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Thursday, April 19, 2007

WaMu Trying to Cope With Slowdown

Local mortgage giant Washington Mutual has been in the news quite a bit the last few days. On Tuesday, Seattle Times business reporter Amy Martinez made the (not-so-bold) prediction that WaMu won't escape subprime turmoil.

During the housing boom of the past several years, Washington Mutual was among the nation's top lenders in the high-risk sector of subprime mortgages.

Now subprime loans industrywide are failing at an alarming rate.

Although the Seattle-based thrift has cut back its subprime lending, it still has a lot of the loans on its books.

Exactly how vulnerable it remains will become clearer today when WaMu holds its annual shareholders meeting and releases first-quarter financial results.

The high-credit-risk market known as "subprime" represented 9 percent of WaMu's overall loan portfolio at the end of 2006. Analysts who follow the company predict first-quarter profit will suffer as a result.
Un-shockingly, she was proven absolutely correct later that day when WaMu's first quarter results were released:
Washington Mutual Inc. said Tuesday its first-quarter profits slid 20 percent amid a nationwide implosion of the subprime home loan market.
Kerry Killinger, Washington Mutual's chairman and chief executive, said the company's retail banking, card services and commercial groups fared well, while the home loan market - particularly the subprime segment for consumers with high-risk credit histories - remained a serious challenge.

Washington Mutual's home loans group posted a first-quarter loss of $113 million compared to a $52 million profit during the year-ago period. The company suffered a quarterly loss of $164 million on sales of subprime mortgages, alone.

To limit further damage as the housing slump continues, Washington Mutual said it had scaled back its subprime portfolio and had set aside more money to cover future loan losses: $234 million for the quarter compared to $82 million in first quarter 2006.

"Over the past 12 months, we have taken a number of prudent actions to reduce our exposure to the subprime mortgage industry," Killinger said in a statement. "These actions, along with a diversified business mix, limited our exposure to the mortgage market's downturn and position us well to expand and grow as market conditions improve."
Among those "prudent actions" is an open offer to refinance some of their riskiest loans into more traditional products at discounted rates:
Washington Mutual Inc. said Wednesday it will refinance up to $2 billion in subprime mortgages to help borrowers avoid default and foreclosure.

The program will allow subprime borrowers who remain current on their existing loans and are bracing for payment increases to apply for discounted fixed-rate loans or other refinancing options.

"Stepping up and helping our customers stay in their homes is in the best interest of our borrowers, our communities and WaMu," Kerry Killinger, chairman and chief executive of the Seattle-based savings and loan, said in a statement.
Will measures like these be enough to keep WaMu from experiencing serious financial pain as the consequences of yesterday's loose lending begin to pile up? Only time will tell, but at least WaMu has one important thing going for it: headquartered in the specialest place on earth!

(Amy Martinez, Seattle Times, 04.17.2007)
(Bill Virgin, Seattle P-I, 04.17.2007)
(Associated Press, KOMO TV, 04.17.2007)
(Associated Press, Seattle P-I, 04.18.2007)
(Bloomberg News, Seattle P-I, 04.18.2007)


T,V & Mr.B said...

So I had a WAMU Heloc and used my house as an ATM to pay for my daughters college. My interst rate went up and my payments went up substantially. I knew I was going to sell my house but when I put it on the market, it sat for 10 months in San Diego. I scratched, stressed, maxed out credit cards at exporbitant interst rates, all to make my payments on time. I was NEVER late on a payment, working two jobs to make sure I paid that on time.

So now all these other saps that did the same thing I did are getting a break on refinancing? Bullshit!!!!!!!!! I want all the extra money I put out back. I want my time back, I want the hair that turned grey due to stress back and I want it now. Bullshit bullshit bullshit. I am PISSED!

smeegs said...

We can probably expect mass layoffs at Wamu soon, to offset this increase in expenditures for bad loans and to keep Wall Street happy.

Finance said...

smeegs - They are one step ahead of in they have laid off ~11,000 people in the last 12 months. (I was about to be laid off due to a reduction in our dept and was the newest to the company thus the reason I was chosen. I left before they did though).

Last year this time they had 26 LFC's (Loan Fulfillment Centers) which they consolidated to 16.

They also sold off almost half of their MSR (Mortgage Servicing Rights, who you send your pmt to each month) off to Wells Fargo last summer...great timing on that one! MSR is extremely volitile, thus can be very profitable (yet hedge for the downside risk to some extent).

Terry said...

Hey t,v & mr. b,

There are lots of other people that feel the way you do. Check out the comments to this Arizona Republic Article. It seems bailing out foreclosure “victims” is a rather volatile topic down there right now.

Arizona effort aims to avoid foreclosures

Sample comments:

Dear, dear Collette you are so right why should anyone assume responsibility for their own actions. ALL parties have a piece of blame to share INCLUDING the "Poor screwed want to be home buyers". I'm sure you probably think the rest of society should be forced to help bail out these poor pathetic folks who got taken advantage of.(Mike3607, April 19, 2007 03:23PM)

I want to know what loans went to people who didn't understand how a loan worked. Seems to me if you can't manage a budget, don't grasp interest, and are clueless enough not to read your paperwork.... how can you have a FICO score over 200? (Julie9673, April 19, 2007 03:20PM)

Deejayoh said...

Tim - What happened to the Wednesday open thread?

