Lower rates slowing defaults, Wachovia says
Posted on Thursday, February 14, 2008
Wachovia Corp., the fourthlargest U. S. bank by assets, said investors are exaggerating concern about the company’s home-loan defaults as lower interest rates reduce pressure on borrowers.
Mortgages still contribute “significant profits” at the Charlotte, N. C.-based bank and will continue making money even if losses from bad loans quadruple from current levels, Chief Risk Officer Donald Truslow said in a conference call with analysts Wednesday.
Lower interest rates are curbing payment increases on adjustable-rate mortgages, which will reduce delinquencies and charge offs, Truslow said. While losses will mount this year, Wachovia expects lower charges than industry peers, he said.
U. S. regulators and banks announced new steps this week to slow foreclosures, which are at record highs. Wachovia has declined 40 percent in 12 months of New York trading as nonperforming mortgages — home loans that borrowers stopped repaying — more than doubled. Most of those were made by Golden West Financial Corp., acquired for about $ 24 billion in October 2006 when home prices were near their peaks.
Wachovia gained 22 cents to $ 35. 05 in New York Stock Exchange composite trading.
Treasury Secretary Henry Paulson and lenders including Citigroup Inc. and Bank of America Corp. announced plans this week for a 30-day freeze on some foreclosures while loan modifications are considered.
Golden West’s main business was making “option adjustablerate mortgages” that let borrowers make lower mortgage payments from month to month, deferring interest payments until future years.
Some banks add those payments onto the unpaid principal, swelling the overall debt. Regulators are concerned that such loans make defaults more likely in the months ahead.
Wachovia said Option ARM loans that were more than 90 days late as of Dec. 31 rose to $ 2. 8 billion from $ 675 million a year earlier. The sum was about 2. 3 percent of the $ 120 billion portfolio.
Option ARM loans increased to 8. 9 percent of the almost $ 3 trillion in U. S. home loans made in 2006, from 8. 3 percent in 2005, according to an estimate by industry newsletter Inside Mortgage Finance. Originations of option ARMs fell 50 percent during the first nine months of last year, the newsletter says.
Two-thirds of Wachovia’s Option ARM borrowers paid the least amount possible in December, little changed from past practice, Truslow said.
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