WaMu Cuts Dividend, Jobs Amid Mortgage Losses
Washington Mutual, the U.S. savings and loan slammed by slumping mortgage markets, said it would slash its dividend, cut more than 3,000 jobs and announced a $2.5 billion capital infusion.
The Seattle-based bank also expects to report a net loss in the fourth quarter after recording non-cash write-downs of home loans segment goodwill. Wamu said the write-down will not hurt its key capital ratios or liquidity.
The news was announced after the market close on Monday. Washington Mutual shares plunged more than 6 percent in after-hours trading.
"I'm not at all surprised. It's just another casualty in the mortgage tsunami sweeping over the country," said Sean Egan, managing director of credit rating firm Egan-Jones Ratings.
Among the steps announced Monday afternoon, Wamu will sell $2.5 billion of convertible preferred stock.
The thrift, one of the nation's top home lenders, also said it will slash operating expenses by about $500 million next year by reducing its residential mortgage business and corporate support staff.
Wamu is also slashing its dividend payout 73 percent to 15 cents a share. At the old rate, Wamu's beaten down shares had offered a dividend yield of nearly 12 percent.
WaMu Chairman and Chief Executive Kerry Killinger said the moves will let the thrift pursue various initiatives, particularly in retail banking.
The bank expects the convertible offering and dividend cut will generate about $3.7 billion of tangible equity. This, combined with job cut savings, will help Wamu weather the downturn in credit and housing markets.
Exposed to Housing Slump
Last month, the bank said its loan losses will mount as the housing slump persists through 2008.
It also faced a widening probe by New York Attorney General Andrew Cuomo over whether it pressured a big title insurer to inflate home values in appraisals, making it possible for
borrowers to obtain mortgages they couldn't afford.
Washington Mutual, one of the largest U.S. mortgage lenders, expected to set aside $1.1 billion to $1.3 billion in the fourth quarter for credit losses, and a similar amount or slightly more in the first quarter of 2008.
It also expected credit losses to remain "elevated" through 2008. The thrift, known as WaMu, set aside $967 million in the third quarter, and expects to set aside $2.7 billion to $2.9 billion this year.
"The soft landing we were anticipating quickly transitioned to a severe downturn," Killinger told an investor meeting in New York in November. "This process is painful."
Delinquencies and defaults have mounted industrywide as falling home prices leave thousands of borrowers unable to refinance as rates on their adjustable-rate mortgages rise.
Capital markets also seized up, saddling lenders with losses on loans that investors refused to buy. The market for so-called "nonconforming" loans is "illiquid," WaMu Chief Financial Officer Tom Casey said.
"Investors can't really get a handle on what the numbers will look like," said Chris Armbruster, an analyst at Al Frank Asset Management. "Financial stocks are falling knives right now." The Laguna Beach, California firm invests $850 million and owns WaMu stock.
Citigroup and Merrill Lynch are among other companies to post big mortgage losses. On Tuesday, Capital One Financial, the credit card and banking company, boosted its forecast for 2008 credit losses.
Mortgage Lending Falls
Washington Mutual expects mortgage lending nationwide to slump to $1.5 trillion in 2008, the lowest in eight years, from an estimated $2.3 trillion to $2.4 trillion in 2007. The Mortgage Bankers Association estimates $1.9 trillion of originations for 2008.
WaMu's other businesses, including branch banking, credit cards and commercial lending, have been profitable this year, but a $498 million loss in home lending helped drive overall profit down 27 percent from January to September.
CEO Killinger said home prices in California, Arizona, Florida and Nevada will face "above-average pressure" through 2008. California is WaMu's largest home-lending market.
He nevertheless said WaMu has "contained" its own lending risks. Like many lenders, WaMu stopped offering some riskier home loans, including ones that allow borrowers with little or
no money down to take out loans where rates reset quickly.
Killinger said he would "not speculate" on market conditions in January, when WaMu's board is expected to meet next to assess the company's 56-cents-per-share dividend. Analysts have said a cut may be needed.