Wells Fargo 2014 Annual Report Download - page 71

Pick-a-Pay Portfolio The Pick-a-Pay portfolio was one of the
consumer residential first mortgage portfolios we acquired from
Wachovia and a majority of the portfolio was identified as PCI
loans.
The Pick-a-Pay portfolio includes loans that offer payment
options (Pick-a-Pay option payment loans), and also includes
loans that were originated without the option payment feature,
loans that no longer offer the option feature as a result of our
modification efforts since the acquisition, and loans where the
customer voluntarily converted to a fixed-rate product. The Pick-
a-Pay portfolio is included in the consumer real estate 1-4 family
first mortgage class of loans throughout this Report. Table 26
Table 26: Pick-a-Pay Portfolio - Comparison to Acquisition Date
provides balances by types of loans as of December 31, 2014, as a
result of modification efforts, compared to the types of loans
included in the portfolio at acquisition. Total adjusted unpaid
principal balance of PCI Pick-a-Pay loans was $26.3 billion at
December 31, 2014, compared with $61.0 billion at acquisition.
Primarily due to modification efforts, the adjusted unpaid
principal balance of option payment PCI loans has declined to
16% of the total Pick-a-Pay portfolio at December 31, 2014,
compared with 51% at acquisition.
December 31, December 31,
2014 2008
Adjusted Adjusted
unpaid unpaid
principal principal
(in millions) balance (1) % of total balance (1) % of total
Option payment loans $ 20,258 41% $ 99,937 86%
Non-option payment adjustable-rate and fixed-rate loans 6,776 14 15,763 14
Full-term loan modifications 22,674 45 — —
Total adjusted unpaid principal balance $ 49,708 100% $ 115,700 100%
Total carrying value $ 45,002 $ 95,315
(1) Adjusted unpaid principal balance includes write-downs taken on loans where severe delinquency (normally 180 days) or other indications of severe borrower financial
stress exist that indicate there will be a loss of contractually due amounts upon final resolution of the loan.
Pick-a-Pay loans may have fixed or adjustable rates with
payment options that include a minimum payment, an interest-
only payment or fully amortizing payment (both 15 and 30 year
options). Total interest deferred due to negative amortization on
Pick-a-Pay loans was $606 million at December 31, 2014, and
$902 million at December 31, 2013. Approximately 95% of the
Pick-a-Pay customers making a minimum payment in
December 2014 did not defer interest, compared with 93% in
December 2013.
Deferral of interest on a Pick-a-Pay loan may continue as
long as the loan balance remains below a pre-defined principal
cap, which is based on the percentage that the current loan
balance represents to the original loan balance. A significant
portion of the Pick-a-Pay portfolio has a cap of 125% of the
original loan balance. Most of the Pick-a-Pay loans on which
there is a deferred interest balance re-amortize (the monthly
payment amount is reset or “recast”) on the earlier of the date
when the loan balance reaches its principal cap, or generally the
10-year anniversary of the loan. After a recast, the customers’
new payment terms are reset to the amount necessary to repay
the balance over the remainder of the original loan term.
Due to the terms of the Pick-a-Pay portfolio, any remaining
recast risk is covered through our allowance for credit losses and
nonaccretable difference. Based on assumptions of a flat rate
environment, if all eligible customers elect the minimum
payment option 100% of the time and no balances prepay, we
would expect the following balances of loans to recast based on
reaching the principal cap and also experiencing a payment
change over the annual 7.5% reset: $56 million in 2015,
$29 million in 2016, $26 million in 2017, $0.4 million in 2018
and $0.2 million in 2019. In addition, in a flat rate environment,
we would expect the following balances of loans to start fully
amortizing due to reaching their recast anniversary date and also
having a payment change over the annual 7.5% reset:
$339 million in 2015, $395 million in 2016, $1,496 million in
2017, $208 million in 2018 and $4 million in 2019. In 2014, the
amount of loans reaching their recast anniversary date and also
having a payment change over the annual 7.5% reset was
$96 million.
Table 27 reflects the geographic distribution of the Pick-a-
Pay portfolio broken out between PCI loans and all other loans.
The LTV ratio is a useful metric in predicting future real estate
1-4 family first mortgage loan performance, including potential
charge-offs. Because PCI loans were initially recorded at fair
value, including write-downs for expected credit losses, the ratio
of the carrying value to the current collateral value will be lower
compared with the LTV based on the adjusted unpaid principal
balance. For informational purposes, we have included both
ratios for PCI loans in the following table.
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