Wachovia reflecting on loan losses

After racking up big losses from Pick-A-Payment mortgage loans in recent quarters, Wachovia Corp. executives have started reflecting on the lessons learned, according to a report this week by analysts at research firm CreditSights.

In a recent meeting, departing chief financial officer Tom Wurtz and chief risk officer Don Truslow discussed the bank's $122 billion portfolio, “going over some of the product weaknesses and (the company's) own misjudgments,” analysts David Hendler and Baylor Lancaster wrote in their report. According to the report, here are some of the bank's conclusions about loans inherited from its ill-timed 2006 Golden West Financial Corp. acquisition:

-- Wachovia admitted it was caught off guard by the losses, which contributed to a $9.1 billion second-quarter loss. The big difference from past downturns was the rapid pace of home price declines and the tendency of borrowers to walk away when they had no equity left in their home.

-- Borrowers attracted to Pick-A-Pay mortgages, which offer a minimum payment that doesn't cover the full interest owed, seem to have a higher propensity to default. “It seems that borrowers who choose a mortgage with the option of lower minium payments may in fact be indicating to the lender that there is more likelihood that they will not have the resources to cover the (full) payment,” the analysts wrote.

-- Efforts to lower risk in the portfolio may have backfired. Golden West had a $400,000 limit on loans, an effort to avoid bigger “jumbo” loans and to spread risk among more borrowers. However, this may have forced the company to lend in farther out suburbs, where homes were more affordable than in more desirable coastal locations. These farther out suburbs, in areas such as California's Central Valley, have seen much steeper home price declines because of higher gas prices and less demand.

Amid the rising losses, new Wachovia chief executive Bob Steel has announced steps to preserve capital and to pare back the Pick-A-Pay portfolio. He's remained committed to keeping the company independent, although the analysts believe a sale is more likely. “We feel that a strategic merger would be a more favorable outcome for stock investors,” Hendler and Lancaster wrote.