The Associated Press was reporting early Wednesday that yet another major mortgage
bank "has finally bogged down in the mortgage muck that's muddying
one major bank after another."
Wells Fargo, the number five U.S. bank has said it will recognize $1.4 billion
in losses in the fourth quarter OF 2007. Unlike most of the losses which have
clobbered other lenders, Wells Fargo appears to be in trouble not because of
sub-prime lending of first mortgages but because of its large portfolio of home
equity loans.
The announcement of the write downs came after the market closed yesterday
in a Securities and Exchange Commission filing and shares of his stock immediately
dropped $1.40 or 4.7 percent in extended trading.
Michael Liedtke, AP business writer stated in his article that Wells Fargo
is still in far better shape than many other banks because it had previously
sold most of the $2 trillion in home mortgages it had originated in the last
six years and had not been a big investor in the mortgage-backed securities
that are now decimating other banks' bottom lines.
Most of Wells Fargo's its anticipated loan losses are concentrated in
an $11.9 billion bundle of high-risk home equity loans. $12 billion is an impressive
number but still represents only 14 percent of the bank's $83 billion total
portfolio of home equity loans.
Home equity loans have been a popular vehicle with which homeowners have pulled
cash out of the equity in their homes as real estate values skyrocketed without
having to refinance what were often very favorable first mortgage loans. However
in the last seven or eight years creative lenders have also used the loans to
supplement a buyer's available cash required for a down payment. In some cases
the equity lines, often called "piggyback
loans" were used to provide the entire down payment leaving the buyer with
zero equity in the property. As home values have dropped over the last year
the home equity portion of these packages have lost much, maybe all of the collateral
which originally secured them. Interest rates on many equity lines have, until
very recently, been rising as they are usually tied to the Prime Rate and many
borrowers were simultaneously faced with dramatic increases in their adjustable
rate first mortgages.
Wells Fargo did not specify any many of its potentially bad loans were of the
piggyback variety.