Wachovia Corp. is taking a 25% loss on the sale of California homes financed by payment-option ARMs, and the banking company has seen the performance of those negatively amortizing loans deteriorate over the past few quarters. The Charlotte, N.C.-based bank reported a $1 billion increase in nonperforming option adjustable-rate mortgages as the percentage of loans 90 days or more past due in its $120 billion portfolio rose from 1.47% in the third quarter to 2.31% in the fourth quarter. Wachovia took a $93 million chargeoff against the portfolio. But company executives say they expect the option ARM business to remain profitable, despite rising chargeoffs and real-estate-owned sales. The banking company reported a 98% drop in earnings to $51 million in the fourth quarter compared with the level of a year earlier, mainly due to chargeoffs and provisioning relating to its residential and commercial mortgage portfolios. "Lower earnings largely reflect the effect of continued disruption in the capital markets, which resulted in net valuation losses of $1.7 billion as well as a provision for credit losses of $1.5 billion, which exceeded net chargeoffs by $1.0 billion," the bank said.

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