The following discussion and analysis of our financial condition and results of operations should be read in conjunction with selected consolidated financial data set forth in Item 6 and our audited consolidated financial statements and related notes included in this Form 10-K. In addition to historical information, the discussion in this Form 10-K contains certain forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated by these forward-looking statements due to factors including, but not limited to, those factors set forth under "-Risk Governance and Administration" and elsewhere in this Form 10-K. See also "Forward-Looking Statements" in Part I above.

For the tax year ended December 31, 2008, we expect to be taxed as a REIT and we intend to comply with the relevant provisions of the Code to be taxed as a REIT. These provisions for qualifying as a REIT for federal income tax purposes are complex, involving many requirements, including among others, distributing the majority of our earnings to shareholders and satisfying certain asset, income and stock ownership tests. To the extent we meet those provisions, with the exception of the income of our taxable REIT subsidiary, WPR, we will not be subject to federal income tax on net income. We currently believe that we continue to satisfy each of these requirements and therefore continue to qualify as a REIT. We continue to monitor each of these complex tests.

In the event we do not continue to qualify as a REIT, we believe there should be minimal adverse effect of that characterization to us or to our shareholders:

† From a shareholder's perspective, the dividends we pay as a REIT are ordinary income not eligible for the dividends received deduction for corporate shareholders or for the favorable maximum 15% rate applicable to qualified dividends received by non-corporate taxpayers. If we were not a REIT, dividends we pay generally would qualify for the dividends received deduction and the favorable tax rate applicable to non-corporate taxpayers.

† In addition, we would no longer be eligible for the dividends paid deduction, thereby creating a tax liability for us. Wachovia agreed to make a capital contribution to us equal in amount to any income taxes payable by us. Therefore, a failure to qualify as a REIT is not expected to result in any net liability to us.

Critical Accounting Policies

Our accounting and reporting policies are in accordance with U.S. generally accepted accounting principles ("GAAP"), and they conform to general practices within the applicable industries. We use a significant amount of judgment and estimates based on assumptions for which the actual results are uncertain when we make the estimations. We have identified the allowance for loan losses policy as being particularly sensitive in terms of judgments and the extent to which estimates are used. Periodically, the Audit Committee of our board of directors reviews these policies, the judgment and estimation processes involved, and related disclosures.

Allowance for Loan Losses and Reserve for Unfunded Lending Commitments

The allowance for loan losses and reserve for unfunded lending commitments (collectively, the "allowance for credit losses") are maintained at levels we believe are adequate to absorb probable losses inherent in the loan portfolio and unfunded commercial lending commitments as of the date of the consolidated financial statements. We monitor qualitative and quantitative credit metrics and trends, including changes in the levels of past due, criticized and nonperforming loans as part of our allowance modeling process. In addition, we rely on estimates and exercise judgment in assessing credit risk.

As a subsidiary of Wachovia until December 31, 2008, our loans were subject to the same analysis of the adequacy of the allowance for loan losses as loans maintained in all of Wachovia's subsidiaries, including the Bank. Beginning in 2009, our loans are subject to the same analysis of the adequacy of the allowance for loan losses as loans maintained in all of Wells Fargo's subsidiaries, including the Bank. Wachovia employed a variety of modeling and estimation tools for measuring credit risk. These tools were periodically reevaluated and refined, as appropriate.

The following provides a description of Wachovia's methodology, which was Wachovia Funding's methodology.

Our model for the allowance for loan losses had four components: formula-based components for both the commercial and consumer portfolios, each including a factor for historical loss variability, a reserve for impaired commercial loans and an unallocated component, when applicable. The only period in which we had an unallocated component was the third quarter of 2008, and it related to an increased level of uncertainty in the estimation processes we use.

For commercial loans, the formula-based component of the allowance for loan losses is based on statistical estimates of the average losses observed by credit grade. Average losses for each credit grade reflect the annualized historical default rate and the average losses realized for defaulted loans.

For consumer loans, the formula-based component of the allowance for loan losses is based on statistical estimates of the average losses observed by product classification. We compute average losses for each product class using historical loss data, including analysis of delinquency patterns, origination vintage and various credit risk forecast indicators.

