First, they moved up their earnings date four days to today. Second, they miss horribly - analysts were expecting 40 cents and they announced NEGATIVE 14 cents. Third, they cut their dividend drastically. Fourth, they raised $7 Billion in combo of common and preferred shares. Terms of their offering...$3.5 bil in preferred shares at 7.5% coupon and 30% conversion premium PLUS 146 million common shares at $24. Given they are one of the largest Pay Option ARM holders in the world, this is likely only their FIRST capital raise despite what Goldman is trying to push this morning.
Wachovia, who bought World Savings/Golden West a couple years ago and inherited $120 BILLION in Pay Option ARMs in the process, is having trouble. The is undoubtedly due to their massive expose to the Pay Option ARM. As you all know, Wach adopted the Pay Option ARM as their primary portfolio mortgage since the acquisition and are still doing commercials to this date with people dancing around their house shaking their bodies and dancing because they can make a much lower mortgage payment when they want to and accept negative amortization (mortgage balance INCREASES). Absolutely irresponsible! Pay Option ARMs were in part responsible for the massive losses from all the players who were the largest players in the program including American Home Mortgage, Countrywide, IndyMac, Downey, First, Fed Bank United, Lehman and Bear. In addition, when they go bad they are total losses in many cases because most are in a severly negative equity position.
We have learned in the past few months, that negative equity is a leading cause of loan defualt, even more so than periodic ARM adjustments. This is why Pay Option ARMs are essentially worthless and Wachovia will be stuck with these in perpetuity awaiting their default or modifying loan balances lower one by one.
Pay Option ARMs have just started to implode with the big bang coming from 2010 - 2012 unless housing magically appreciates some 5-9% per year going forward (compensate for neg-am) and somehow makes back most of the losses already taken before these loans implode. Remember, this loan programs was the fastest growing from 2005-2007 when prices were at their peak, meaning this group of loans should be some of the worst performing going forward. The ratings agencies just have not got there yet, as usual.
Pay Option factoids...80% of these loans were done in bubble states, 80% of the people pay the minimum monthly payment and accept the neg-am; most of those have an increase in mortgage balance of 5-9% per year, and in 2006-2007 80% were stated income. There are reports out saying at least 50% of all Pay Option ARM borrowers have a second mortgage as well.
This is a great chart of the ARM reset catastrophe - take a look at the Pay Option Implosion coming soon. This could make the 'Subprime Implosion' look like a walk in the park because Pay Options cut across all socio-economic boundaries with these loans being most prevalent in higher-priced bubble regions. -Best, Mr Mortgage