Washington Mutual Skids on Outlook, Cuomo Probe

Washington Mutual, the largest U.S. savings and loan, said 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's headquarters in Seattle.
Washington Mutual's headquarters in Seattle.

Shares of Washington Mutual fell as much as 18.6 percent to their lowest level since July 2000.

The Seattle-based thrift, also one of the largest U.S. mortgage lenders, expects 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 expects 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.

"Process Is Painful"

"The soft landing we were anticipating quickly transitioned to a severe downturn," Chief Executive Kerry Killinger told an investor meeting in New York. "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.

Cuomo Issues Subpeonas

WaMu came under further fire as Cuomo issued subpoenas to Fannie Mae and Freddie Mac for information on home loans they bought from WaMu. The companies also agreed to hire an independent examiner to review WaMu appraisals and mortgages.

Last week, Cuomo sued title insurer First American, accusing its eAppraiseIT unit of inflating appraisals under pressure from WaMu. He did not name WaMu as a defendant.

Inflated appraisals can make it easier for borrowers to obtain home loans, and allow lenders to collect the resulting fees. But if the borrowers fall behind on payments, the investors who buy the loans may face losses.

WaMu officials were not immediately available to comment on the subpoenas. David Schneider, president of its home loans unit, said at the New York session that WaMu took the original
allegations over eAppraiseIT "very seriously" and was investigating them.

Shares of WaMu fell $3.73, or 15 percent, to $20.50 in afternoon trading, after falling as low as $19.72. The stock began the year at $45.49, and through Tuesday had lost more than $18 billion in market value this year.

Lending to Slump

The thrift 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.