The acquisition of Washington Mutual by JPMorgan Chase and Wachovia by Citigroup, which is currently being challenged by Wells Fargo's attempting to buy Wachovia, have created mortgage and credit card powerhouses. As of today
Experts said that the acquisitions would not solve the problems with the underlying assets in Wachovia's and WaMu's portfolios. These deals were made to build the branch networks and commercial deposits of the acquiring institutions, and were entered into despite the bad mortgages on WaMu's and Wachovia's books.
Citigroup Global Markets analysts said that WaMu, for instance, has a very large deposit base - roughly $143 billion in deposits - making it attractive from an "access to liquidity" perspective. However, the depositary institution is also "saddled" with a huge mortgage loan book that is expected to see considerable losses in the next three years, Citigroup analysts said.
Wachovia is similarly situated. The beleaguered firm reported $122.2 billion worth of pick-a-pay or option ARMs in 2Q08. These mortgages largely accounted for the firm's nonperforming loans and losses over the quarter. Meanwhile, the firm still maintained strong low-cost core deposit growth in 2Q08, with total deposits reported at $435.5 billion.
"The acquisitions gave JPMorgan and Citigroup a branch footprint in places where they did not have any," said Bart Narter, senior analyst at Celent. For instance, Citi will now have access to Wachovia's numerous locations on the eastern sea board as well as California, where Wachovia subsidiary Golden West Financial was based.
JPMorgan acquired both huge mortgage and credit card portfolios through WaMu, Narter pointed out. "Credit cards and mortgages are scale businesses," he said. "When you have these massive economies of scale you have the ability to do better analytics on your costumers' credit profiles, although these analytics are more widely used now in credit cards than in mortgages. Having scale also drives down costs. The acquisitions gave Citi and JPMorgan the ability to bulk up."
Even though WaMu's credit card portfolio might not be as strong as JPMorgan's, the acquisition was beneficial. Not only did JPMorgan gain scale through the acquisition, an early amortization on WaMu's card securitizations was averted.
Consequent to the purchase, Citigroup analysts said in a separate report, regulators made the decision to effectively waive the early amortization event and sell the majority of the WaMu assets to JPMorgan. "This is the best of all possible outcomes for holders of WaMu master trust ABS," Citigroup analysts said. "JPMorgan will take over management of the portfolio, and we would expect the rating agencies to remove the ratings watch negative opinion now that the stability of WaMu's funding base is resolved."
Both the JPMorgan Chase/Washington Mutual and Citigroup/Wachovia buyouts will create servicing powerhouses. According to ASR sister publication National Mortgage News figures as of Sept. 22, merging Chase (the official name of JPMorgan Chase's lending unit) and WaMu would make the combined entity the number-three servicer with $1.45 trillion and a 15.09% market share.
Meanwhile, Citigroup ($1.02 trillion), which was one of the top four servicers in the country before the merger, gained even more clout by acquiring Wachovia, which had a 2.09% share of the servicer market.
What will these mega servicers mean for the business?
"The two mergers will result in very large servicing firms, which could be positive for the market in terms of strengthening their respective platforms, but could also create challenges in terms of capacity," said Diane Pendley, a managing director and head of the operational risk group at Fitch Ratings. "However, there are and will continue to be other portfolios and possibly platforms that will be attractive to mid-size or smaller servicers. There will continue to be a valuable role for these servicers to play in the industry."
It will take time for these mergers to play out. "The way it was explained to us, it could take up to two years for the full integration of these operations," Pendley said. "For example, Citigroup indicated a completion date by 2010."
Since these mergers are in their early stages, it is not possible to know what the eventual outcome might be, Pendley said. For instance, Chase, which has several servicing platform locations already, could decide to keep WaMu's servicing as additional separate locations, or to integrate the two operations. She indicated that this type of decision would typically be made after both a capacity and best practices analysis could be completed.
In a related development, Fitch last week placed Wachovia Bank's 'RPS2' servicer rating on Watch Evolving. "This rating action was taken based on the announced acquisition of Wachovia's banking operations as well as pending completion of the analysis of the annual review and confirmation that the servicing operations remain the same regarding systems and employees," said Mary Kelsch, a senior director in Fitch's operational risk group.
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