This look at Wells Fargo (WFC) strangely begins with an investigation into 3.875% mortgage loans - fixed for 30 years - offered by Arbor Custom Homes near Portland Oregon.



3.875% is rather interesting given that current mortgage rates are much higher as the following Table of Mortgage Rates from Bloomberg shows.







The Lending Partner for Arbor Homes is Wells Fargo. How can Wells offer a fixed rate of 3.875% for 30 years given the current rate term structure and conditions in the MBS/CDO markets?



The only answer I can come up with is Wells Fargo is going to promptly bundle and dump those securities straight into the insolvent arms of Freddie Mae (FNM) and Fannie Mac (FRE). Who else would take them?



Furthermore, the Portland area is saturated with homes already (see the section Happy Valley Foreclosed in Housing gridlock: Trapped in Suburbia for more details).



Leading the Way Home



Wells Fargo claims to be Leading the Way Home to Stabilize Hard-Hit Communities.



Wells Fargo Merger Gives 478,000 Wachovia Customers Access to New Wells Fargo Solutions if Their Mortgage Payments Become At-Risk.



Through active calling and letter-writing campaigns, workshops, regional outreach events and door-to-door contact, Wells Fargo Home Mortgage has reached 94 percent of its customers who are two or more payments past due. For every 10 of these customers, it has worked with seven on a solution, two declined the help, and the remainder cannot be reached or a solution simply cannot be found. Of the customers who received a loan modification, one year after the loan was modified approximately seven of every 10 of these customers were either current on their loans or less than 90-days past due.

30% of Wells Fargo's reworked mortgage loans are 90 days past due or longer, one year after loan modification.

Wells Fargo 4th Quarter Earnings

“Despite the unprecedented contraction in the credit markets, we remained ‘open for business’ and continued to lend to credit-worthy customers. We made $106 billion in new loan commitments during 2008 to consumer, small business and commercial customers and originated $230 billion of residential mortgages.



The allowance for credit losses, including unfunded commitments, totaled $21.7 billion (Wells Fargo and Wachovia combined) at December 31, 2008, compared with $8.0 billion (Wells Fargo only) at September 30, 2008.



The Wachovia acquisition was completed on December 31, 2008, and therefore Wachovia’s results are not consolidated in Wells Fargo’s income statement. Wells Fargo’s balance sheet includes Wachovia’s period-end balance sheet data net of closing purchase accounting adjustments.

Wells Fargo's Balance Sheet

Off-Balance Sheet Exposure

OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS



Almost all of our off-balance sheet arrangements result from securitizations. Based on market conditions, from time to time we may securitize home mortgage loans and other financial assets, including commercial mortgages. We normally structure loan securitizations as sales, in accordance with FAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities – a replacement of FASB Statement No. 125. This involves the transfer of financial assets to certain qualifying special-purpose entities (QSPEs) that we are not required to consolidate.

What Exactly Are QSPEs?

Basically, an off–balance-sheet entity is created by a party (the transferor or the sponsor) by transferring assets to another party (the SPE) to carry out a specific purpose, activity, or series of transactions.



Regardless of their legal form, off–balance-sheet entities share the following characteristics:



They are often thinly capitalized.

They typically have no independent management or employees.

Their administrative functions are often performed by a trustee who receives and distributes cash in accordance with the terms of contracts and who serves as an intermediary between the SPE and the parties that created it.

If the SPE holds assets, one of these parties usually services them under a servicing agreement.

The challenge for investors is the difficulty in spotting these transactions. Unfortunately, the magnitude of the dollar amounts involved in these transactions notwithstanding, any available disclosures about them are buried in footnotes . There is no easy way of estimating the amount of assets or liabilities that are subject to these arrangements.



As the Enron crisis brought attention to the use of SPEs, FASB responded by issuing a proposed interpretation of existing accounting principles aimed at putting many off–balance-sheet entities back onto the balance sheet of the companies that created them.



The current accounting standards require an enterprise to include in its consolidated financial statements subsidiaries in which it has a controlling financial interest. The existing common definition of “control” is met when a parent company has more than 50% of the voting stock in a subsidiary. Over the years, however, companies have found ways to obtain economic control of other entities without owning 50% of the voting stock, thereby avoiding consolidation of these entities.



Not Practical To Tell The Truth

FASB Postpones Off-Balance-Sheet Rule for a Year



On July 30th, FASB Postpones Off-Balance-Sheet Rule for a Year.



The Financial Accounting Standards Board postponed a measure, opposed by Citigroup Inc. and the securities industry, forcing banks to bring off-balance-sheet assets such as mortgages and credit-card receivables back onto their books.



FASB, the Norwalk, Connecticut-based panel that sets U.S. accounting standards, voted 5-0 today to delay the rule change until fiscal years starting after Nov. 15, 2009. The board needs to give financial institutions more time to prepare for the switch, FASB member Thomas Linsmeier said at a board meeting.



"We need to get a new standard into effect," Linsmeier said, though " it's not practical " to begin requiring companies to put assets underlying securitizations onto their books this year.



Citigroup's Mysterious Shadow Assets



Of that $11 trillion in total bank off balance sheet entities, Citigroup has $1.1 trillion of it. Enquiring minds may wish to consider Citigroup's $1.1 Trillion in Mysterious Shadow Assets.



If Citigroup is looking for an award, it can take the blue ribbon for greed, arrogance, and stupidity in the off balance sheet category. There are plenty of other categories and more blue ribbons will be awarded. Nominations are being taken now.

Balance Sheet Is The Future

The income statement is the past. The balance sheet is the future.