Sunday, December 28, 2008

Wells Fargo / Wachovia Option Arms

The December-2008 Wells Fargo Investor Presentation had an interesting table on page #19

The key content was:
WB - Pick-a-Pay ARMs
  • $122bn outstanding:
  • 58% secured by California real estate
  • Weighted average LTV at origination 76%
  • 80%+ stated income with average 675 FICO
  • Recast at 125% loan balance or 10 years minimizes contractual payment shock
  • Remaining losses after purchase accounting to peak in 2010
  • Loss mitigation program appears to have significant potential. Life of loan loss projections do not incorporate any loss mitigation program impacts
  • Life of loan loss estimated at $36bn = 29% of outstanding
Note: WB = Wachovia Bank & "Pick-a-Pay ARMs" = "Option ARM"

Now considering that according to California has had 6 consecutive quarters of declines in housing values with Q3-2008 dropping ~21% in the last year. That means there are plenty of Californians with Option-ARMs that have zero (or negative) equity in there homes, and for the loans that Wells Fargo acquired via Wachovia, their losses "should" crest in 2010.

Now only time will tell if the loan loss estimates ($36 billion / 29% of WB's outstanding Option-ARMs) is conservative enough)

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