For both commercial and consumer loans, the formula-based components include additional amounts to establish reasonable ranges that consider observed historical variability in losses. This historical loss variability component represents a measure of the potential for significant volatility above average losses over short periods. Factors we may consider in setting these amounts include, but are not limited to, industry-specific data, geographic data, portfolio-specific risks or concentrations, and macroeconomic conditions.

At December 31, 2008, the formula-based components of the allowance were $23.5 million for commercial loans and $245.8 million for consumer loans compared with $33.6 million and $59.5 million, respectively, at December 31, 2007.

When applicable, we have established specific reserves within the allowance for loan losses for impaired loans, which we define as commercial loans on nonaccrual status. We individually review any impaired loans with a minimum total exposure of $5.0 million. The reserve for each individually reviewed loan is based on the difference between the loan's carrying amount and the loan's estimated fair value. No other reserve is provided on impaired loans that are individually reviewed. At December 31, 2008 and 2007, we did not have any impaired loans over $5.0 million. Generally, loans on nonaccrual status were considered to be credit-impaired for purposes of applying SOP 03-3. Purchased credit-impaired loans are accounted for under SOP 03-3 and initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loan. Accordingly, an allowance for credit losses related to these loans is not carried over in purchase accounting.

The allowance for loan losses may be supplemented with an unallocated component which reflects the inherent uncertainty of our estimates. The amount of this component and its relationship to the total allowance for loan losses may change from one period to another as warranted by facts and circumstances. We anticipate the unallocated component of the allowance will generally not exceed 5 percent of the total allowance for loan losses. At December 31, 2008, there was no unallocated component of the allowance for loan losses.

The reserve for unfunded lending commitments, which relates only to commercial business where our intent is to classify the funded loan in the loan portfolio, is based on a modeling process that is consistent with the methodology described above for the commercial portion of the allowance for loan losses. In addition, this model includes as a key factor the historical average rate at which unfunded commercial exposures have been funded at time of default. At December 31, 2008 and 2007, the reserve for unfunded lending commitments was $570 thousand and $488 thousand, respectively. As a result of Wells Fargo's acquisition of Wachovia, Wachovia Funding recorded a $348 thousand conforming adjustment to the provision for loan losses at December 31, 2008, to increase the reserve for unfunded lending commitments to align with Wells Fargo's methodology.

The factors supporting the allowance for loan losses and the reserve for unfunded lending commitments as described above does not diminish the fact that the entire allowance for loan losses and reserve for unfunded lending commitments are available to absorb losses in the loan portfolio and the related commercial commitment portfolio, respectively. Our principal focus, therefore, is on the adequacy of the total allowance for loan losses and reserve for unfunded lending commitments.

Results of Operations

For purposes of this discussion, the term "loans" includes loans and loan participation interests, the term "residential loans" includes home equity loans and residential mortgages, and the term "commercial loans"

includes commercial and commercial real estate loans. See Table 1, Performance and Dividend Payout Ratios, following "-Accounting and Regulatory Matters" for certain performance and dividend payout ratios for the years ended December 31, 2008, 2007 and 2006.

Although we have the authority to acquire interests in an unlimited number of loans and other assets from unaffiliated third parties, the majority of our interests in loans that we have acquired have been acquired from the Bank or an affiliate pursuant to loan participation agreements between the Bank or an affiliate and us. Substantially all of our assets were acquired directly from the Bank. The Bank either originated the mortgage assets, or purchased them from other financial institutions or acquired them as part of the acquisition of other financial institutions.

In each of the years in the three-year period ended December 31, 2008, we purchased loans from the Bank at fair value. In 2008, 2007, and 2006, Wachovia Funding paid $3.6 billion, $3.7 billion and $5.2 billion, respectively, for residential loans.