Both Euleua and I had posted links to a blog that tore down the WAMU results. Basic premise was that they had used about every accounting trick in the book to make their results look good, and that over half of thier "earnings" were from increased balance sheet value of NegAm loans.

Conclusion was that the man behind the curtain would be exposed next quarter. I wish I could find the link...

Deejayoh said...

Doh. I figured it out. here is the link and a bit of the text

Let's use WaMu as an example, because they make a particularly good - or ugly, depending on your perspective - example of this.

In March of 2006, Washington Mutual recorded net income of $985 million dollars. 4Q06 they booked $1,058 mln. This last quarter, they booked $784mln.

But in those three quarters they booked $194mln, $333mln and $361 million, respectively, in PayOption ARM "Capitalized Interest." This was booked and recognized as EARNINGS.

Now here's the problem: In 1Q 06, 194 million out of $985 is 19.7%. In December, it was 31%. But this last quarter, it was FORTY SIX PERCENT, more than a DOUBLE over the year ago levels.

And what's worse, not one dime of that "income" can be spent! It is entirely phantom.

This is the same sort of crap that sunk Lucent and Enron - booking "income" that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!

There is a legitimate argument to be made for booking this as a net increase in the bank's assets, offset with a loss reserve due to the increase in LTV on the property (this is the most likely part of the principle to be unrecoverable in the event of a default.) In effect this is a capital asset that is drawn down in value over some period of time - up to 30 years for most mortgages.

But now the bank has elected to pay 55 cents of dividend, yet the single largest contributor to their "86 cents of net income" this last quarter was in fact capitalized interest that cannot be spent!

So if you take that out you find that the bank actually made 46 cents - less than the dividend! (Oh, and let's not forget the preferred either)

WaMu had better hope that the housing market markedly improves out there in Californicated. I doubt it will though. And as more and more people get squeezed and have to pay those minimum payments, that "back cap" will grow - up until all those loans hit hard recast.

Terry said...


Good stuff!

I seem to recall reading somewhere that Washighton Mutual got into the sub-prime market rather late in the game. Is that right, or am I remembering wrong?

FB said...

Yes, great post.

This GAAP rule is just another piece of the lunacy that has lead to this situation. 10 bucks says this will be a no-no in a few years, when the pain really starts to throb.

You don't have to be much of a finance guru to see that a guy who is paying the neg-am option of his ARM, on a depreciating asset, is going to be a HUGE credit risk in the coming years. So let's not worry about that fact, LET'S BOOK IT AS INCOME!

Eleua said...

Here is another pasting of WM's accounting and financial soundness.

If you sniff around the site, the author has plenty of data on how the subprime contagion is spreading and Wall Street is in full denial/damage control mode.

Also, the site deejayoh referenced has many articles pertaining to mortgage finance and WaMu.

Right now, this is nothing more than blatant manipulation by the FED. I read on another board that the FED printed up another $110B in one day!!!! That's almost $350 for every man, woman, child, and illegal alien in the country.

No wonder the markets go up when they announce hideous numbers.

They have to do this to defend their counter-market interest rate policy. The FED has the rate artificially low, and has to print money to keep rates at that level.

This is not a free economy. The Soviets and East Germans bankrupted themselves trying this.

refractedthought said...

Eleua, are you aware of any solid evidence about PPT action and money printing? I've read a lot of rumors about that, but haven't seen anything substantiated. It would certainly explain the Dow.

If that shit is happening, it needs to be given a lot more attention.

Eleua said...

I would like to believe in the PPT. I really would.

It would seem to me the FED has a below market interest rate, and given the economic activity and speculative fervor, they need to keep printing in order to meet the demand for debt at that rate.

All that liquidity is sloshing around and bidding up crap.

Some day soon, the dollar will crack and the FED will have to sop up all that liquidity by raising interest rates and pulling money out of circulation to defend that interest rate.

Right now, I see the Yen carry trade as the key to all of this unwinding.

I'm getting hammered waiting for it.

Nathan said...

From MarketWatch, top 10 best places to live:
Below are the top 10 cities on's "America's Top 100 Places to Live for 2007":

1. Asheville, N.C.
2. Traverse City, Mich.
3. Ithaca, N.Y.
4. Chicago
5. Cary, N.C.
6. Portland, Maine
7. San Francisco
8. Stevens Point, Wis.
9. O'Fallon, Mo.
10. Spencer, Iowa

Wait, I don't see Seattle on there. Ah, but there's Portland. Oh, Portland, Maine.

Seattle is on the top 100 list, but I'm not sure where as the link is returning and error.

And what's up with the DOW today?

Lionel said...

Money Magazine predicts a robuest 0.6% price gain for Seattle over the next year. Oh wait, what about inflation... that's not so good. Too bad I didn't buy in Tacoma. 0.8%!

refractedthought said...

It would seem to me the FED has a below market interest rate, and given the economic activity and speculative fervor, they need to keep printing in order to meet the demand for debt at that rate.

That all makes sense, but is there a public record somewhere of how much money is being printed and where it's going?

Eleua said...

One interesting point is how just about everyone knows that WM made the number by blatant manipulation.

It's in the paper. My neighbors are talking about it. It is on every blog that isn't dedicated to Anna Nicole Smith.

Yet the Lumps keep bidding up the price. When do they all hit the panic button?