NEW YORK -- Admitting that its plunge into adjustable-rate mortgages has failed, Wachovia Corp said Monday it will abandon its emphasis on the home loans and instead focus on providing a wider array of loan products.
The fourth-largest U.S. bank became a dominant provider of "option" adjustable-rate mortgages when it paid $24.2 billion in October 2006 for Golden West Financial Corp, a Oakland, California-based lender and thrift.
Ninety-nine percent of Golden West's mortgage loans were option ARMs, which give borrowers a variety of payment options, including payment of less than the interest and principal due.
Wachovia preserved that percentage of so-called "Pick-a-Pay" mortgages after the merger and tried to maintain Golden West's standards for conservative underwriting. The nation's housing crisis got in the way.
"We're trying to tinker with the model to get it just right," Thompson said on a conference call with reporters. "It's clear to me that we will move to a mortgage company with a balanced product line."
Story Continues Below
He said the option ARM "will certainly be one of those products," and that Wachovia will be a "player" in a mortgage industry dominated by a few large banks. It was the seventh- largest U.S. mortgage lender in 2007, according to the newsletter Inside Mortgage Finance.
Pick-a-Pay mortgages were a big reason Wachovia posted a $350 million first-quarter loss, surprising analysts who on average expected a $900 million-plus profit. Wachovia set aside $2.83 billion for credit losses, including $1.1 billion for Pick-a-Pay mortgages.
The Charlotte, North Carolina-based bank is one of many U.S. mortgage providers to change its lending practices as home prices tumble and defaults soar.
"Loans are still available," said Lynn Reaser, a senior economist at Bank of America Corp's wealth and investment management unit, in an interview. "Homebuyers should expect to see standards as they might have expected four or five years ago."
She did not comment on Wachovia's plans.
CATASTROPHIC
Until Golden West, Thompson built a reputation for avoiding the bad acquisitions that marked his predecessor's run at First Union Corp, which bought Wachovia in 2001 and took its name.
"The performance of option ARMs has been catastrophic in the industry," said David Olson, co-founder and president of Wholesale Access in Columbia, Maryland. "Wachovia is doing better than its peers, but delinquencies are going up."
Wachovia said Pick-a-Pay problems were more severe in parts of California and Florida. It said the states account for $82.6 billion, or 68 percent, of the $121.2 billion of Pick-a-Pay loans in Wachovia's $170.1 billion mortgage portfolio.
But the average "FICO" credit score of Pick-a-Pay borrowers is only 664, below the average 734 on traditional mortgages.
And falling home prices have left the average ratio of loan size to home value at 78 percent for Pick-a-Pay mortgages, compared with 67 percent for traditional mortgages. A growing number of borrowers owe more than their homes are worth. Many, especially in California, are giving up, and walking away.
"It's hard to quantify, though, from the standpoint of how many of our defaults are just 'walk-away' and the reason is, people, they don't tell you," Chief Risk Officer Don Truslow said on a conference call.
IRRELEVANT GARBAGE
Wachovia expects to suffer $3.2 billion to $3.8 billion of credit costs for Pick-a-Pay this year and $2.4 billion to $2.8 billion in 2009.
To minimize future credit risk, it will require minimum 700 FICO scores and maximum 60 percent loan-to-value ratios on Pick-a-Pay mortgages in markets with large housing price declines. That may mean fewer borrowers, and less business.
"It is not as bad as subprime or Alt-A," said Olson, referring to other types of mortgages. "But a big part of the problem is that much of the lending is in California. They never saw it coming."
It can be said that Herbert Sandler, who with his wife Marion became billionaires running Golden West before selling it to Wachovia, did not see the problems either.
"They were worried about the option ARM," Sandler said on a May 8, 2006 conference call announcing the acquisition. "We are going to have a real estate crisis. They are selling at the high. I mean, that is a bunch of garbage. I have never heard anything so irrelevant in my life."
© Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.
Editor's note:
Why Oil Prices Will Go Much Lower After November Election. Best Ways to Profit Now.
The Recession's Silver Lining. What it Means for Investors.
Why the Dollar May Have Hit Bottom. New Actions to Take Now.
Four Reasons to Own This Medical Devices ETF
