While eyebrows were raised last week at the timing of Wachovia Corp.'s purchase of savings bank and mortgage lender Golden West Financial Corp., Golden West Chief Executive Herb Sandler vehemently denies it had anything to do with his outlook for the U.S. real estate market. Ninety-nine percent of Golden West's portfolio consists of widely criticized option adjustable rate mortgages, and more than half of those loans were originated to Californian borrowers.
"That's a bunch of garbage. I've never heard anything so irrelevant in my life. It's nothing to do with anything," Sandler snapped last week during a conference call about the merger, in response to the suggestion that the company sold out at the height of the real estate market. "It has nothing to do with management succession, it has nothing to do with option arms, it has nothing to do with the real estate environment," he said. Sandler runs the company with his wife Marion, both in their 70s - and the pair's decision not to accept positions at Wachovia have led some to question whether there will be adequate leadership in place.
Merger implications
But for Wachovia, the deal brings West Coast presence and a slew of new customers to sell new products to, according to one analyst, as well as an increase in capital derived from banking deposits - a cheap source of funding. Wachovia is expecting the merger to bolster them to a top-10 mortgage and auto lender. Golden West is currently the nation's sixteenth largest mortgage lender, and it is the only savings bank with a double-A corporate credit rating.
Liquidity from extra deposits will mean Wachovia will reduce its reliance on the secondary market. "We are a deposit funded company. We will ... undoubtedly book more loans going forward, and I would predict that over time, our securitization portfolio will shrink, and to some extent, be replaced by whole loan portfolios," said Tom Wertz, Wachovia's chief financial officer. Wachovia also plans to eventually curtail the sale of its fixed-rate product, he said.
Golden West's market activity
Golden West's securitization activity amounted to $34.3 billion last year, compared with $24.5 million in 2004 and $13.7 billion in 2003, according to its annual filing. Meanwhile, Wachovia was the 15th largest issuer by dollar volume in 2005, with $20.4 billion worth of deals, compared with only $6 billion in 2004.
Golden West's securitization portfolio growth came despite a mere 5% increase in loan originations from 2004 to 2005, to $51.5 billion from $48.9 billion; the company originated $35.9 billion worth of loans in 2003. As of year-end 2005, Golden West's total loan portfolio was $119.4 billion, a 16% increase from $102.7 billion a year earlier. Its ARM portfolio alone accounted for a record high $116.4 billion. The company's ARM product resets each month; it sells the majority of the fixed-rate product it sells.
"The only way I can describe it is Golden West is a crown jewel," said Ken Thompson, Wachovia's chief executive. Golden West's loan portfolio, which consists only of prime loans, has performed exceptionally well throughout ups and downs in the real estate market. That is a testament, Sandler says of the company's strict underwriting standards and knowledge of its flagship option ARM product. "We've been doing it for a quarter of a century, we know the loan more than anybody," Sandler said. "Nobody knows what they're talking about when they talk about the option ARM - they discovered it two years ago."
Golden West's mortgages have an average loan-to-value ratio of 68% and the average size is less than $250,000.
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