SAN FRANCISCO ( TheStreet) -- Wells Fargo ( WFC) has a funny way of easing investor concerns.

After three quarters of astounding, Street-beating bottom lines, Wells' shares are still saddled with credit concerns. Even last quarter, while TARP-laden peers like Bank of America ( BAC) and Citigroup ( C) reported losses, driven down by consumers and businesses finking on debts, Wells reported a $3.2 billion profit -- in the league of so-called "healthier" competitors like JPMorgan Chase ( JPM) and Goldman Sachs ( GS).

"We want to ask a rhetorical question here -- why is it that when companies like Goldman Sachs have huge trading quarters, the Street cheers that occurrence and bids up the stock--but when Wells Fargo has several (in a row) large mortgage banking quarters, the Street's reaction is "Not sustainable" and the stock gets taken down?" analyst Nancy Bush wrote in a note reiterating her buy rating on Tuesday.

But scrutinizing the numbers more closely gave room for the bears to settle in.

Wells' nonperforming loan ratio has rocketed to 2.61% from just 1.25% just six months ago. The firm has reassured investors that a credit-loss peak is at hand; that Wachovia's bad debt was written down far enough at the time of its acquisition to no longer be a concern; that "not all NPAs result in a loss"; that its loan workout program has yielded positive results; and that Wachovia's most toxic book of loans -- the "Pick-A-Pay" portfolio -- is doing better than initially expected.

On Tuesday it became clear why.

The bank has been allowing homeowners to make "interest only" mortgage payments to stay current, and stay in their residences. They are still tens if not hundreds of thousands of dollars "underwater" -- meaning their homes are worth much less than what they owe -- but Wells believes this isn't anything to worry about.

When asked by the Wall Street Journal why people would continue to make payments, rather than cut their losses and run, co-president of Wells Fargo Home Mortgage Michael Heid said, simply, "kids and schools."

It's an interesting theory, but thousands of their one-time homeowning peers also had kids and schools, but dropped their keys in the mailbox and abandoned their mortgage debts, which no longer made economic sense to pay.

Perhaps the most intriguing -- and riskiest -- part of Wells' strategy is that the bank believes those gambles ultimately will not lose money. Heid told the Journal that Wells is "banking on the fact the economy will improve and recover over time," the same reason one of its top shareholders, Berkshire Hathaway's ( BRK-A) Warren Buffet gave on Tuesday for agreeing to purchase Burlington Northern ( BNI) at a steep premium.

But any bet on the U.S. recovery still faces incredible challenges and a very long time horizon for success.

Will an economic revival funnel more value into the depleted housing markets of the West Coast and Southeast, where many of Wells' mortgages reside? Of course. Will it bring home values up to the overblown levels they were at the height of the housing bubble? Not any time soon. And despite signs of encouragement in some parts of the housing market, Wells' loan book in question is only getting worse.

Wells had $110 billion in Pick-A-Pay loans outstanding at Sept. 30, or about 11% of its total overage loans. About $10 billion have been worked out or written down. Last quarter, another $1.2 billion worth of Wachovia's Pick-A-Pay loans ceased to generate income for Wells. More than 40% of Wachovia's consumer charge-offs, or $443 million, came from "non-impaired" Pick-A-Pay loans - those that weren't considered the worst of the worst.

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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