2008 to 2007 Comparison

Acquisition. On December 31, 2008, Wells Fargo acquired Wachovia and accordingly, under purchase accounting, the assets and liabilities of Wachovia and its subsidiaries were recorded at their respective fair values at December 31, 2008. The more significant fair value adjustments were recorded to the loan portfolio. Because the acquisition occurred on the last day of the reporting period, the income statement for 2008 was not affected by purchase accounting. Information for all "predecessor" periods prior to the merger is presented using our historical basis of accounting, which impacts comparability to our "successor" period.

Net income available to common stockholders. We earned net income available to common stockholders of $474.0 million and $679.6 million in 2008 and 2007, respectively. The decrease was driven by higher provision for credit losses, lower net interest income and higher loan servicing costs, partially offset by higher gains on interest rate swaps and lower management fees.

Interest Income. Interest income of $1.2 billion in 2008 decreased $55.9 million, or 5%, compared with 2007 driven by decreases in interest rates on interest-earning assets, primarily commercial loans and overnight eurodollar deposits, compared with the same period one year ago. The average interest rate on total interest-earning assets was 6.54% in 2008 compared with 6.73% in 2007 which reflects the impact of a lower interest rate environment in 2008. Average home equity loans increased $333.9 million to $12.7 billion compared with 2007 while average commercial loans decreased $539.9 million to $2.8 billion in the same period due to pay-downs. In the first, third and fourth quarters of 2008, proceeds from loan pay-downs were reinvested in home equity loans. Average residential mortgages decreased $165.2 million to $792.4 million in 2008 compared with the prior year. We currently anticipate that we will continue to reinvest loan pay-downs primarily in consumer real-estate secured loans. Interest income on cash invested in overnight eurodollar deposits decreased $47.6 million to $30.9 million in 2008 compared with 2007 driven by lower short-term interest rates in 2008. See the interest rate risk management section under "Risk Governance and Administration" for more information on interest rates and interest income.

The average balances, interest income and rates related to interest-earning assets for the two years ended December 31, 2008, are presented below. The purchase accounting adjustments recorded on Wachovia Funding's interest-earning assets and interest-earning liabilities to reflect market rates of interest for each instrument or pool of instruments will affect net interest income beginning in first quarter 2009.

                                                                       Year Ended                                             Year Ended
                                                            December 31, 2008 (a)                                      December 31, 2007
                                        Average         Interest         Interest              Average         Interest         Interest
(In thousands)                         Balances           Income            Rates             Balances           Income            Rates
                                  (Predecessor)    (Predecessor)    (Predecessor)        (Predecessor)    (Predecessor)    (Predecessor)
Commercial loans                $     2,848,256          130,757             4.59 %    $     3,388,175          231,161             6.82 %
Home equity loans                    12,705,928          969,849             7.63           12,372,049          861,407             6.96
Residential mortgages                   792,391           41,435             5.23              957,583           57,765             6.03
Interest-bearing deposits in
banks and other earning
assets                                1,592,639           30,892             1.94            1,531,125           78,511             5.13

Total earning assets            $    17,939,214        1,172,933             6.54 %    $    18,248,932        1,228,844             6.73 %

(a) 2008 average balances and interest income based on predecessor.

We allocate the changes in net interest income to changes in either average balances or average interest rates. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion of the percentage changes in average volume and average interest rate. The dollar amount of change in interest income related to our interest-earning assets for the year ended December 31, 2008, is presented below.

                                                                   2008 Compared with 2007
                                                                             (Predecessor)

                                                          Interest                Variance
                                                            Income         Attributable to
(In thousands)                                            Variance        Rate      Volume
EARNING ASSETS
Commercial loans                                        $ (100,404 )   (69,593 )   (30,811 )
Home equity loans                                          108,442      84,076      24,366
Residential mortgages                                      (16,330 )    (7,028 )    (9,302 )
Interest-bearing deposits in banks and other earning
assets                                                     (47,619 )   (49,793 )     2,174

Total earning assets                                    $  (55,911 )   (42,338 )   (13,573 )

Interest Expense. Interest expense decreased to $6.1 million in 2008 compared with $28.6 million in 2007 reflecting a lower interest rate environment in 2008 and decreased borrowings on our line of credit with the Bank, which funded our lower volume of purchases of home equity loans in the second and third quarters of 2007 and the first, third and fourth quarters of 2008. At December 31, 2008, there was an outstanding balance of $170.0 million under the line of credit with the Bank.

