NEW YORK Washington Mutual Inc (WM.N), shares tumbled 17 percent to a seven-year low on Wednesday after the largest U.S. savings and loan said mortgage losses will mount through 2008, and a probe into alleged inflated home appraisals widened.
New York Attorney General Andrew Cuomo said his office is examining whether Washington Mutual pressured a big title insurer to inflate home values in appraisals, making it possible for borrowers to obtain mortgages they couldn't otherwise afford.
Shares of banks, thrifts and mortgage lenders declined broadly on Wednesday, as investors worried that mounting losses and probes into lending practices might reduce profits.
Seattle-based Washington Mutual 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.
"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 Inc (C.N) and Merrill Lynch & Co MER.N are among other companies to post big mortgage losses. On Tuesday, Capital One Financial Corp (COF.N), the credit card and banking company, boosted its forecast for 2008 credit losses.
Cuomo said he issued subpoenas to Fannie Mae FNM.N and Freddie Mac FRE.N 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 Corp (FAF.N), 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.
Late Wednesday, WaMu said it is continuing its own investigation into the matter, and "takes any allegations of improper practices seriously." It also said Fannie Mae and Freddie Mac are continuing to buy its loans.
Shares of WaMu closed down $4.19 at $20.04 on the New York Stock Exchange, their lowest level since July 2000. The stock has fallen 56 percent this year, wiping out $23 billion of market value.
The cost of insuring WaMu debt against default rose 62 percent to 380 basis points, or $380,000 per year for five years to insure $10 million of debt, from 235 basis points, according to Markit Intraday.
The Philadelphia KBW Bank Index .BKX fell 5.8 percent, while the KBW Mortgage Finance Index .MFX dropped 7.1 percent.
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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.