April 11 (Bloomberg) -- Wachovia Corp., the fourth-largest U.S. bank, will require minimum credit scores for mortgage borrowers and will reduce loan-to-value ratios because of the weak U.S. housing market.

Beginning April 26, the bank will rate markets as either ``stable'', ``watch'' or ``distressed'' based on an index of home prices, the number of homes for sale and how quickly homes are being sold, David Pope, head of Wachovia Mortgage and Retail Credit, said in a memo to employees today.

The bank will require borrowers in distressed markets to have higher minimum credit scores and to take on less debt in relation to the property's value, Pope said. The new policy applies to loans that Wachovia holds on its balance sheet rather than selling to the secondary mortgage market.

Wachovia spent $24 billion in 2006 to acquire Golden West Financial Corp., an Oakland, California-based lender that had $120 billion in so-called option adjustable-rate mortgages, with flexible payments that proved to be much riskier than fixed-rate loans. Almost 60 percent of Wachovia's home loans are in California, among the states hardest hit as housing prices slide.

``Everybody is pulling back like Wachovia and it's troubling because it's going to exacerbate the problem and slow the recovery,'' said David Lykken, an Austin, Texas-based industry consultant. ``I know that every regulated finance institution is being visited by the regulators and decisions on mortgage lending are being heavily scrutinized right now.''

Delinquencies Rising

Delinquencies on the adjustable-rate loans are rising faster than traditional fixed-rate mortgages, though the bank's portfolio of option ARMs remains profitable, Wachovia Chief Risk Officer Donald Truslow said in a March 12 investor presentation. Details on Wachovia's lending will be announced when the bank reports its earnings April 18.

Wells Fargo & Co., the nation's second largest mortgage lender behind Countrywide Financial Corp., and other lenders use guidelines specific to their markets, similar to Wachovia's new policy, Lykken said.

Wachovia, based in Charlotte, North Carolina, wouldn't disclose the markets it views as distressed, spokesman Don Vecchiarello said. The bank expects the policy changes to slow lending volume in some markets this year, he said.

Borrowers' assets and employment will always be verified under the new policy, Pope said in the memo.

Late Payments

The proportion of U.S. borrowers at least 30 days late on their payments rose to 4.5 percent in March, compared with about 2.9 percent in the same period a year ago, according to data collected by credit reporting bureau Equifax Inc. and analyzed by Moody's Economy.com. Mark Zandi, chief economist at the Moody's unit, yesterday called the report ``astonishingly bad.''

California's Central Valley and Inland Empire regions and Florida's southwest and panhandle areas were particularly weak, Truslow said on March 12.

A housing price report by mortgage insurer PMI Group, Inc. yesterday also cited California and Florida, plus Arizona and Nevada as softer markets.

Wachovia had considered ending option-ARMs in the most distressed California markets. It will continue offering the loans everywhere, Vecchiarello said.

Wachovia declined 12 cents to $27.75 at 4 p.m. in New York Stock Exchange trading. The company's stock has declined 48 percent in the past year, compared with a 30 percent fall in the 24-company KBW Bank Index.

To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

Last Updated: April 11, 2008 16:55 EDT