Provision for Credit Losses. The provision for credit losses was $321.6 million in 2008 compared with $21.2 million in 2007. The increase in the provision for credit losses was primarily driven by continued weakness in housing markets, particularly in Florida. See the allowance for loan losses section under "Balance Sheet Analysis" and "Critical Accounting Policies" for further information.

Interest Rate Swaps. Our interest rate swaps lose value in an increasing rate environment and gain value in a declining rate environment. The gain on interest rate swaps was $16.1 million in 2008 compared with a gain of $7.6 million in 2007. Included in gain on interest rate swaps was expense associated with the derivative cash collateral received of $5.6 million and $16.6 million in 2008 and 2007, respectively. The

increase in the gain on interest rate swaps is primarily due to a decrease in expense on cash collateral as the result of a decrease in short-term rates paid on these balances.

Loan Servicing Costs. Loan servicing costs increased $3.2 million to $65.3 million in 2008 which reflects the impact of reinvesting pay-downs in home equity loans which have a higher servicing fee related to other loan products. These loans are serviced by the Bank pursuant to our participation and servicing agreements which include market-based fees. For home equity loans, the monthly fee is equal to the outstanding principal balance of each loan multiplied by 0.50% per annum. For commercial loans, the monthly fee is equal to the total committed amount of each loan multiplied by 0.025% per annum. Servicing fees related to residential mortgages are negotiated when the Bank purchases loans from unrelated third parties, and are based on the purchase price of the loans.

Management Fees. Management fees were $18.7 million in 2008 compared with $39.1 million in 2007 reflecting Wachovia's decreased allocable expense base. Management fees represent reimbursements to Wachovia for general overhead expenses paid on our behalf. In both 2008 and 2007, Wachovia charged the management fee to affiliates that have over $10.0 million in qualifying assets. If the affiliate qualifies for an allocation, the affiliate is assessed monthly management fees based on its relative percentage of total consolidated assets and noninterest expense plus a 10% markup.

Other Expense. Other expense primarily consists of costs associated with foreclosures on residential properties. In 2008 and 2007, these costs were not significant.

Income Tax Expense. Income tax expense, which is primarily based on the pre-tax income of WPR, our taxable REIT subsidiary, was $13.2 million in 2008 compared with $16.8 million in 2007 with the decrease related to a decrease in pre-tax income. WPR holds our interest rate swaps as well as certain cash investments. The decrease in pre-tax income in WPR was due to lower interest income on cash invested in overnight eurodollar deposits compared with the prior year driven by lower short-term interest rates in 2008. Partially offsetting was the effect of higher gains on interest rate swaps in 2008 compared with the prior year.

2008 to 2007 Fourth Quarter Comparison

Net income available to common stockholders decreased to $86.6 million in the fourth quarter of 2008 compared with $167.6 million in the fourth quarter of 2007, which was driven by a $119.3 million increase in the provision for credit losses. The majority of the income for both quarters was associated with interest on commercial loans, home equity loans and residential mortgages. Net interest income increased $9.5 million to $310.8 million in the fourth quarter of 2008 compared with the fourth quarter of 2007 due to the impact of a higher yielding mix of loans. Average loans of $16.4 billion in the fourth quarter of 2008 decreased $570.9 million, or 3%, from the fourth quarter of 2007. This decrease was driven by lower average commercial loans of $2.7 billion compared with $3.2 billion in the fourth quarter of 2007.

Provision for credit losses was $134.5 million in the fourth quarter of 2008 compared with $15.2 million in the fourth quarter of 2007. The higher provision expense in the fourth quarter of 2008 was driven mostly by the effect of significant weakness in certain housing markets. See the allowance for loan losses section under "Balance Sheet Analysis" and "Critical Accounting Policies".

Gains on interest rate swaps were $11.5 million in the fourth quarter of 2008 compared with $5.4 million in the fourth quarter of 2007. The gain in the fourth quarter of 2008 primarily reflects lower long-term interest rates and a higher net present value, as a result of the passage of time, compared with the fourth quarter of 2007.

