Wednesday, August 30, 2006

WaMu: 30 Billion in bad loans

In an indication that there was reason to worry, Washington Mutual, one of the country's biggest mortgage lenders and a big option ARM player, slipped in a rather stunning confession in its annual filing with the Securities and Exchange Commission.

In the filing, WaMu confessed it had bungled the underwriting for option ARMs, improperly measuring some of its customer's debt-to-income ratios for 2004 and most of 2005. As short-term interest rates rose in those years, the company disclosed, the interest rate at which lenders qualified for loans "was not adjusted upward, which resulted in loans being made to borrowers who were qualified based on debt-to-income ratios calculated using an interest rate below" the prevailing interest rate.

In other words, the applicants looked more credit-worthy than they really were. Talk about violating Rule No. 1 in lending.

Of $43 billion of such loans, WaMu discloses, the unpaid balance for borrowers who were qualified at below the market rates totaled $30 billion.

The bank says it fixed the problem in October. It disclosed the problem in its annual filing this spring, but outside American Banker, few in the media or Wall Street picked it up.

A WaMu spokesman emails that the company expects that "the credit performance of these loans will not differ materially from the expected performance of option ARMs [customers] qualified" at the correct interest rates. WaMu, which says it has more than 20 years experience writing option ARMs through all economic cycles, says that the customers' credit scores and the ratio of the size of the loan to the value of the property were high and that these measures are more important gauges of loan quality.

Option ARMs have been among the most scrutinized exotic mortgage products over the past year. That such an error could creep into WaMu's lending should worry investors not only about the bank's balance sheet but the industry's lending standards as a whole.

Option ARMs didn't go to subprime customers. That's precisely why the coming mortgage problems may not be isolated to customers with poor credit.

Stock today: 42 1 year range: 36.64 - 47.01


Blogger Rob Dawg said...

..."the credit performance of these loans will not differ materially from the expected performance of option ARMs [customers] qualified" at the correct interest rates.

Puuulleeeze. Were this true why bother with qualifing buyers at all?

10:18 AM  
Blogger jmf said...

wow from germany!
great blog

very good and scary.

i always wonder when such news/events will take the stock from wm down.

At the end of 2003, 1% of WaMu’s option ARMS were in negative amortization (payments were not covering interest charges, so the shortfall was added to principal). At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.

Every month, these borrowers’ debt increases; most of them probably don’t know it. There is no strict disclosure requirement for negative amortization.

This financial system cannot work; houses are not credit cards. But WaMu’s situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million.

8:42 AM  
Blogger bhargava said...

This comment has been removed by the author.

11:27 PM  

Post a Comment

<< Home