Sonoma Housing Bubble

Pulling the cork out of Sonoma's bubbly housing foolishness

Monday, May 08, 2006

Mortgage Lending Exposure for Wachovia?

Today it seems quite a few readers are interested in reading about the Wachovia/Golden West acquisition. Here you go...

(Yahoo News)"Investors on Monday expressed disappointment with Wachovia Corp.'s (NYSE:WB - news) agreement to buy California thrift Golden West Financial Corp. (NYSE:GDW - news) for $25.5 billion, calling the purchase risky and too costly."

"The purchase gives Wachovia 285 new branches and its first significant presence in the fast-growing western United States. But it also increases the No. 4 U.S. bank's exposure to mortgage lending, which many analysts say has peaked."

"Oakland-based Golden West, the No. 2 U.S. savings and loan, is best known as an adjustable-rate mortgage lender, and has mortgage operations in 39 U.S. states. It operates branches as World Savings Bank."

"Wachovia shares fell nearly 7 percent, dropping the value of the stock-and-cash transaction by about $1.3 billion."

"Herbert Sandler called suggestions that he sold Golden West to avoid a weakening mortgage lending market "garbage."'

"Yet Gimme Credit analyst Kathleen Shanley wrote that Golden West's loan portfolio, 63 percent of which is in California, "could be vulnerable in a prolonged downturn."'

"The Mortgage Bankers Association expects industrywide originations to fall 40 percent this year from their 2003 peak. Analysts expect loan losses to rise from recent low levels."

"Prudential Equity Group LLC analyst Michael Mayo downgraded Wachovia to "underweight" from "neutral weight."'

"Gary Townsend, a Friedman, Billings, Ramsey & Co. analyst, downgraded it to "market perform" from "outperform," seeing no "strategic imperative" for the purchase. Before the merger, Golden West shares had nearly doubled in the last three years."

"Wachovia is "getting good merchandise," said Mark Batty, an analyst at PNC Advisors in Philadelphia, which owns Wachovia shares. However, he said the purchase "dilutes Wachovia's capital markets exposure as a percentage of revenue."'

"Golden West may owe Wachovia a $995 million termination fee if the merger breaks down."

"Golden West Financial Corp., one of the last major savings and loans in California, agreed Sunday to be acquired by North Carolina-based Wachovia Corp., the nation's fourth-largest bank, for $25.5 billion in cash and stock. The $25.5-billion deal would bring an end to one of the last major thrifts in California."

"Golden West is best known as an adjustable-rate-mortgage lender, with operations in 39 states. Its World Savings Bank has more than 280 branches in 10 states. Burned by rising rates in the '80s, Golden West and smaller S&L survivors, including Newport Beach's Downey Financial Corp. and Santa Monica's FirstFed Financial Corp., specialized in adjustable-rate mortgages to keep from being stuck with permanently low-earning loans should rates rise again."

"These loans often give borrowers the option of paying less than the full interest due during the early years of the loan — a flexible feature that many other lenders have offered in recent years as home prices have soared."

"These so-called pay-option ARMs have attracted the scrutiny of bank regulators in the last year. They have expressed concern that some borrowers might not understand how high payments could rise once the loans are adjusted to full payments."

"By buying Golden West, Wachovia, which does business mostly in the southern and eastern U.S., would also boost its presence in the West. Wachovia entered the California banking market in March, when it bought Westcorp Inc. of Irvine and its WFS Financial Inc. unit. Richard X. Bove, an analyst for Punk, Ziegel & Co., said the deal would allow Wachovia "to achieve a 20-year goal of penetrating the West Coast with a sizable presence" and would create little or no immediate dilution for existing stockholders."

"The risk to Wachovia comes if the housing market suffers a crash. That may be why the Sandlers chose to sell their thrift now, he said."

'"The mortgage business is weakening across the country. I think the California housing market is due for a crash — prices could drop at least 20% and housing starts fall by 30%. And their mortgage portfolio is characterized by these untraditional loans — these payment-option ARMs, and interest-only mortgages."'

"What's more, Bove said, Golden West is a heavy borrower from the San Francisco Home Loan Bank. Bove said that bank was likely to curtail lending because of proposals that would restrict the federal housing-finance system."

'"So the deal could be problematic, and we'll just have to wait and see if in fact the housing market in California does blow up before we know if Wachovia is overpaying."'


At 5/08/2006 01:13:00 PM , Anonymous tom stone said...

god yes wachovia is overpaying! world savings has frightneningly loose underwriting( i'm not going to use the fr word)but has tight appraisal standards. however all these "tight" appraisals are for market value in a market that is way too high and that has just started to correct.i doubt this deal will go through at this price ,if at all.if wachovia's people do due diligence on world's arms they are going to need smelling salts and a stiff whiskey after reviewing the underwriting.

At 5/08/2006 03:46:00 PM , Blogger Athena said...

Golden West is maintaining that they always qualify their borrowers to be able to afford their loan payments at the reset amounts and not the introductory rates... they better hope that is true if they want this deal to go through.

I can't help but be skeptical that right now in this time of unprecedented amounts of risky loans in the market that this mom and pop team would suddenly decide THIS is the time to hand their bag to someone else...

The reason they didn't fail when so many other S&L's failed is they DID stick to their lending standards, but at that time ARM financing was only 15% of the market... now it is 82% and largely due to unaffordability and inability to qualify people for loans... this is a different story, and my money is on them KNOWING they don't want to be the ones holding the bag when the fecal matter hits the ventilator.


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