Wells Fargo has $83 billion in home equity exposure

In Moody’s affirmation of Wells Fargo’s Aaa credit rating the rating agency pointed to the health of Wells Fargo’s $83.68 billion home equity portfolio as a key driver in the company’s rating. If this portfolio should see degradation then the bank’s rating could suffer, said Moody’s in a press release.

From Moody’s press release about Wells Fargo’s credit rating:

MUMBAI, Apr. 18, 2008 (Thomson Financial delivered by Newstex) — Moody’s Investors Service said Wells Fargo & Co. (NYSE:GWF) (NYSE:JWF) (NYSE:WSF) (NYSE:WPF) (NYSE:WFC) has avoided the market pitfalls that plagued its peers but added that key rating drivers still center on the credit performance of its $83.68 billion home-equity portfolio and its capital trends.

Currently, Moody’s said the credit performance of the portfolio is within its broad expectations.

Moody’s rates WFC’s senior debt at the holding company ‘Aa1.’ The bank’s financial strength rating is ‘A’ and its deposits are rated ‘Aaa.’ The rating outlook is stable.

‘Nevertheless, we continue to revisit our loss estimates in light of the historically weak housing market, especially in California where WFC has a $31 billion exposure,’ the rating agency said.

How are the home equity loans holding up?

There has to be some serious discussion around these home equity loans. What percentage are basically uninsured at this point? Which of these are in a negative equity area? While the loans may still be performing there has to be some serious questioning about their long-term chances of full repayment. Most HELOC’s and seconds were issued during the boom with the belief that they would be repaid during a refinance of the property as values increased. Now with prices depreciating the banks have frozen many of the lines to try to limit exposure - but exposure remains.

I’d love to see a distribution of Wells’ $31 billion California exposure by zip code. That could be an exceptionally telling graph.

Don’t expect the rating to hold

There is no question that the equity portfolio will experience degradation. The question is how much? With nearly half of all exposure in California, it is tough for me to see how Wells can maintain the quality of that portfolio in such a negative equity environment. If Moody’s is pinning their rating on, among other things, the health of this portfolio I would anticipate seeing a downgrade as we get further in to this housing meltdown and prime borrowers who start feeling the affects of the credit crunch, shrinking job market, etc. come under pressure to make the payments on those free-floating equity debts.

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