Servicing Turnaround Helps WaMu Beat '04 Expectations

Washington Mutual exceeded expectations by turning a profit in its mortgage banking business during 2004, in no small part because its mortgage servicing operations performed better than expected.

But the company seems eager to lower expectations for the unit this year.

At a Smith Barney Citigroup investors conference here, WaMu chairman and CEO Kerry Killinger said he expects mortgage banking revenue to be flat in 2005 from last year's level.

Still, he told investors that the reorganization of WaMu's mortgage unit is on track to become "fully competitive" by the end of this year. Over the past 12 months, WaMu did not want to add a significant amount of mortgage servicing rights to its books, he said. But he also maintained that servicing is a core part of the company's business.

"We are transforming the mortgage business so it can produce substantially better returns with less variability over the course of the cycle."

In the meantime, WaMu will continue to place more emphasis on retail and wholesale lending than on the correspondent channel.

"Our market shares in each of those channels is roughly the same as a year ago," he said.

Mr. Killinger said one reason for de-emphasizing correspondent lending is that the company did not want to aggressively grow its mortgage servicing portfolio over the past 12 months. The company also felt margins were too low in the correspondent channel.

But he said as the company moves forward with its plan to reduce the cost structure in mortgage banking, "You can expect us to refocus on improving our market share in all channels."

WaMu continues to pursue aggressive productivity goals for the unit, saying expenses in the mortgage banking unit are down 30% from the third quarter of 2003.

In the servicing unit alone, WaMu's expenses have declined from $325 million to $198 million.

Mr. Killinger said the performance of WaMu's mortgage servicing rights has been "very good in recent times."

And apartment lending remains high on the list of opportunities for growth, Mr. Killinger said. WaMu has focused on growing the business in markets including New York and California, which have large immigrant populations and a high disparity between rental costs and homeownership costs. Recent immigrants tend to stay in rental housing longer than native born citizens, Mr. Killinger said.

He said WaMu is now the second-biggest multifamily lender in greater New York and is the national leader in the multifamily sector.

As always, he said WaMu strives to be the low-cost provider. He said the company has built a "manufacturing process" that brings greater standardization to multifamily loan products.

WaMu recently announced plans to add 250 more retail banking branches to its nationwide network of about 1,940 stores this year. In addition, the company said it is updating another 200 existing stores during the year.

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