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Mortgage-market shifts keep WaMu adjusting to change

By Bradley Meacham
Seattle Times business reporter

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The mortgage boom is petering out, but that doesn't mean Seattle-based Washington Mutual will.

WaMu said third-quarter profit rose 4.9 percent to $1.03 billion, or $1.12 a share, as it sold more mortgages and expanded its retail-banking business. The result topped $980 million, or $1.02 a share, for the same quarter a year earlier and was in line with analyst estimates of $1.12 a share.

WaMu and other lenders have benefited from the lowest interest rates in a half-century and a wave of home refinancings, generating fees and swelling lenders' loan books.

Mortgages, home-equity and apartment lending volume surged 73 percent from a year ago at the country's largest thrift to $131 billion during the quarter. Rivals Wells Fargo, Bank One and U.S. Bank also posted similar quarterly gains yesterday.

The new-loan business covered a loss in WaMu's mortgage portfolio stemming from the bank's handing of interest-rate changes that led to a 68 percent drop in mortgage income during the quarter to $224 million.

Demand for home loans collapsed during the quarter, with applications at WaMu falling 50 percent in September compared with July.

"What WaMu and anyone else who is doing a lot of mortgage activity has to do is balance," said Les Childress, owner of Childress Investment Research on Bainbridge Island, pointing to the loan portfolio and shifting customer demand.

"I don't know if you will get the same drop during the rest of the year, but the trend is there," he said.

"It's not bad news but it's not necessarily good news, either."

Partly to weather swings in the mortgage business, WaMu has been expanding its banking operations nationally.

In the third quarter, it added 75 branches, part of about 250 it plans to open this year.

WaMu added 245,032 customer accounts during the quarter for a total of 7.9 million. The expansion in banking boosted fees by 11 percent to $471 million.

Income from mortgages fell sharply after changes in interest rates led to unexpected losses from the financial instruments WaMu uses to balance its loan portfolio.

WaMu continued to sell many of its loans to avoid risk that homeowners might default, and was able to use some reserves to cover the shortfall.

WaMu had a $271 million loss on its mortgage loans, a category that should have been a $400-to-$500-million profit, said Jay Tejera, an analyst at Ragen MacKenzie in Seattle. "It was a messy quarter, and there will be some criticism for it."

That WaMu could report rising profit despite the stumble "demonstrates financial security and shows they have more than one source of income," Tejera said.

In a statement, Chief Executive Kerry Killinger said the mistake won't be repeated. "We have identified the issue that led to these challenges and have implemented measures to address them," he said.

Killinger is expected to discuss the issue during a conference call with investors and analysts this morning.

WaMu's total assets grew 9.2 percent from a year earlier to $287 billion; total nonperforming loans declined to $2.22 billion, or 0.78 percent of the total.

The bank set aside $113 million to cover loans that aren't repaid.

WaMu raised its quarterly dividend to 41 cents a share from 40 cents, the 33rd quarterly increase in a row.

The results were released after markets closed yesterday.

In after-hours trading, the stock rose 22 cents to $40.69 a share.

The stock is up 16.5 percent this year, less than the 19.8 percent rise in the Standard & Poor's 500 index of financial stocks.

Bradley Meacham: 206-515-5066 or bmeacham@seattletimes.com

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