Sunday, 05 July 2009 20:00

Beware of Bank Earnings Propaganda - They are still in BIG trouble! Featured

Written by
Rate this item
(0 votes)

If one were to parse the bullshit that the government has allowed the banks to proffer in the name of earngings, one would find the banks will probably be flailing this quarter from bad loans and mortgages. Beware of the FASB authorized accounting games and peer beneath the hood.  I have included a portion of the professional level Wells Fargo analysis (click this link to subscribe) to help drive my point home, but before you peruse it as a non-subscriber, be sure to remember how this research subject twisted and manipulted their numbers to produce a bank profit out of a bank loss - Tricky Dick Bank Reporting Schemes - What record earnings are you referring to? then take a look at the hard data released by the FDIC and the NY Fed: Revised SCAP Assumptions Public Open Source Version 1.1 Revised SCAP Assumptions Public Open Source Version 1.1 2009-05-18 15:15:47 1.21 Mb) as well as an explanation as to how I tabuluated it. 

 Wells Fargo

Wells Fargo acquired home equity loans from Wachovia, which carries the highest default risk as its portfolio largely comprises second lien mortgages. The value of the home equity portfolio is US$128.9 billion.

Home equity portfolio

US$ mn

Core portfolio

 

California

31,784

Florida

12,067

New Jersey

8,086

Virginia

5,653

Pennsylvania

5,129

Other

56,342

Total core portfolio

119,061

Liquidating Portfolio

 

California

3,835

Florida

492

Arizona

233

Texas

179

Minnesota

122

Other

5,001

Total liquidating portfolio

9,862

Total core and liquidating portfolios

128,923

The value of Wells Fargo’s pick-a-pay portfolio (home loans) is US$93.2 billion of which US$39.7 billion or 42.6% is impaired loans. The principal balance of the impaired loans is US$61.6 billion. This loan has the highest probability of risk and could result in complete writedown. Currently, the LTV in majority of the states is above 100%, with California and Arizona having the highest – 161% and 152%, respectively. Despite writing down US$21.9 billion, the carrying value at these two states hovered around 100%, implying high risk.

 

Pick-a-pay-portfolio

Impaired loans

 

Unpaid principal balance

Current LTV %

Carrying value

Carrying value to current value

California

42,216

152.0%

26,907

98.0%

Florida

6,260

129.0%

3,779

79.0%

New Jersey

1,750

101.0%

1,271

74.0%

Texas

475

76.0%

336

54.0%

Arizona

1,642

161.0%

987

99.0%

Other states

9,306

110.0%

6,397

77.0%

 Total

61,649

 

39,677

 

Methodology to compute loan loss rate: Real estate 1−4 family junior lien mortgage

Real estate 1−4 family junior lien mortgage comprises home equity line of credit (HELOC) and second/junior lien mortgage. Home equity carries a very high risk of default due to high LTV and being second lien mortgage. We segregated the loans into owner occupied and non-owner occupied based on the state-wise proportion published by FDIC. Thereafter, applying the respective default rate of each category we arrived at the weighted average default rate.

To determine net charge-offs, we have considered the recovery rate based on historical recovery rates applied in conjunction with the current LTV. The table below gives the recovery rates used to determine net charge-offs.

 

 

Current LTV

Recovery rate

Basis

Greater than

120%

12.0%

(recovery rates during 1990-1991, lowest since 1976)

Greater than

110%

16.7%

 

Greater than

100%

21.4%

(average recovery rate since 1976)

Greater than

90%

28.2%

 

Less than

<90%

35.0%

(highest recovery rate since 1976)

Source: FDIC and Boombustblog.com Analysis

We estimated the current LTV for home equity loans based on the housing price decline calculated using the Case-Shiller Index of each state and LTV at origination to determine the current LTV. Impaired loans have a two-year loss rate of 67.5%, while other loans have a loss rate of 56.4%. We have assumed impaired loans to have a 0% recovery rate in each of the states. The non-impaired home equity loans would have a loss rate of 56.4% for 2009 and 2010, while the Federal Reserve’s estimated loss rate is 21–28% for the same period.

 

Real estate 1−4 family junior lien mortgage

High Risk Subprime ARM Loans (Low FICO and high LTV)

 

 

Current LTV

Owner Occupied

Non- Owner Occupied

Default rate

Recovery Rate

Loss Rate

Impaired Loans

 

65.0%

95.0%

 

 

 

California

128%

93.7%

6.3%

66.9%

0%

66.9%

Florida

124%

88.7%

11.3%

68.4%

0%

68.4%

New Jersey

108%

91.5%

8.5%

67.6%

0%

67.6%

Arizona

146%

91.9%

8.1%

67.4%

0%

67.4%

Other

112%

91.0%

9.0%

67.7%

0%

67.7%

Total Impaired Loans

 

 

 

 

 

67.5%

All other loans:

 

 

 

 

 

 

California

128%

93.7%

6.3%

66.9%

12%

58.9%

Florida

124%

88.7%

11.3%

68.4%

12%

60.2%

New Jersey

108%

91.5%

8.5%

67.6%

21%

53.1%

Virginia

111%

91.1%

8.9%

67.7%

17%

56.4%

New York

90%

92.0%

8.0%

67.4%

28%

48.4%

Pennsylvania

111%

90.0%

10.0%

68.0%

17%

56.6%

North Carolina

86%

88.3%

11.7%

68.5%

35%

44.5%

Texas

89%

91.6%

8.4%

67.5%

35%

43.9%

Georgia

105%

88.5%

11.5%

68.5%

21%

53.8%

Arizona

146%

91.9%

8.1%

67.4%

12%

59.3%

Other

112%

91.0%

9.0%

67.7%

17%

56.4%

Home equity portfolio

 

 

 

56.4%

  As a reminder...

 For those who want the hard data that I used to come up wit; h the findings below, as well as to run their own calculations, I welcome you to the open source model: The Truth About the Banks Has Been Released: the open source spreadhseet edition as well as the Welcome to the Big Bank Bamboozle! and  The banking backdrop for 2009.

Read 5069 times Last modified on Monday, 06 July 2009 07:51
Reggie Middleton

Resident Contrarian Badass at BoomBustBlog (you can call me Editor-in-Chief)...

Disruptor-in-Chief at Veritaseum.com, where we're ushering the P2P Economy.

 

www.boombustblog.com
Login to post comments