Loan-to-value ratios soar on Wachovia's Pick-A-Pay home loans in California; average LTV is 109% in the Central Valley

Wachovia Corp.’s second-quarter earnings report today details the risks the struggling bank faces with its now-notorious Pick-A-Pay mortgages in California.

The home loans, the legacy of the Golden West Financial Corp. acquisition that Wachovia made in 2006, allowed borrowers to name their payment -- including paying so little that their loan balances actually rose.

Of the $5.6 billion Wachovia set aside last quarter for potential loan losses, $3.3 billion was for Pick-A-Pay loans.

But the bank has $122 billion of the loans on its books, and 58% of the total is in California. And the second-quarter data on loan-to-value ratios, or LTVs -- loan amounts relative to the value of the underlying homes -- paint a dismal outlook if more people walk away from their houses and leave Wachovia with the keys.

The combination of minimal loan payments and falling home prices has jacked up LTV ratios across the bank’s Pick-A-Pay portfolio, but particularly in California.

In the Central Valley, for example, Wachovia has $10.2 billion in Pick-A-Pay loans outstanding. The average LTV ratio now is 109%, the bank said, using estimated valuations from May. In the cities of Stockton and Modesto the average LTV is 116%.

When the loans were made the average LTV was 72% in the Central Valley, according to Wachovia.

In the Inland Empire, home to $11.3 billion of the loans, the average LTV ratio is 99%, Wachovia said. For all of California it’s 90%.

In Arizona the average Pick-A-Pay LTV is 87%; it’s 82% in Florida.

Things are much better, so far, in New Jersey (74%) and Texas (63%), Wachovia data show. But the Pick-a-Pay loan totals in those states are a fraction of what the bank has in the Golden State.

Photo: The Flower Clock in Modesto. City of Modesto

Comments

[paul in Texas]

PAP- "allowed borrowers to name their payment -- including paying so little that their loan balances actually rose."

The Pick a Pay is an excellent loan.
It gives customers options.

Why do 9 out of 10 American's have VISA cards in their walet..because they demand payment options. Pick a Pay is the same type of repayment system.

It is not the loan product it is the falling real estate values.

[Jason]

Paul:

In general terms when people use their Visa or Mastercard, do the things they buy more often appreciate or depreciate?

[Karl in Burbank]

So instead of putting 10% down, they are getting 10% back.

What's in you're wallet!

[martscan]

Not one mortgagor in a thousand understood the ramifications of a negative amortization clause which was explained in the boilerplate of their loan contract. However, lenders understood it perfectly well and, IMO, relished the effectively usurious income which was sure to inure to them from a dead certain percentage of loans containing a neg am proviso. What the lenders did not input into their algorithmic models was a calculation designed to cope with an effective 'credit Armageddon.' In the argot of moralists and philosophers, this is known as 'poetic justice.'

[martscan]

Falling real estate values and negative LTVs should have nothing to do with foreclosures. Ability to make the house payment has everything to do with foreclosures.

For traditional home buyers, those that plan to stay in the house for an extended period, what difference does it matter if the house's value drops 20%, 50% or 90% at, say, the mid point of their tenancy? In fact, an ad valorem tax reassessment would be a benefit. If the owner/occupier's job and income status remains static, what does the value of his house have to do with foreclosure? Nothing, at least until he sells it. On the other hand, if the homeowner is using equity to finance living standards, or move every two years, or overtly speculate, or opt for mortgages they don't understand, that is a different story, non-traditional and, well, risky. Despite the extraordinary number of defaults, repos and hardships..and the attendant publicity, there are millions of homeowners that will continue making their payments on conventional, ARMs, interest only and other esoteric instruments that were booked without credit diligence...but have enabled home ownership to those who wouldn't have qualified under traditional standards.

[Paul in Texas]

Jason:

Here is what's going to happen.
The average listing price today in LA County is, what $440,000.
Values are going to fall to the $225,000 range another $200K+

Why are they going to fall, so much?

The majority of stated income loans have disappeared. Are more people becoming employed or self-employed? I would imagine, self-employed by contracting back to the original employer or going independent, Do self employed people show all their income on their tax returns? No. Now they will share those tax returns with the Fannie Mae lenders.
What's the average annual family income in LA County? HUD says $65,500.
How much of a home can you buy with 3-5% down payment on an income of $65,000? Add to it the monthly car payment of $300 & that pesky VISA payment of $200.
After you take 41% of your monthly income $5,458 you have $2237. To qualify, this is going to have to pay the mortgage, insurance, PMI, taxes, car payment, VISA bill. If you subtract out the car & visa, you have only $15737 remaing for the house payments.
What can you buy in LA County, with a monthly house payment of $1737?
I would say $225,000.
At 6.75% for 30 years Princ. & Int. would be $1386
Monthly property taxes: $234
Monthly insurance: $75
PMI: $75

So... welcome to the new paradigm.
Expect values to decrease to $225,000.

[Dave]

How do people who owe 125% loan to value and are having the PMI paid by there lender ever going to get some relief in the near future.