for $25 billion in 2006.
Wachovia acquired Golden West at the height of the real-estate boom in order to quickly expand its nontraditional home-lending business, a once-lucrative industry that provided mortgages to riskier buyers by using less stringent underwriting guidelines.
That deal gave Wachovia the very same “option-ARM” lending business that’s now at fault for so many of Wachovia’s losses.
According to Wachovia’s Web site, Pick-a-Payment loans are fixed- and adjustable-rate loans that allow borrowers to make a range of monthly payment amounts, including partial-interest payments that add the unpaid interest to the homeowner’s loan balance. Wachovia has taken fire from consumer groups and analysts for offering the products, which critics say encourage borrowers to fall behind in repaying their mortgages, leading to more frequent delinquencies and foreclosures.
Data released Monday day gives credence to those critical claims: According to Wachovia, more than four of every 10 Pick-a-Payment mortgage holders, about 41%, have elected to pay the minimum payment allowed in each of the past 12 months.
This trend bodes very poorly for Wachovia’s performance over the next few years since housing values in most regions are falling, leaving borrowers with less equity – and banks with less collateral to rely on when borrowers stop paying. Wachovia said it projects housing values will fall another 6.8% nationwide before hitting bottom in “mid-2009.”
The length and severity of that decline is crucial, since borrowers who have no home equity, or negative home equity – that is, when a homeowner’s mortgage balance equals or exceeds the home’s value – are quitting their mortgages en masse, choosing to face the consequences of foreclosure rather than continue to fund a home whose value is falling.
“When equity in the home approaches zero, behavior changes,” said Ken Thompson, Wachovia’s chief executive.
Much to Wachovia’s chagrin, even homeowners with high credit scores – once thought to carry little risk of foreclosure – are walking away from their mortgages.
In February, Don Trunslow, Wachovia’s chief risk officer, told analysts that although a homeowner’s FICO score “is a predictor” of whether a homeowner will keep current on their mortgage,” it appears that a…borrower feeling like they’ve lost equity in their home seems to be an even bigger driver of whether they actually default.” He later called the trend “unprecedented,” adding: “I don’t understand it.”
If other bank officials don’t understand the new psychology, say analysts, they need to get smart – and fast.
In recent years, FICO scores – or complex credit-risk rating scores produced by Fair Isaac Corp. (FIC) in Minneapolis – have come to be lenders’ most popular tool in evaluating mortgage applicants’ likelihood of defaulting on their mortgage payments. In fact, during the boom times, mortgage applicants with sky- high FICO scores were often approved for a mortgage automatically by lenders’ underwriting software.
That rush to approve could mean even more foreclosure trouble among highly- rated mortgage borrowers lies only a short jog down the road.
“Loans were made not locally, but centrally, with little underwriting expertise beyond the increasingly unreliable FICO score,” according to Meredith Whitney and Kalmon Chung, banking analysts at Oppenheimer & Co., a unit of Oppenheimer Holdings Inc. (OPY), who wrote their comments last month in a note to investors.
Wachovia said it has tightened its underwriting standards considerably, and now writes Pick-a-Pay mortgages only to well-qualified borrowers. In fact, to the dismay of many analysts, Wachovia has repeatedly said that it remains enthusiastic about the loans, and will even expand the sales force that sells the product.
What’s more, reports earlier this year confirmed that Wachovia pays richer commissions to employees who sell Pick-a-Payment loans, an extra incentive that Wachovia says it pays because the loans require more time to explain.
Some analysts say Wachovia’s urge to write more Pick-A-Payment loans is hardly a safe risk-management decision.
“In the very short term, this strategy could help generate higher loan origination fees and…boost profits slightly,” MacLeod said. “Over the longer term, however, the balance sheet risks could be substantial.”
Wachovia shares closed Monday down $2.26, or 8.1%, to $25.55, on volume of 185 million compared with average daily volume of 33.7 million. In recent after- hours trading, shares were down to $25.50.
-By Marshall Eckblad, Dow Jones Newswires; 201-938-4306; marshall.eckblad@ dowjones.com
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