Originally published October 18, 2007 at 12:00 AM | Page modified October 18, 2007 at 2:01 AM
WaMu doesn't expect to see woes end soon
Almost the only good news for WaMu shareholders Wednesday was that the company's bad news wasn't quite as bad as outlined earlier this month...
Seattle Times business reporter
Almost the only good news for WaMu shareholders Wednesday was that the company's bad news wasn't quite as bad as outlined earlier this month.
More borrowers are falling behind on their payments, foreclosures are rising, home prices are down in much of the country, and the mortgage markets that seized up earlier this summer still are closed to nearly all but the safest loans.
And none of it, WaMu executives say, is likely to get better any time soon.
"This is perhaps the most challenging cycle for housing that we've seen in many decades," WaMu Chief Executive Kerry Killinger said in an interview. He and other WaMu executives said they don't see any improvement in the near term.
Seattle-based WaMu, the nation's largest thrift and third-biggest home lender, reported a 72 percent drop in third-quarter profits: $210 million (or 23 cents per share) for the three months ended Sept. 30, compared with $748 million (or 77 cents per share) in the same period a year earlier.
That was below Wall Street's consensus profit estimate of $233.2 million, or 27 cents a share, as reported by Thomson Financial. But it was slightly better than the worst-case scenario WaMu had warned about earlier this month, when it said profit could drop as much as 75 percent.
With more borrowers falling behind and foreclosures rising, WaMu set aside $967 million in the quarter to cover mortgages and credit-card loans gone bad — again, slightly less than previously forecast.
Still, that brings the total of WaMu's loan-loss provisions so far this year to $1.57 billion. And there's more to come: With conditions in the housing market not expected to improve before the end of this year, Chief Financial Officer Tom Casey said WaMu will sock away another $1.1 billion to $1.3 billion in the fourth quarter.
In September, Killinger said the company would put aside $2 billion to $2.2 billion for the full year to cover loan losses. Wednesday that was increased to $2.7 billion to $2.9 billion.
Like other big mortgage players, WaMu has been hit by sagging home prices and higher mortgage rates, which make refinancing more expensive and less attractive; and the evaporation of the secondary market for all but plain-vanilla mortgages, which has hurt the value of WaMu's loan portfolio.
Nonperforming assets, including past-due home loans and foreclosures, grew to $5.45 billion at quarter's end, or 1.69 percent of all assets. A year earlier, by contrast, WaMu reported $2.4 billion in nonperforming assets, representing 0.69 percent of all assets.
In a teleconference with analysts and investors, Killinger and Casey said WaMu had become concerned about the housing boom as far back as the summer of 2005 but expected a relatively orderly wind down.
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That changed rapidly over the summer, when defaults on subprime mortgages and other nonstandard loans began rising sharply, and investors in mortgage-backed securities — panicked over how much subprime debt they might unknowingly own — all but stopped buying new debt.
"I have never seen housing credit conditions change so significantly over such a short period of time, nor can I remember a period when there was less clarity about near-term housing and credit trends," Casey said during the call.
Outside the home-loan segment, WaMu's credit-card business also showed signs of strain. The company charged off $120 million worth of bad credit-card debt in the third quarter, up from $98 million a year earlier, and boosted its credit-card loan-loss provision to $323 million from $229 million in the second quarter.
Despite the gloom, Killinger said WaMu would press ahead with plans to add more home loans to its books.
By pinching off the flow of investors' cash into the mortgage market, he said, the credit squeeze has given an advantage to companies such as WaMu, which can fund their own loans.
With less competition and higher interest rates, he said, WaMu can make more money from safer loans than during the height of the housing boom.
"This is a unique opportunity to add relatively high-quality loans at attractive prices," he said in the interview. "We have significantly tightened underwriting standards, so the loans are of higher [credit] quality than a year or two ago."
Indeed, the total loans WaMu is holding in its portfolio — as opposed to the loans it hopes to sell off — grew to $237.1 billion by quarter's end on Sept. 30, versus $215 billion at the close of the second quarter on June 30.
To fund those loans, however, WaMu had to rely relatively more on borrowed funds and less on deposits.
Total deposits slipped to $194.3 billion at the end of the third quarter from $201.4 billion in the second quarter, while advances from the Federal Home Loan Bank system and other borrowings grew to $93.4 billion from $61.7 billion.
Because it costs WaMu more to borrow cash than to tap its deposit base, the company's profit margin from lending shrank slightly versus the second quarter — to 2.86 percent from 2.9 percent.
WaMu announced its earnings after the close of regular trading on the New York Stock Exchange. In after-hours trading, the shares fell $1.17 to $31.90.
Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com
Copyright © 2007 The Seattle Times Company
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