Wells Fargo to take $1.4 billion charge for bad loans

The hemorrhaging just keeps on flowing. This Yahoo New story (http://news.yahoo.com/s/nm/20071128/bs_nm/wellsfargo_charge_dc) looks at the both Well Fargo's situation and the larger picture in the housing industry. I hope at some point some serious question begin to be asked about how such risky lending practices were allowed in the first place. Here are some story highlights:

NEW YORK (Reuters) - Wells Fargo & Co (WFC.N), the second-largest U.S. mortgage lender, said on Tuesday it would take a $1.4 billion fourth-quarter charge largely related to losses on home equity loans as the nation's housing market deteriorates. The company, which is also the fifth-largest U.S. bank, said it also was significantly scaling back making home equity loans through brokers, citing a need to tighten lending standards and reduced demand from investors to buy the loans. Wells Fargo said in July it would stop making subprime home loans, which go to people with weaker credit, through brokers.

Wells Fargo said it would put its riskiest $11.9 billion of home equity loans into a "special liquidating portfolio." It expects losses in this portfolio will total $1 billion over 2008 and 2009, and decline over time as loans are repaid. The $11.9 billion represents about 14 percent of the $83.4 billion of home equity loans in Wells Fargo's portfolio, and about 3 percent of total loans outstanding as of September 30. Wells Fargo said it expects the $1.4 billion charge to "adequately cover all losses inherent in its portfolios."

Wells Fargo announced the write-down after Chief Executive John Stumpf projected in a November 15 presentation "elevated" home equity loan losses into 2008. Lamenting that "we have not seen a nationwide decline in housing like this since the Great Depression," he said: "I don't think we're in the ninth inning of unwinding this. If we are, it's an extra-inning game." Citigroup Inc (C.N), Bank of America Corp (BAC.N) and Wachovia Corp (WB.N) are among the many other banks to announce mortgage-related write-downs of $1 billion or more this month. Olson, from Wholesale Access, said: "Real estate values will likely plummet in 2008 and 2009. You don't want any high LTV loans in your portfolio because you'll be under water."

Sadly, many homeowners who bought at the peak of the housing bubble and who put little or no money down on their homes are going to find themselves seriously under water and will not be able to sell their homes for enough to cover their loan payoffs. As another Yahoo News story indicates (http://news.yahoo.com/s/nm/20071127/us_nm/usa_economy_homes_index_dc;_ylt=Al4YEF.AuC5rBoyIuRL9_Z2s0NUE), home prices are dropping significantly in some markets. I believe the Hampton Roads area will be somewhat insulated due to the continual rotation of military personnel through the market. Other areas will not be so lucky:

NEW YORK (Reuters) - Prices of existing U.S. single-family homes in the third quarter slumped 4.5 percent from a year earlier, matching a record decline from the previous period as the housing downturn deepened, according to a national home price index on Tuesday. The S&P/Case-Shiller National Home Price Index fell 1.7 percent from June, marking the largest quarterly decline in the index's 21-year history, S&P said in a statement.

The quarterly S&P/Case-Shiller index has been falling since the second quarter of 2006 as lenders clamp down on lending to risky borrowers who had depended on home price gains to keep their homes. Rising foreclosures are adding to soaring inventories of unsold homes, depressing prices further. Florida is the hardest hit state, with prices in the Tampa and Miami areas down 11.1 percent and 10 percent respectively over the past year, the indexes show. Home prices around San Diego, California, and economically depressed Detroit, Michigan declined by 9.6 percent over the 12-month period.

Lehman Brothers said the decline in home prices is the start of an extended decline in the market. "We look for home prices to fall well into 2009 as excess inventory is slowly cleared and foreclosed homes return to the market at a discounted price," the company said in commentary published Tuesday. This will translate to a 15 percent decline in national home prices from peak to trough, Lehman Brothers said.

A 15% decline on a $300,000 home equates to a $45,000 price drop. For folks with 100% loans or even 95% loans, the math shows how painful the situation will become for many homeowners .