WaMu's Credit Losses, Default Estimates Rise

Washington Mutual lost $3.3 billion in the second quarter as credit losses continued to pile up, forcing the company to boost its loan loss reserves by $3.7 billion.

That brings WaMu's total loss provision to $8.46 billion as of June 30.

The company's home loan business accounted for $1.3 billion of the total loss, though much of the mortgage-related loss provisioning is actually included in WaMu's retail banking group.

The company said it changed its assumptions for determining loan loss provisions to reflect "continued declines in housing prices nationwide." Nonperforming assets rose sharply from 2.87% of the company's assets at the end of the first quarter to 3.62% at the end of the second.

WaMu's projections for home price depreciation are more pessimistic than those of some others in the banking industry. John McMurray, chief enterprise risk officer, said during the company's conference call that WaMu anticipates a peak-to-trough decline in home prices of about 30% nationally.

"We expect the worst rate of decline to be reached some time during the middle of this year, and then we expect house prices to decline all the way through 2009 and into 2010," Mr. McMurray said.

On a positive note, WaMu said that early-stage delinquencies for subprime mortgages and home-equity loans "showed early signs of stabilization" during the second quarter. Early delinquencies on WaMu's $52 billion portfolio of prime home loans are still rising, however, CEO Kerry Killinger said during the conference call with investors and analysts.

WaMu said that as a percentage of loans held in portfolio, its reserve stands at 3.53%, up from 1.05% at the end of 2007. WaMu also said it continues to streamline its home loan and other businesses. The company hopes to trim its expense base by $1 billion annually. Mr. Killinger said WaMu continues to reduce its mortgage exposure, with the company's owned mortgage portfolio declining by $8.5 billion, or 4%, year to date. He also said WaMu's troubled payment-option ARM portfolio is actually performing better than those pooled for securitization, noting that 81% of WaMu's option-ARM borrowers made a downpayment of at least 20%.

But some analysts were not impressed by WaMu's performance. Friedman Billings Ramsey reiterated its "underperform" rating on WaMu's stock. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/