'Near Perfect Storm' Brewing in Housing -- WaMu

With conditions in the housing market continuing to deteriorate, Washington Mutual Inc. said Monday it may be forced to set aside reserves to cover bad loans. The largest U.S. thrift may have to increase its loan loss provision, which had been estimated at $1.5B-$1.7B for the year, by $500M, as the corrections in housing and capital markets now appear to be worse and longer lasting than expected. It would mark the fourth increase in reserves this year. "The combination of rising delinquencies, higher foreclosures, more housing inventories, increasing interest rates on many mortgages and greatly reduced availability of mortgages due to limited liquidity is creating what we call a near-perfect storm for housing," CEO Kerry Killinger said at a financial services conference. A perfect storm is a situation in which several events, which on their own may not be significant, occur simultaneously creating a more powerful situation. WaMu expects to write down $200M in Q3 for the value of loans moved to its portfolio that are not eligible to be sold to government-sponsored agencies like Freddie Mac and Fannie Mae. Killinger said the thrift also could face higher levels of charge-offs for the foreseeable future. Nevertheless, he said WaMu hoped to benefit from the situation by increasing its market share and adding more loans to its portfolio as competitors retreat from the market. Wachovia Corp. CEO G. Kennedy Thompson, also speaking at the conference, said it too was grabbing more business as a result of the shakeout, noting that its outstanding mortgage loans increased by some $1.2B during the first two months of the third quarter.

Sources: Bloomberg, Wall Street Journal, Reuters
Commentary: Washington Mutual: Riskiest Portfolio in U.S. • Goldman's Take on the MBA Foreclosure Data • Washington Mutual : Fundamentals Spiraling Downwards
Stocks/ETFs to watch: WM, WB, FNM, FRE. Competitors: WFC, BAC. ETFs: KRE, RKH, IAT

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Comments

[Uncle Bill:]

Killenger is a flat-out liar. All of those components he cited -- "rising delinquencies, higher foreclosures, more housing inventories, increasing interest rates on many mortgages and greatly reduced availability of mortgages due to limited liquidity" -- are highly correlated and were easily forseeable. ARMS and no-money-downs accounted for nearly half the home sales over the past three years, all while Fed funds rates were rising. Any bank executive could see it was an anomaly that couldn't last. All that money he makes, and he can't even take the blame. Disgusting. We hope the stock rises the next couple months so we can short the heck out it in December.

2007 Sep 11 10:30 PM