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business newsWells Fargo's Balance Sheet: Scaring the Horses
By
Mike Mish Shedlock
Feb 02, 2009 8:45 am
Off-balance-sheet assets could spell dire future.
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3.875% is a rather interesting number, given that current mortgage rates are much higher, as the following table shows.
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The lending partner for Arbor Homes is Wells Fargo. How can Wells offer a fixed rate of 3.875% for 30 years given the current rate term structure and conditions in the MBS/CDO markets?
The only answer I can come up with is this: Wells Fargo is going to promptly bundle and dump those securities straight into the insolvent arms of Freddie Mac (FRE) and Fannie Mae (FNM). Who else would take them?
Furthermore, the Portland area is saturated with homes already (see the section "Happy Valley Foreclosed" in Housing Gridlock: Trapped in Suburbia for more details).
Leading the Way Home
Wells Fargo claims to be working to stabilize hard-hit communities through its Leading the Way Home program.
Through active calling and letter-writing campaigns, workshops, regional outreach events and door-to-door contact, Wells Fargo Home Mortgage has reached 94% of its customers who are two or more payments past due. For every 10 of these customers, it has worked with 7 on a solution, 2 declined the help, and the remainder cannot be reached or a solution simply cannot be found. Of the customers who received a loan modification, one year after the loan was modified approximately 7 of every 10 of these customers were either current on their loans or less than 90 days past due.
This seems a rather self-serving way to look at it: Note the grouping of "current" with "less than 90 days past due."
Here's a more accurate way of phrasing things: 30% of Wells Fargo's reworked mortgage loans are 90 days past due or longer, 1 year after loan modification. That doesn't sound so good, does it?
Moreover, hidden in the 70% grouping is an undisclosed percentage of customers who aren't even current. What percentage is that?
Odds are high that those not current shortly after a rework are going to fail. What's the percentage? Again, Wells Fargo doesn't say.
With that backdrop, it's time to dive into Wells Fargo's fourth-quarter earnings and balance sheet.
Wells Fargo's Fourth-Quarter Earnings
The company's news release announced a net loss of $2.55 billion -- $0.79 per share -- after significant de-risking and merger-related actions.
“Despite the unprecedented contraction in the credit markets, we remained ‘open for business’ and continued to lend to credit-worthy customers. We made $106 billion in new loan commitments during 2008 to consumer, small business and commercial customers and originated $230 billion of residential mortgages.
"The allowance for credit losses, including unfunded commitments, totaled $21.7 billion (Wells Fargo and Wachovia combined) at December 31, 2008, compared with $8.0 billion (Wells Fargo only) at September 30, 2008.
The Wachovia acquisition was completed on December 31, 2008, and therefore Wachovia’s results are not consolidated in Wells Fargo’s income statement. Wells Fargo’s balance sheet includes Wachovia’s period-end balance sheet data net of closing purchase accounting adjustments."
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Wells may be open for business, but the securities it's seeking to offload increased from $86+ billion to $151+ billion. Goodwill, which may easily be worthless, increased, to $22+ billion.
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Note that Wells has $110+ billion in junior-mortgage liens. That's a lot of risk. Total consumer loans, most of which is mortgage related is a whopping $474+ billion. That's a lot of risk. And given that commercial real estate is just now starting to crumble badly, commercial and commercial real estate exposure of $356 billion is a lot of risk. Will $21 billion in loan loss provisions cover that? I doubt it.
No positions in stocks mentioned.
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