YOU ARE HERE: LAT HomeCollections

Wachovia tries to shake off doubts

Despite turmoil in mortgage markets, it says its takeover of lender Golden West has been a success.

August 24, 2007|From the Associated Press

CHARLOTTE, N.C. — Wall Street is still not convinced that Wachovia Corp.'s $24-billion purchase last year of one of the country's largest mortgage lenders was a smart bet. But bank executives say that the doubters are wrong and that the takeover is working out just fine.

Shares in the nation's fourth-largest bank slumped after its May 2006 acquisition of Golden West Financial Corp. of Oakland and moved even lower in recent weeks as turmoil in mortgage markets intensified. Golden West operated 285 retail banking facilities under the World Savings Bank name in California and nine other states, and its lending was focused on adjustable-rate mortgages.

Never mind the delinquencies and defaults that contributed to thousands of job cuts and bankruptcy filings at dozens of mortgage lenders around the country, say top executives of Charlotte, N.C.-based Wachovia.

"We set out to build our franchise with the fastest-growing market in the West," Wachovia's Chief Financial Officer Tom Wurtz said. "We have been successful."

Other than temporarily suspending making home loans through outside brokers to those with slightly better credit than sub-prime borrowers, Wachovia hasn't made any radical changes at the onetime Golden West locations. What was once Golden West's deposit base has grown 26% to $75.3 billion since the deal was announced, giving the bank a pot of relatively inexpensive funds that can be deployed elsewhere to grow Wachovia's other lines of business.

In Wachovia's second quarter, the addition of Golden West's mortgage business helped drive a 24% jump in profit. This week, Wachovia's board approved a 14% increase in the company's regular quarterly dividend to 64 cents a share.

But the trouble in the mortgage market has also caused "a little pain," Wachovia Chief Executive Ken Thompson acknowledged to analysts last month. The bank reported a sharp increase in unpaid mortgages and loan charge-offs in the second quarter and earmarked $179 million to pay for future credit losses, about three times more than the company set aside a year earlier.

"It's hard at this point to guess the significance of this," Wurtz said. "There have been a vast amount of competitors that have gone out of business or changed their strategies. No question [the current environment] is going to continue to put pressure on the housing market."

Golden West was known for its rigorous underwriting standards, which isn't surprising to anyone who followed the careers of former co-CEOs Marion and Herb Sandler, mom-and-pop types who were among the lone voices railing against the excesses that led to the savings and loans crisis in the 1980s.

In recent years it specialized in what's known as option ARMs, in which the interest rate changed monthly and consumers had the option to defer interest payments. It also assumed all the ARM lending risk by keeping those loans in its inventory. The company sold most of the fixed-rate mortgages it originated, as well as ARMs that customers converted to fixed-rate loans.

Before selling out to Wachovia, Golden West reported most of the deferred-interest loans in its portfolio had limited credit risk because the homes backing the loans had appreciated in value. The company touted its careful monitoring of deferred-interest borrowers and said that although deferred interest had grown to $915 million as of June 2006, it still made up less than 1% of its portfolio.

As part of Wachovia, the deferred interest on the books soared to $2.3 billion by the end of June. That's still just 1% of the bank's outstanding residential mortgage portfolio, which is worth more than all the bank's commercial loans combined. It's been booked as earned income; should an increasing number of loans go bad, Wachovia will have to recast its past accounting.

"There's not an immediate crisis, I would say," said Frederick Cannon, an analyst with Keefe, Bruyette & Woods who is one of several analysts who cite Golden West as a shining example of how option ARMs can be structured so they work well for both borrowers and lenders.

The flexibility of option ARMs is attractive to many buyers, but critics say they pose big risks for borrowers and lenders if the value of homes declines at the same time the mortgage balance is rising.

So far, though, fewer than 4% of the option and interest-only ARMs nationwide are delinquent, compared with 14% of sub-prime mortgages, according to research firm First American Loan Performance. Sub-prime loans are those offered to borrowers with risky credit histories.

With the Sandlers out of the picture, Wachovia has started making all of its products available in the former Golden West branches, including small-business loans and wealth management services. A majority of the branches will operate under the Wachovia name by the end of the year and eventually all will offer the full suite of the bank's products.

The bank doesn't include in its annual report the enormous detail Golden West provided on its mortgage operations, but Wurtz said in the context of the combined operation it was no longer needed.

"Golden West dedicated a fair amount of their 10-Q [quarterly report] to a boilerplate of their product," Wurtz said. "If we have something new to say, we will include it."

Thompson told analysts last month that looking ahead one to two years, "we're going to be very happy we did this deal."

The initial unease among investors hasn't fully subsided. Wachovia shares remain off their pre-deal high of just under $60. But analysts said that could be a result of overall worry on Wall Street, rather than a commentary on Wachovia's fortunes.

"There's no question that Wachovia is a survivor," said Gary Townsend, an analyst with Friedman, Billings, Ramsey & Co., who rates Wachovia as "outperform."

Los Angeles Times Articles