Moody's may cut Wachovia on mortgage exposures

NEW YORK, July 10 (Reuters) - Moody's Investors Service on Thursday said it may cut its debt ratings on Wachovia Corp (WB.N: Quote, Profile, Research) after the bank said it expects a second-quarter loss of up to $2.8 billion.

Wachovia, the fourth-largest U.S. bank, said on Wednesday that mortgage and legal problems would result in a second-quarter loss of $2.6 billion to $2.8 billion, much larger than many analysts expected.

The bank also named senior Treasury Department official Robert Steel as its chief executive. For details, see [ID:nN09436713]

Expectations on losses in Wachovia's option adjustable rate mortgage portfolio will be key to Moody's review, as these mortgages constitute around 25 percent of Wachovia's total loans, Moody's said.

"Initially, we thought the lifetime losses on this book would be around $8.4 billion, but the review will update and possibly increase our loss expectations," Moody's analyst Sean Jones said in a statement.

The rating review will also focus on Wachovia's ability to offset charges through internal and external and capital growth initiatives, and asset quality trends in its other portfolios, Moody's said.

Strategic initiatives that may be instituted under Steel will also be considered, the rating agency said.

Moody's rates Wachovia's senior debt "Aa3," the fourth highest investment grade.

The cost to insure Wachovia's debt with credit default swaps rose 16 basis points on Thursday, to 235 basis points, or $235,000 per year for five years to insure $10 million in debt. (Reporting by Karen Brettell; Additional reporting by Anastasija Johnson; Editing by Leslie Adler)