Loan Modification And Mortgage Crisis Could Bring Down New Banking Giant
The housing and credit crisis of 2007 showed the weaknesses of our banking system. In fact a whole international market of mortgage securities was based on bad loans that homeowners could simply not pay. Banks among other players had invested heavily in mortgage securities and other financial contracts. This hit banks hard, very hard. The U.S government reacted with financial measures that were unprecedented. First by taking control of two of the largest home mortgage firms, bailing out leading banks and a major, some would say “the major”, insurance company and that was only the beginning.
The bailout then consisted of an initial $600 billion and then $12.8 trillion pledged for loans, loan purchases and credit guarantees in an effort of stopping the freefall the economy was going through.
Even a bailout of this magnitude was not enough to help banks like Wachovia that were by now too underwater with bad loans and mortgage securities to survive. Wachovia was by no means alone in this problem various large banks were bought out.
Wachovia was bought by Wells Fargo & Co a regional bank happy to pay for the nationwide network Wachovia had.
Wells Fargo & Co. did look like a promising company as a regional bank with plenty of room to grow. However now finance commentators feel Wells Fargo & Co shares look expensive in the light mounting losses in the large pool of troubled loans it took from the Wachovia Corp takeover.
It is hard to explain why Wells Fargo & Co trades at 2.2 times its tangible book value when other top banks like JPMorgan, often considered the best, and Bank of America Corp trade at 1.9 and 1.3 times respectively.
Before the Wachovia takeover there might have been logic in adding value to Wells Fargo because of the great potential of growth it had, but it is hard to see this potential now it has the nationwide presence and is saddled with billions of dollars in bad loans both in mortgages and commercial real estate. Losses in bad loans are mounting and the question is how long can Wells Fargo absorb these losses before being toppled by them.
Analysts estimate the inherited impaired mortgages from Wachovia at $38 billion that could bring another $2.3 billion in losses and that is only one category of the bad loans Wells Fargo holds. The worst news for Wells Fargo is that they are not specially capitalized to deal with these huge losses. The ratio of tangible common equity to tangible assets is below 4 percent. Other similar banks like JPMorgan and Bank of America range from 4.5 to 4.8 percent.
It is true that hard initial losses due to bad mortgages and the cost of loan modifications are to be expected especially when Wells Fargo marked down many of Wachovia’s assets to reflect expected lifetime losses. Other banks are taking these same losses over time which you would make them look their capital levels look a little healthier.
The jury is hanging, like it is over millions of troubled homeowners, on if the current mortgage and housing crisis will be the end of Wells Fargo long climb or a bold move that grasped an opportunity in difficult times.
Related posts:
- The Banking Crisis is Over (?) Long Live the Economic Crisis
- Loan Modification Plan Stalled By Mortgage-Backed Securities
- Loan Modification Alternatives: Wells Fargo Interest Only Loans
- The Banking Crisis is Over (?) Long Live the Economic Crisis
- Loan Modification Plan Stalled By Mortgage-Backed Securities
- Loan Modification Alternatives: Wells Fargo Interest Only Loans