Loan servicing costs of $17.0 million in the fourth quarter of 2008 were essentially flat compared with the fourth quarter of 2007. Management fees of $5.7 million in the fourth quarter of 2008 decreased $1.1 million from the fourth quarter of 2007 reflecting Wachovia's decreased allocable expense base.

Income tax expense was $5.5 million in the fourth quarter of 2008 compared with $5.0 million in the fourth quarter of 2007 due to higher pre-tax income in WPR, our taxable REIT subsidiary. The higher pre-tax income in the fourth quarter of 2008 was driven by higher gains on interest rate swaps in the fourth quarter of 2008 compared with the fourth quarter of 2007, partially offset by lower interest income on cash invested in overnight Eurodollar deposits in the fourth quarter of 2008 compared with the same quarter one year ago.

2007 to 2006 Comparison

Net income available to common stockholders. We earned net income available to common stockholders of $679.6 million and $670.5 million in 2007 and 2006, respectively. This increase was driven by higher net interest income and a gain on interest rate swaps, partially offset by higher provision for credit losses, loan servicing costs, income tax expense and dividends on preferred stock.

Interest Income. Interest income of $1.2 billion in 2007 increased $54.2 million, or 5%, compared with 2006. This was primarily driven by increases in the interest rates on interest-earning assets compared with the same period a year ago. The average interest rate on total interest-earning assets was 6.73% in 2007 compared with 6.53% in 2006. Average home equity loans increased $1.4 billion to $12.4 billion compared with 2006 while average commercial loans decreased $944.7 million to $3.4 billion in the same period due to pay-downs. Average residential mortgages decreased $283.2 million to $957.6 million in 2007 compared with 2006. We currently anticipate that we will continue to reinvest loan pay-downs primarily in consumer real-estate secured loans. Interest income on cash invested in overnight eurodollar deposits increased $4.7 million to $78.5 million in 2007 compared with 2006 driven by the impact of higher average balances and a higher interest rate environment in 2007. See the interest rate risk management section under "Risk Governance and Administration" for more information on interest rates and interest income.

The average balances, interest income and rates related to interest-earning assets for the two years ended December 31, 2007, are presented below.

                                                                  Year Ended                                             Year Ended
                                                           December 31, 2007                                      December 31, 2006
                                   Average         Interest         Interest              Average         Interest         Interest
(In thousands)                    Balances           Income            Rates             Balances           Income            Rates
                             (Predecessor)    (Predecessor)    (Predecessor)        (Predecessor)    (Predecessor)    (Predecessor)
Commercial loans           $     3,388,175          231,161             6.82 %    $     4,332,833          289,321             6.68 %
Home equity loans               12,372,049          861,407             6.96           10,937,891          740,679             6.77
Residential mortgages              957,583           57,765             6.03            1,240,805           70,852             5.71
Interest-bearing
deposits in banks and
other earning assets             1,531,125           78,511             5.13            1,481,047           73,823             4.98

Total earning assets       $    18,248,932        1,228,844             6.73 %    $    17,992,576        1,174,675             6.53 %

We allocate the changes in net interest income to changes in either average balances or average interest rates. Because of the numerous simultaneous volume and rate changes during any period, it is not possible to precisely allocate such changes between volume and rate. For this table, changes that are not solely due to either volume or rate are allocated to these categories in proportion of the percentage changes in average

volume and average interest rate. The dollar amount of change in interest income related to our interest-earning assets for the year ended December 31, 2007, is presented below.

                                                                         2007 Compared with 2006

                                                    Interest                            Variance
                                                      Income                     Attributable to
(In thousands)                                      Variance               Rate           Volume
                                              (Predecessor)       (Predecessor)    (Predecessor)
EARNING ASSETS
Commercial loans                             $       (58,160 )            5,604          (63,764 )
Home equity loans                                    120,728             22,243           98,485
Residential mortgages                                (13,087 )            3,542          (16,629 )
Interest-bearing deposits in banks and
other earning assets                                   4,688              2,156            2,532
. . .