Wells Pick-A-Pay Plan Poses Risk

Since the acquisition, none of the worst type of Pick-A-Pay loans have been paid in full, none have been repaid by sales to a third party, and none have posted improving cash flows.

Each borrower has had about $46,000 knocked off his balance through 43,500 modifications. Wells is giving each of them six-to-10 years to defer their balances. In the meantime, the San Francisco-based bank is sure to face more charge-offs, write-downs and modifications.

While Pick-A-Pay isn't Wells Fargo in its entirety, investors should factor that investment time horizon -- and the logic behind it -- into their own.

Rochdale Securities analyst Richard Bove reduced Wells' rating to sell the day it reported third-quarter results, explaining that it will have a "high level" of loan losses for at least a year, and other streams of revenue are less certain. He also estimated it may take as long as three years to fully integrate Wachovia into the merged entity.

"The debate over Wells Fargo's loan portfolio takes many forms..." Bove writes. "I am not interested in any of these contentions because it is difficult to prove or disprove any of the arguments. I am only interested in the provable fact that the bad loans are growing in a declining portfolio."

Wells shares were up 1% at $27.97 in morning trading on Wednesday. The stock is down 20% over the past 52 weeks, and has lost about $3.80, or 12%, over the past few weeks since reaching a recent high of $31.53 before its third-quarter report.

-- Written by Lauren Tara LaCapra in New York.

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