Is Washington Mutual The Next one to Fail?

Washington Mutual tumbles 30 percent to 17-year low

By Jonathan Stempel and Dena Aubin Wed Sep 10, 4:37 PM ET
NEW YORK (Reuters) - Washington Mutual Inc (WM.N) shares sank 30 percent to a 17-year low and the perceived risk of its debt soared on worries the largest U.S. savings and loan will not find a buyer or raise enough capital to combat soaring mortgage losses.
The stock closed down 98 cents at $2.32 on the New York Stock Exchange, and are down 44 percent in the last two days. It fell earlier to $2.30, the lowest since January 1991, according to Reuters data.
Analysts attributed the decline in part to anxiety that potential buyers might walk away because of a pending accounting rule requiring they value the assets of targets at market prices, and perhaps the need to raise capital.
They also pointed to Lehman Brothers Holdings Inc (LEH.N), which said earlier on Wednesday it plans to sell a majority stake in its asset management unit and spin off commercial real estate, and posted a $3.93 billion quarterly loss. The shares of Lehman, Wall Street's fourth-largest investment bank, fell 7 percent.
"Lehman failed to find anyone to invest capital. With Washington Mutual potentially needing some in the future, the market is taking the opportunity to punish that company," said Jaime Peters, a banking analyst at Morningstar Inc in Chicago.
Washington Mutual did not immediately return a call seeking comment.
Earlier this year, it raised $7.2 billion from investors, including private equity firm TPG Inc (TPG.UL).
On Monday, the thrift ousted the longtime chief executive, Kerry Killinger, and replaced him with Alan Fishman, the former chief of Brooklyn, New York's Independence Community Bank Corp.
Washington Mutual lost $3.33 billion in the second quarter, and said cumulative losses from subprime mortgages and other home loans could reach $19 billion through 2011. The thrift's shares have fallen 93 percent in the last year.
SHAKE-OUT
It costs $4.3 million up front plus $500,000 annually to protect $10 million of Washington Mutual debt against default for five years, Phoenix Partners Group said on Wednesday. The up-front payment increased from $3.2 million on Tuesday.
Wednesday's level suggests that investors see an 85 percent chance of default within five years, according to Tim Backshall, chief analyst at Credit Derivatives Research in Walnut Creek, California.
"The market's shaking out who's going to be able to survive over the next year, and this is just part of the shake out," said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan.
On Tuesday, Standard & Poor's lowered its outlook to "negative" for its "BBB-minus" credit rating, which is one notch above "junk" status.
Washington Mutual this week announced an agreement with its chief U.S. regulator, the Office of Thrift Supervision (OTS), requiring improved risk management and compliance. It said the agreement doesn't require it to raise capital.
An OTS spokesman did not immediately return a call seeking comment. A Federal Deposit Insurance Corp spokesman said the agency does not comment on banks that are open and operating.
Morningstar's Peters said a falling stock price complicates Fishman's task to nurse Washington Mutual back to health.
"Fundamentally, nothing has changed at Washington Mutual since he was named CEO," Peters said. "He already has a very difficult task ahead of him. His primary task is to stabilize loan losses, and keep capital at a level that makes regulators happy."
(Additional reporting by Herbert Lash and Phil Wahba in New York, and John Poirier in Washington, D.C.)

U.S. Mortgage Foreclosures, Delinquencies Reach Highs

More Bad News:

Sept. 5 (Bloomberg) -- Foreclosures accelerated to the fastest pace in almost three decades during the second quarter as interest rates increased and home values fell, prompting more Americans to walk away from homes they couldn't refinance or sell.

New foreclosures increased to 1.19 percent, rising above 1 percent for the first time in the survey's 29 years, the Mortgage Bankers Association said in a report today. The total inventory of homes in foreclosure reached 2.75 percent, almost tripling since the five-year housing boom ended in 2005. The share of loans with one or more payments overdue rose to a seasonally adjusted 6.41 percent of all mortgages, an all-time high, from 6.35 percent in the first quarter.

Tumbling home prices are making it difficult for even the most creditworthy owners with adjustable-rate mortgages to sell or get a new loan as their financing costs rise, said Jay Brinkmann, MBA's chief economist. Prime ARMs accounted for 23 percent of new foreclosures and subprime ARMs were 36 percent, he said.

``People chose the lowest payment option to get into some of the very expensive housing markets and now that prices are coming way down, they can't sell and they can't afford the higher payments,'' Brinkmann said in an interview. The unadjusted rate for new foreclosures was 1.08 percent, also a record, he said.

The three-year-old housing slump has slowed growth of the world's largest economy, caused more than half a trillion dollars of losses at banks such as Citigroup Inc. and UBS AG, and crimped earnings for companies such as Home Depot Inc. and Lowe's Cos. that rely on home purchases to fuel demand.

Economic Growth

The drop in home sales and values, along with tighter credit conditions and higher energy costs, probably will ``weigh on economic growth over the next few quarters,'' Federal Reserve policy makers said Aug. 5 when they decided to hold their benchmark rate at 2 percent. The central bankers cut the rate seven times in the last year in an attempt to avert a U.S. recession.

The Fed probably will keep the rate level for the next few months, according to the price of Fed funds futures. There's an 81 percent chance of no change at the Sept. 16 meeting and a 75 percent chance of no action at the Oct. 29 meeting, they indicate.

Foreclosures started on prime mortgages rose to 0.67 percent from 0.54 percent and the foreclosure inventory increased to 1.42 percent from 1.22 percent, the report said. The share of seriously delinquent prime mortgages was 2.35 percent, up from 1.99 percent.

Prime Mortgages

The share of new foreclosures on prime ARMs was 1.82 percent, triple the 0.58 percent in the year-earlier quarter, and the total foreclosure inventory was 4.33 percent, up from 1.29 percent, the report said. The share of seriously delinquent prime ARMs was 6.78 percent, rising from 2.02 percent a year ago.

New foreclosures on subprime loans rose to 4.7 percent from 4.06 percent in the first quarter, according to the report. The total foreclosure inventory increased to 11.81 percent from 10.74 percent and the so-called seriously delinquent share of loans that are 90 days or more overdue rose to 17.85 from 16.42 percent.

The bankers' report cites percentages without providing the number of mortgages. The U.S. had $10.6 trillion of outstanding home loans at the end of March, according to a June 5 report by the Federal Reserve. Mortgage lending fell to $320.9 billion in the first quarter, down from $782.6 billion a year earlier, the Fed report said.

Existing home sales fell to a 10-year low in the second quarter and the median price for a single-family house dropped 7.6 percent, according to the National Association of Realtors in Chicago.

Market Bottom

Tumbling prices and foreclosure sales by banks may be helping to form a bottom for the housing market, said Brian Bethune, chief U.S. financial economist at Global Insight Inc. in Lexington, Massachusetts.

``People who have been waiting on the sidelines -- and there have been quite a number of them -- are starting to see prices come down to the point where they perceive good value,'' Bethune said in an interview. ``Foreclosures do provide opportunities and induce some people to come back into the market.''

Sales of previously owned homes rose 3.1 percent in July to an annualized pace of 5 million, boosted by foreclosures that accounted for about a third of all transactions, the National Association of Realtors said in an Aug. 25 report.

The Mortgage Bankers report is based on a survey of 45.4 million loans by mortgage companies, commercial banks, thrifts, credit unions and other financial institutions.