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WaMu, Wachovia Feel Pinch of Credit Turmoil

Two of the largest U.S. banking companies said Monday that tough credit market conditions may cause higher losses related to lending.

Washington Mutual's headquarters in Seattle.
AP
Washington Mutual's headquarters in Seattle.

Washington Mutual, the largest savings and loan and sixth-largest mortgage lender, said it may set aside $500 million more for bad loans this year than the $1.5 billion to $1.7 billion it had forecast, citing what Chief Executive Kerry Killinger called a "near perfect storm" in housing.

Wachovia, the fourth-largest bank, said its investment banking unit may be stuck holding loans intended to fund leveraged buyouts, but which investors will not buy.

"Volatility in the fixed-income market is being felt at Wachovia," Chief Executive Ken Thompson said. "We don't know when markets will normalize."

The comments at Lehman Brothers' financial services conference followed Friday's announcement by Countrywide Financial, the largest mortgage lender, that it plans to cut up to 12,000 jobs, or 20 percent, by December.

Banks and thrifts are struggling as investors worry how far credit problems will and should spread beyond riskier "subprime" home loans into other markets.

Mortgage lenders face rising defaults and mounting losses on loans they cannot sell.

Investment banks are struggling to find buyers for some of the roughly $300 billion of loans and debt they had committed to place to fund buyouts, before this summer's credit crunch.

Thompson said Wachovia's exposure may reflect its 3 percent to 4 percent market share in that area.

Signs of the problems' depth may emerge next week, when Wall Street banks Bear Stearns, Goldman Sachs Group, Lehman Brothers Holdings and Morgan Stanley are scheduled to report quarterly results.

Washington Mutual fell 47 cents to $34.55 and Wachovia fell 83 cents to $47.23. Countrywide slid $1.01 to $17.20.

Losing Ground in Mortgage Market

Seattle-based Washington Mutual has fallen to sixth in U.S. mortgage lending from third in 2005, after it stopped making some riskier loans and eliminated nearly 11,000 jobs in 2006.

"Most housing markets appear to be weakening to us," Killinger said. "We would not be surprised to see declines in housing prices in many regions of the country ... for the next few quarters."

Dozens of mortgage lenders have cut back lending or quit the industry in 2007, positioning rivals to add market share. Thompson said growth has been lower than expected at the former Golden West Financial, a mortgage specialist that Wachovia acquired last October for $24.2 billion.

Still, he said mortgage loan volume rose $1.2 billion in July and August. Charlotte, N.C.-based Wachovia is the eighth-largest mortgage lender.

Lenders with big balance sheets and easy access to funding, including Wachovia, Citigroup, Bank of America, JPMorgan Chase and Wells Fargo, may be well-positioned to add mortgage business.

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"The turbulence of some competitors not being able to be in the business is good for us," said Liam McGee, Bank of America's consumer banking chief, at the Lehman conference.

Wells Fargo, the second-largest mortgage lender, appears to have avoided many of the sector's problems because it did not make many exotic loans that homeowners now cannot pay off.

"It's a delicate time," Chief Financial Officer Howard Atkins said at the Lehman conference. "You have to be really careful in this environment to find that right balance between pricing, underwriting, risk levels and opportunity."

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