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WaMu Takes Servicing Hit in Volatile Second Quarter

Washington Mutual's profit fell to half its prior year level in the second quarter, with mortgage banking profits eaten up by a high cost structure and hedging losses that exceeded gains on servicing rights, the company said.

Overall, Washington Mutual earned $489 million in the quarter, or $0.55 per share, compared to $995 million, or $1.07 per share in the second quarter of last year.

In a conference call with investors, WaMu chairman and CEO Kerry Killinger said the company is being hindered by an "unacceptably high cost structure" in the mortgage banking unit and higher hedging costs associated with mortgage servicing.

He said WaMu's top priority for the rest of this year and next year will be to reduce the mortgage unit's fixed costs.

The company also announced an additional management change in the mortgage arena, naming Craig Chapman as head of mortgage banking. His previous duties as chief administrative officer for WaMu will be reassigned to other executives.

Mr. Killinger said that Washington Mutual also is seeking a chief financial officer to focus on the mortgage unit while praising the efforts of the current management of the mortgage unit, which was formed after a shakeup last fall (see related story, p.5).

"We will not rest until we know that we have the strongest team in the business," he said.

Mr. Killinger also noted that WaMu completed the conversion of its entire mortgage servicing portfolio to the Fidelity Mortgage Servicing Package over the July 4 weekend. The company said it will close its loan servicing office in San Antonio, Texas, accounting for 660 job losses as part of the company's effort to streamline operations.

Mr. Killinger minced few words about the mortgage unit during the conference call, vowing to "fix" problems that have plagued the unit since the acquisition of companies including PNC Mortgage, Fleet Mortgage, HomeSide Lending and North American Mortgage.

Mr. Killinger acknowledged that integration of these units was slowed by heavy refinancing volume.

"When we did undertake this integration effort, we did not execute as well as we should have."

He said the company's retail banking and other businesses have been performing pretty much as expected, however.

"The problem lies with our mortgage banking results, which were poor," he said. "Our mortgage banking business is undergoing a complete overhaul."

But completing the systems improvements needed to reduce fixed costs in the mortgage banking unit "will take some more time," he said. And until those fixes are in place, WaMu is unlikely to pursue the kind of rapid expansion of its mortgage banking business that characterized the firm in recent years.

"We are unable to reach for additional market share until we have sound, efficient platforms," Mr. Killinger said.

The company also announced that it has hired BlackRock to advise it about hedging strategies.

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