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Originally published April 19, 2007 at 12:00 AM | Page modified April 19, 2007 at 2:02 AM

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WaMu commits $2 billion to aid borrowers with subprime loans

A day after calling the turmoil in the nation's subprime-mortgage market "unprecedented," Washington Mutual said it's committing as much...

Seattle Times business reporter

A day after calling the turmoil in the nation's subprime-mortgage market "unprecedented," Washington Mutual said it's committing as much as $2 billion to help high-credit-risk borrowers make their home-loan payments and avoid foreclosure.

Seattle-based WaMu said it will allow subprime borrowers who are current on their loans but facing "payment shock" to apply for discounted 30-year fixed-rate loans.

"When a lender has to take someone's home, it's bad for the lender, it's bad for the borrower and it's bad for the neighborhood," David Schneider, president of WaMu's home-loan group, said in an interview Wednesday. "Nothing positive happens, and that's the last thing we want."

Subprime loans are made to borrowers with tarnished credit or low incomes in relation to debt. The loans often come with low "teaser" rates that rise after a couple of years.

Schneider said WaMu is contacting subprime borrowers whose payments are due to increase in the next six months. It also has a toll-free number for them to call: 800-881-7099.

Schneider said borrowers could qualify for a half-percentage-point discount on a 30-year, fixed-rate subprime loan, or they might be eligible for a lower-priced prime loan if their credit has improved significantly.

Tuesday, WaMu said "unprecedented deterioration" of the subprime market contributed to a 20 percent decline in its first-quarter profit, which fell to $784 million from $985 million a year ago.

At $20.4 billion, subprime loans made up about 10 percent of WaMu's overall real-estate loan portfolio.

The amount of subprime loans WaMu has declared uncollectible has stabilized somewhat but remains double year-ago levels.

The company charged off $40 million in subprime loans in the first quarter, compared with $52 million in the final three months of 2006 and $20 million in 2006's first quarter.

Industrywide, more than two dozen subprime lenders have failed since the beginning of 2006 as borrowers dropped behind on payments, defaulted on loans and ultimately saw their homes fall into foreclosure.

WaMu's announcement came a day after federal regulators urged lenders to work with subprime borrowers struggling to make their mortgage payments.

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Congressional leaders have ruled out the possibility of a government bailout to cover defaults.

Also Wednesday, the government-sponsored finance giant Freddie Mac said it will buy as much as $20 billion in new subprime mortgages from lenders to help high-credit-risk borrowers refinance into better mortgages.

The new mortgages, expected to be available by midsummer, will "limit payment shock by offering reduced adjustable-rate margins, longer fixed-rate terms and longer reset periods," Freddie Mac said.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com

Information from Bloomberg News and The Associated Press was used in this story.

Copyright © 2007 The Seattle Times Company

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