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Will Killinger Survive? And How about WaMu?

One of these days Washington Mutual, now the nation's third-largest servicer of residential loans, will be sold. The big questions are these: who will buy America's largest thrift and will WaMu chairman and chief executive Kerry Killinger still be on board when a deal gets done.

There are plenty of unhappy mortgage worker bees at Washington Mutual, some of whom might soon be unemployed. Not only might they be out of work, but if the own any stock in the once-mighty WaMu, they will be looking at a company that has a "sell" rating.

Industry officials close to the company - both inside and out - lay WaMu's current woes on Killinger. After all, he's the top dog and the buck stops at the CEO's office, or at least it should. (The mortgage buck used to stop with Craig Davis, but he got fired last fall after it was revealed that the mega-lender/servicer had trouble tracking loan commitments.)

But before we explore the Killinger question a little more, it's best to ask a basic question that many in the industry are forgetting to ask: how did WaMu - which at one time had a decent reputation in the industry - find itself in its current predicament?

The short answer is that it grew too fast - way too fast. Over a three-year period it gobbled up mortgage franchises left and right, purchasing $511 billion in servicing rights along the way. The biggest portfolios it swallowed include HomeSide ($187 billion) and Fleet Mortgage ($136 billion).

The problem with the acquisitions is that WaMu - and assumably Messrs. Killinger and Davis - weren't paying close attention to the details, in particular the different servicing and production technology platforms that came along with its acquisitions.

Earlier this year a WaMu insider told us, "This is slated as the year we straighten out the platforms." In other words, growth is out, at least for now. Of course, how can you grow when your technology is all fouled up? How can you grow when you can't keep track of your loan commitments?

In the second quarter, WaMu earned $489 million, a stunning 49% decline from the same quarter last year. Discussing the thrift's woeful second quarter, Killinger tried to accentuate the positive by saying the thrift is "strong and growing profitably" but he also blamed its massive servicing portfolio and the volatility of such a portfolio.

Wait a second. If the massive portfolio and the accompanying volatility is a problem, why did Killinger buy so many firms and grow so aggressively? Did he realize - after the fact - that managing $725 billion in mortgage contracts wasn't so easy?

Also to blame, the mortgage division's "high cost structure." High cost structure? That usually means too many people sitting around not doing enough to generate revenue. But then again, the mortgage industry funded $6.7 trillion over the past 30 months.

If WaMu was having such a tough time the past 12 months, then surely other mega-lenders must be in trouble. Right? So far, it doesn't look that way, at least not yet. Countrywide and Wells Fargo plan on hiring more people. Chase? It's holding its own. Bank of America?

No, right now, WaMu is a mess. Killinger is determined to fix the problem, which is good but can he do it before the board gets antsy and decides to toss him overboard?

There's talk that a foreign bank might buy WaMu, perhaps HSBC. But most think that if a deal is struck it won't be until next year.

But WaMu's rise and fall carries an abject lesson. Why, oh, why, are some firms so hell bent on gorging on the competition? Isn't it better to grow organically, like Countrywide, or slowly and methodically ala Wells, Chase and Bank America? Blame Wall Street, I guess. After all, someone was whispering in Killinger's ears these past few years. And the mantra went like this: buy, buy, buy. Today, analysts that cover the company are shouting: sell, sell, sell.

Paul Muolo is executive editor of both Mortgage Servicing News and National Mortgage News.

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