Wachovia Follows WaMu, Bank of America Down, Down, Down
- 19.10.2007
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Wachovia is the latest bank to take massive write down charges for loan loss reverses relating to mortgage lending - adding $1.3 billion to the write down pile in what will be remembered as one of the worst weeks for banks for a long time to come. From Reuters:
Wachovia Corp posted on Friday a 10 percent decline in third-quarter profit, missing forecasts, as the fourth-largest U.S. bank suffered $1.3 billion of write-downs at its investment banking unit.
The drop was the first in six years. It concluded a dismal week for large U.S. banks, which have been battered by increases in bad loans and capital market disruptions that resulted in losses on mortgages and other kinds of debt.
Profit fell 57 percent at Citigroup Inc and 32 percent at Bank of America Corp. It rose 2 percent at JPMorgan Chase & Co and 4 percent at Wells Fargo & Co. Results and outlook for all but JPMorgan disappointed investors.
One thing to keep an eye on is Wachovia’s performance over the next 24 months. Wachovia acquired World Savings last year. World is a large portfolio-lending Option ARM bank that makes Option ARM loans to worse credit risks than other Option ARM players. While most Option ARM lenders require 660 minimum FICO scores World has made a living on writing Option ARM negative amortizing loans to people with 640 credit scores. This could cause a lot of problems for World Savings and Wachovia as these Option ARMs reset to fully amortized payments over the next 24-36 months.
While World Savings may have hedged their bets by being ultra-conservative on appraised value; the latest downturn in housing prices (particularly out west) may end up much greater than even the most conservative predictions of 5 years ago. If these Option ARMs start going bad (which there is no doubt they will) look for Wachovia to suffer more than the others due to their newly acquired exposure via World Savings.
