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

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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.