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Sunday, November 29, 2009 12:16 PM

More on Wells Fargo Pay Option ARMs Extend and Pretend

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Here is an email from the Healdsburg Housing Bubble (HHB) about Wells Fargo Chief Economist: "There is no clear, easy way out for housing".

HHB writes ...

Hi Mish,

I saw you linked to an istockanalyst article that quotes extensively from a piece I wrote on Wells Fargo Option ARMs. In his piece, and subsequently in your post, it is hard to tell where his analysis ends and mine begins (due to lack of blockquotes).

For the record the istockanalyst opinion that Option ARMs don't pose a threat to Wells is not one I agree with, despite the fact he relies on my data to get to this conclusion.

You hit the nail on the head. This is a version of extend and pretend, granted one that was written into the terms of the loans from the start. RECASTS won't automatically happen until 2014/15.

But the point of my article was simply to point out that that the widely used reset chart by Credit Suisse had a major error by assuming contractual 5 year recasts (when the Golden West 10Ks clearly state 10 year recasts) and most people were not paying attention to how this played out on Wells' balance sheet.

In fact, I made a point of saying "Of course, none of this is to say that Wells Fargo is out of the woods. They are essentially stashing away on their balance sheet tens of billions of neg-am loans that will recast into 20-year fixed rate mortgages in 2014 and 2015."

Here is my original piece:

Reset Chart from Credit Suisse has a Major Error

If you click through, I also put together a chart showing that while recasts won't technically occur until 2014, people will definitely be walking away long beforehand as those yearly 7.5% increases start to stack up. It's a mess for Wells and they know it.

They are trying to outrun the problem racking up earnings now while short rates are near zero, hoping they'll be able to absorb these losses down the road. We'll see how it turns out.

Again, good analysis of the problem. I just wanted to clarify my opinion from the istockanalyst article given you both quoted me at length.

Keep it up the good work...

Thanks HHB.

One of the limitations of blogger is that one cannot put a blockquote in a blockquote and layers of referbacks are not easy to represent. I handle it with italics as best I can.

In this case however, I never made it back to the original post because it was clear that istockanalyst missed the boat. Inquiring minds may want to take a look at HHB's post for a couple nice charts and graphs on the situation with Pay Option ARMs.

Mike "Mish" Shedlock
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