Wachovia Exposes Warts Before Wells Wedding Day

The bank reported net charge-offs of $1.9 billion, or an annualized 1.57% of average net loans, due mainly to deteriorating housing markets in Florida and California. It posted total nonperforming assets including loans held for sale of $15 billion, or 3.05% of loans, foreclosed properties and loans held for sale.

Wachovia also significantly increased its expectations for total losses in the Golden West Option-ARM, or "Pick-a-Pay," mortgage portfolio to 22% from 12% just a quarter earlier.

Wachovia inherited the $120-billion portfolio through its 2006 acquisition of residential mortgage lender Golden West. Wachovia's purchase of Golden West, at the height of the housing boom, was contested by Wall Street, who didn't trust Wachovia's low portfolio loss assumptions at the time. Wachovia insisted that Golden West had conservative underwriting standards, but significant home price depreciation since then -- particularly in hard hit areas like California, Golden West's main area of operation -- has speeded up the portfolio's loss rates.

The company said on a conference call that two-thirds of its $4.8 billion reserve for loan losses was related to the pick-a-pay portfolio. Net charge-offs within the Option-ARM portfolio specifically rose 60% from the second quarter to $810 million, or 2.69% of the portfolio. Nonperforming loans rose 27% to $8.9 billion, or 7.57% of the portfolio.

Wachovia currently has 438,000 loans through Golden West, most of which are concentrated in California. The company said on Wednesday that the current loan-to-value ratio on the Golden West loans was 95% compared to 71% originally and 85% in the second quarter.