Wachovia Corp., the nation's largest payment option adjustable-rate mortgage investor, is treating its roughly $122 billion portfolio like a "distressed asset" and will take more hits on the loans, according to a report Sandler O'Neill & Partners LP issued Friday.

The Charlotte company is trying to refinance some of its customers into Federal Housing Administration loans, the report said.

Wachovia inherited much of its option ARM exposure when it bought Golden West Financial Corp. two years ago.

Kevin Fitzsimmons, a Sandler O'Neill analyst, wrote that he recently met with Robert Steel, Wachovia's new chief executive, who indicated that his company is trying to get foreclosures off its books as quickly as possible.

Wachovia is forecasting 12% losses on its "pick-a-pay" portfolio.

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