Friday, October 19, 2007

Wachovia Conference Call Comments

by Bill McBride on 10/19/2007 11:26:00 AM

Wachovia conference call comments (from Brian):

"Much of the increase in non-performing loans and the losses are on loans in certain California markets that have experienced fairly steep declines in prices. Our delinquency call centers report that the primary reasons for borrowers struggling to pay are three fold. First is reduction of income or underemployment. Second is the assumption of additional debt from lenders other than Wachovia and thereby changing the credit profile from the origination of the loan. And third unemployment. We have seen some uptick in unemployment in some of these markets. Let me also point out that while the average current estimate at the appraised value of non-performing loans is 77%, there is $380 million in balances out of the total $1.7 billion where the current estimate of value is over 90%. Actually on that pool, averages in the high 90s, again reflecting the dramatic decline of house prices in certain markets. These particular loans have a low loan to value of just under 80% at origination. It's interesting to note here that problems in these markets, really for all lenders seem to be across the board without originating FICO, the type of loan or the property. Given our outlook for continued weakness in the housing market and possibility for slow income consumer sector, we anticipate loans on consumer mortgage book continue to increase over the next few quarters and that losses will be up albeit fairly modest charge operates. To manage the increase in loans in foreclosure, we have significantly increased our staff responsible for handling Oreo properties and working with delinquent borrowers. Prepare the property to sell and sometimes choosing to maybe take a somewhat higher loss on that sale rather than risk holding out for a top dollar opportunity that may or may not come down the road.” emphasis added
Note that Wachovia is seeing rising unemployment - already - as a factor in delinquencies. But the most important comment is that the problem loans are: "across the board without originating FICO, the type of loan or the property".

Across the board!

On Commercial RE portfolio:
“The commercial real estate portfolio continues to perform very well overall. Loan secured with income producing property continues to enjoy solid underlying fundamentals with favorable vacancy rates and cash flows. As we have noted, probably on the last couple of calls, the portion of the commercial real estate portfolio connected to housing is experiencing an upward trend in criticized assets higher charge-offs and non-performs. While these loans have generally performed well overall and the charge-offs and total real estate financial services portfolio, we're only $3 million in the quarter, we do anticipate further softening and have recently undertaken a thorough review of commercial real estate loans. Nearly all of these loans are on a with-recourse basis. We are and will be moving aggressively to work with borrowers to shore up as best we can. We believe credit costs will be rising, we believe the deterioration will be manageable”
CRE sounds OK so far.

Here’s what they had to say about the marks in their CDO portfolio:
“Next line addresses other structured products [Total of $438MM]. Here we have the marks on warehouse positions and trading inventory, both of which we hold in trading portfolios. This includes the positioning Ken referred to in reference to sub prime mortgage exposure and AAA rated securities. $308 million is associated with sub prime securities [Their slides say $347 of the mark was related to subprime of which $308 was AAA subprime]. Basically there, we never would have expected that you see AAA securities trade so far so quickly from par.”emphasis added
They were later asked if they were happy with their risk management:
“And you know, we'll change the way we do some things. I would say that as we look at results, I think the biggest disappointment for me is that of those $1.3 billion end marks, we had about $300 million, in losses on AAA sub prime paper in trading desks and inventory. And the thing that disappoints me about that, we avoided it in our origination efforts and avoided it in, for the most part in our securitization efforts. So frankly, I think we had a little bit of a break down in having AAA sub prime in some of our portfolios we took losses on. I think it is amazing that we could take $300 million of losses on AAA paper. We didn't expect that that paper could degenerate that fast, with that kind of swiftnessemphasis added
Comments about the general credit environment:
As we talked to companies, September, I think you mentioned this too, was a particularly weak month for credit and is that trend, as you see it in October, about the same? Would you say it's slowed or accelerated?
"Still kind of early in the month, but I would say that the trends we saw late August and September, you know, halfway through this month are about the same. I wouldn't say they've accelerated, but they haven't backed off either."