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Monday, April 14, 2008

Wachovia on Walking Away

by Calculated Risk on 4/14/2008 06:36:00 PM

Here are some comments from the Wachovia conference call (hat tip Brian).

On "walking away":

Q: Kevin Fitzsimmons, Sandler O'Neill: Could you give a little more detail on -- you cited dramatic change in customer behavior or consumer behavior and that led to the decision to cut the dividend, increase capital and so just wondering if you could be particular by -- I'm assuming it's California, but are you talking about people walking away from houses and if you can give any specific examples, thanks.

Ken Thompson, Wachovia Corporation - CEO: I'll let Don talk specifically but I would just say that what we are seeing is that when equity in the home approaches zero, behavior changes. And that's what the model tries to do is to then take that behavior along with house price depreciation and factor that into future losses. Don?

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer Ken, that's exactly right. And Kevin, it's just this pattern almost that somewhere -- I don't know where the tipping point is, but somewhere when a borrower crosses the 100% loan to value, somewhere north of that and they presumably run into some sort of cash flow bump, whether it's reduced income or kind of normal things in life that have created past dues before, their propensity to just default and stop paying their mortgage rises dramatically and I mean really accelerates up and it's almost regardless of how they scored, say, on FICO or other kinds of character, credit characteristics.

It's difficult on the walk-away part of the question, that is going on, clearly and there's lots of evidence of that in the market. 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. And so we do our best to try to gauge but that portion of the defaults is just kind of hard to quantify. But that behavior is going on. We're seeing in our portfolio the most significant declines and defaults activity in California and of course it's the largest concentration for us in the pick a payment portfolio by far. What I don't know and I guess we're just learning over time is whether the same sort of behavioral trends and patterns will spread to other markets or be observed in other markets at the same pace that they have been in California. But in essence, it built our correlations in the model to assume that they do.

Ken Thompson, Wachovia Corporation - CEO: I might just add that you also see evidence of what Don is talking about if you look across our industry and look at credit statistics on equity loans and equity lines. Because there, at many banks, you're seeing those loans going obviously above 100% loan to value and you're seeing dramatically increasing default rates and losses.”
On REOs and outlook for the housing market:
Truslow (Risk Officer): “[W]e are focused in our efforts to quickly move foreclosed properties related to the pick a pay portfolio as we've talked about before and during the quarter, we took in about 1100 homes and the team did a great job of getting over 800 sold during the quarter in a tough time of the year and in a tough market. So we ended the quarter with just over 900 homes in inventory originated through the pick a payment channel and part of this aggressive action basically served to provide the severity that we recognized on average in the first quarter up to about 32% from about 24% in the fourth quarter and I would just also remind people that included in those severities, we have accounted for basically the disposition cost such as the brokerage fees and even costs that are normally accounted for in period costs such as mowing the grass and fixing up the homes.”

“... the overarching assumption here is that we're about halfway through the decline in housing prices with the trough expected to occur sometime around the middle of 2009.”
On the dramatic change in outlook and "shadow" inventory:
Q: Jonathan Adams, Oppenheimer Capital - Analyst: [I]f I look on page 19 of your presentation, it strikes me that there's nothing in the 90 day past due trends that would justify the kind of change that you have made in your outlook. You can pick a different -- a number of different metrics, whether it's the dividend in suggesting that over a broad range of scenarios it wouldn't need to be cut and then five or six weeks later coming to a different conclusion, or it's some other metrics as well. But it just strikes me as difficult to understand how management's view of the environment has changed so dramatically.

Don Truslow, Wachovia Corporation - SEVP, Chief Risk Officer: Well, I guess -- this is Don. One thing that doesn't show on the chart is the level of cures between 90 days and further severities and defaults have been dropping. The severities in the market place when we take a house back, it takes a lower price to get homes sold and our outlook is -- and as I think everybody has been reading, there is an expectation that there's a broad accumulation of foreclosed properties that haven't hit the market yet and perhaps even some shadow foreclosures that haven't emerged as yet. So our concern, looking forward is that -- and again, what we're beginning to see more evidence of and sense more of in the first quarter is that conditions are going to continue to get tougher and there's an overhang of inventory out there that is going to be costly for the industry to work through.

So on the default rates at 90 days, not a dramatic change in pace but it's more the role rates, the propensity to go all the way to foreclosure, the higher severities taken on disposing of properties and then the, just further understanding and recognition that there is an inventory of foreclosed properties building out there that are eventually going to have to get dealt with.
All emphasis added.