Wells Fargo 2015 Annual Report Download - page 75

Table 26 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
Table 26: Pick-a-Pay Portfolio (1)
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.
December 31, 2015
PCI loans All other loans
Ratio of Ratio of
Adjusted carrying carrying
unpaid Current value to value to
principal LTV Carrying current Carrying current
(in millions) balance (2) ratio (3) value (4) value (5) value (4) value (5)
California $ 16,552 73% $ 13,405 58% $ 9,694 53%
Florida 1,875 82 1,307 55 2,009 66
New Jersey 780 81 610 60 1,314 69
New York 526 77 465 62 638 67
Texas 204 57 185 51 781 44
Other states 3,834 79 3,066 62 5,591 65
Total Pick-a-Pay loans $ 23,771 75 $ 19,038 59 $ 20,027 59
(1) The individual states shown in this table represent the top five states based on the total net carrying value of the Pick-a-Pay loans at the beginning of 2015.
(2) 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.
(3) The current LTV ratio is calculated as the adjusted unpaid principal balance divided by the collateral value. Collateral values are generally determined using automated
valuation models (AVM) and are updated quarterly. AVMs are computer-based tools used to estimate market values of homes based on processing large volumes of market
data including market comparables and price trends for local market areas.
(4) Carrying value, which does not reflect the allowance for loan losses, includes remaining purchase accounting adjustments, which, for PCI loans may include the
nonaccretable difference and the accretable yield and, for all other loans, an adjustment to mark the loans to a market yield at date of merger less any subsequent charge-
offs.
(5) The ratio of carrying value to current value is calculated as the carrying value divided by the collateral value.
To maximize return and allow flexibility for customers to
avoid foreclosure, we have in place several loss mitigation
strategies for our Pick-a-Pay loan portfolio. We contact
customers who are experiencing financial difficulty and may in
certain cases modify the terms of a loan based on a customer’s
documented income and other circumstances.
We also have taken steps to work with customers to
refinance or restructure their Pick-a-Pay loans into other loan
products. For customers at risk, we offer combinations of term
extensions of up to 40 years (from 30 years), interest rate
reductions, forbearance of principal, and, in certain cases we
may offer principal forgiveness to customers with substantial
property value declines based on affordability needs.
In 2015, we completed more than 3,600 proprietary and
Home Affordability Modification Program (HAMP) Pick-a-Pay
loan modifications. We have completed nearly 133,000
modifications since the Wachovia acquisition, resulting in over
$6.1 billion of principal forgiveness to our Pick-a-Pay customers.
There remains $10.6 million of conditional forgiveness that can
be earned by borrowers through performance over a three year
period.
Due to better than expected performance observed on the
Pick-a-Pay PCI portfolio compared with the original acquisition
estimates, we have reclassified $7.1 billion from the
nonaccretable difference to the accretable yield since acquisition.
Our cash flows expected to be collected have been favorably
affected by lower expected defaults and losses as a result of
observed and forecasted economic strengthening, particularly in
housing prices, and our loan modification efforts. These factors
are expected to reduce the frequency and severity of defaults and
keep these loans performing for a longer period, thus increasing
future principal and interest cash flows. The resulting increase in
the accretable yield will be realized over the remaining life of the
portfolio, which is estimated to have a weighted-average
remaining life of approximately 12.0 years at December 31, 2015,
up from 11.7 years at December 31, 2014, due to changes in
composition of cash flows due to improving credit performance.
The accretable yield percentage at December 31, 2015 was 6.21%,
up from 6.15% at the end of 2014 due to favorable changes in the
expected timing and composition of cash flows resulting from
improving credit and prepayment expectations. Fluctuations in
the accretable yield are driven by changes in interest rate indices
for variable rate PCI loans, prepayment assumptions, and
expected principal and interest payments over the estimated life
of the portfolio, which will be affected by the pace and degree of
improvements in the U.S. economy and housing markets and
projected lifetime performance resulting from loan modification
activity. Changes in the projected timing of cash flow events,
including loan prepayments, liquidations, modifications and
short sales, can also affect the accretable yield rate and the
estimated weighted-average life of the portfolio.
The predominant portion of our PCI loans is included in the
Pick-a-Pay portfolio. For further information on the judgment
involved in estimating expected cash flows for PCI loans, see the
“Critical Accounting Policies – Purchased Credit-Impaired
Loans” section and Note 1 (Summary of Significant Accounting
Policies) to Financial Statements in this Report.
Wells Fargo & Company
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