WaMu Still Wary of Mortgage Servicing Rights

Washington Mutual's chairman and CEO, Kerry Killinger, likes the mortgage business. But that doesn't mean he wants his company to be thought of as a mortgage bank.

Speaking at a Lehman Brothers investment conference here, Mr. Killinger said that increasingly WaMu looks more like a diversified commercial bank, such as Wells Fargo, than like a "less diversified company," citing Countrywide Financial Corp. as an example.

He said that while mortgage banking remains an essential part of WaMu's business, the company doesn't want to see its balance sheet dominated by mortgage assets. In fact, Mr. Killinger expects prime credit quality mortgage loans and mortgage servicing rights to account for a lower share of WaMu's assets in the future than they do today.

"We want to be a top-tier player, but we are not about trying to build the largest mortgage company in the world," Mr. Killinger said.

Mr. Killinger said the mortgage unit's contribution to WaMu's total earnings will vary because of the industry's cyclical nature.

In 2003, a year when mortgage business was booming, mortgage activity accounted for 33% of WaMu's income. Today, the mortgage unit contributes "a more representative" 26% of earnings, he said.

While WaMu may aim to reduce the percentage of prime quality mortgage loans on its balance sheet, Mr. Killinger said that WaMu will continue to grow its subprime mortgage origination business. Seattle-based WaMu is the parent of Long Beach Mortgage.

The acquisition of Providian Financial also will help that goal, adding credit-card assets to the company's portfolio and diluting the share of mortgage assets.

Mr. Killinger said he is more excited about the Providian acquisition now than when the deal was announced, saying that in addition to expanding WaMu's consumer credit-card business, the merger will generate more growth opportunity for Providian by opening WaMu's customer base to cross-selling opportunities. He said home-equity products also will enjoy continued growth potential through sales to home loan customers.

Mr. Killinger reiterated WaMu's desire to reduce the volatility of its mortgage servicing rights. As previously announced, WaMu plans to cap its MSR asset to about 25% of shareholder equity in value in the long run, though he said the range of the MSR value to shareholder equity could range from 15% to 35% because of the volatility of MSR values.

Mr. Killinger also said that WaMu has revamped its hedging of the MSR asset over the past year to reduce mortgage swap basis risk, a move that is expected to mitigate quarter-to-quarter fluctuations in the MSR value.

While MSRs remain a volatile asset, he said WaMu appears to have "that volatility well within control at this point."

WaMu also has significantly reduced the cost structure associated with its mortgage business, he said.

Non-interest expense related to the mortgage unit was down by $92 million in the second quarter from a year earlier, resulting in nearly $400 in million annual cost savings, he said.

In addition, WaMu has increased the productivity per full-time employment in mortgage fulfillment by 28% in that time period. Servicing productivity, measured in terms of loans serviced per employee, has improved by 43%.

"I now feel that our mortgage operation is in excellent shape and is in position to go toe-to-toe with any competitor in the business," Mr. Killinger said.

SNAPSHOT: Washington Mutual

Mortgage Servicing Portfolio $739 billion

Home-Equity Portfolio $48.4 billon

2nd Qtr Home Loan Originations $63.6 billion

Source: Standard & Poor's

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