Monday, September 29, 2008

Wachovia and Option ARMs

As expected Wachovia is no more. Thanks in a big part to the Option ARMs that are to be shortly exploding and spiking up the foreclosure numbers to all time highs. We are working on an Option ARM post for later today, but first lets take a look at the Wachovia issue. Here is a Bloomberg article titled Wachovia Option-ARM Mortgage Losses May Force Merger. Lets take a look -

Wachovia's plight stems from the $24 billion acquisition of Golden West Financial Corp., a California lender that specialized in payment-option adjustable-rate mortgages. Former CEO Ken Thompson told shareholders in May 2007 the loans would help propel earnings to new highs. Instead, Wachovia now expects losses on 12 percent, or $14 billion, of the $122 billion option-ARM portfolio. Analysts at Fitch Ratings predict default rates on such loans packaged as securities may reach 45 percent.

``I don't see why Wells Fargo would take on $122 billion of option ARMs to work out after they've eschewed doing those kinds of loans over the past five years,'' said Nancy Bush, an independent bank analyst in Annandale, New Jersey. ``Citigroup isn't in a better position to bid than Wells. They've got their own problems.''

Wachovia is the largest holder of option ARMs, ahead of Washington Mutual Inc., the Seattle-based lender that collapsed last week. The mortgages, which the bank calls ``pick-a-pay,'' represent 73 percent of Wachovia's loan portfolio, according to its Web site.

Option ARMs allow borrowers to skip part of their payment and add that sum to their principal. Monthly payments increase after five years or once the loan balance reaches a predetermined limit, usually 110 percent to 125 percent. Introductory interest rates can be as low as 1 percent.

For the average option ARM borrower, payments will rise 63 percent, or by an additional $1,053 per month, when their rates reset, according to a Sept. 2 report by New York-based Fitch.
Think about those numbers - Wachovia had $122 billion in Option ARMs. The article does not state if that was at the original loan price or reflects the additional 10 to 25 percent increases that are allowed prior to the recast taking place. Either way that number is over 17% of the total bailout number. And most of these Option ARMs are heading one place - foreclosure.

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