December 10, 2007 / 9:54 PM / 10 years ago

UPDATE 2-WaMu to cut dividend, jobs; sets capital infusion

(Adds Moody's cut, analyst's comments, byline)

By Joseph A. Giannone

NEW YORK, Dec 10 (Reuters) - Washington Mutual (WM.N), one of the largest U.S. home mortgage lenders, said on Monday it would slash its dividend by almost three-quarters, cut 3,150 jobs and raise $2.5 billion in new capital as it sees losses from mortgages increasing through 2008.

The bank said a sharp downturn in demand for mortgages was forcing it to eliminate 2,600 mortgage and 550 corporate support jobs, or 11 percent of its entire staff, close 190 of 336 mortgage offices and stop making loans to borrowers with subprime, or poor credit.

WaMu is also reducing 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.

"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 Inc.

WaMu was the 6th largest U.S. mortgage company for the first nine months of 2007, according to the trade publication Inside Mortgage Finance.

WaMu, whose shares fell 8 percent in after-market trading, expects a weak market to get even worse next year, forecasting that mortgage originations nationwide would fall 40 percent to $1.5 trillion.

On Monday afternoon, Moody's Investors Service cut the long-term debt ratings of WaMu by two notches, bringing the bank's ratings closer to junk status.

WaMu's long-term debt is now rated "Baa2" from "A3". Moody's said the downgrade was based on its view that credit losses from WaMu's mortgage operations would be noticeably higher than previously estimated.

The bank said it would reduce operating expenses by about $500 million next year by cutting 22 percent of its home lending staff and no longer making subprime loans.

WaMu, based in Seattle, said it would raise new capital by selling $2.5 billion of convertible preferred stock through an offering. The bank said it expects the convertible offering, the dividend reduction and cost cuts to generate about $3.7 billion of tangible equity.

"Given all of the write-offs that everyone has been taking, or losses they've been announcing, we all knew this shoe had to fall and that it was just a matter of time before it did," said Charles Lieberman, chief investment officer of Advisors Capital Management in Paramus, New Jersey.

The bank also said it would close WaMu Capital Corp, its institutional broker-dealer, and its mortgage banker finance warehouse lending business.

It said the actions it announced on Monday would result in $140 million in additional expenses in the fourth quarter.

WaMu expects to report a net loss in the fourth quarter after recording a $1.6 billion charge for writing down all of the goodwill associated with its home loans business. The non-cash charge will result in a net loss for the quarter.

And as a result of rising loan losses and late payments, WaMu said it was setting aside between $1.5 billion and $1.6 billion in the fourth quarter, or twice the level of expected net charge-offs. The company expects the provision, which eats into profit, to rise to as much as $2 billion in the first quarter as charge offs climb.

"When you're that exposed to a mortgage market that is this disrupted, these kinds of changes were inevitable," said Adam Compton, head of U.S. financial services stock research at RCM Global Investors in San Francisco. (Reporting by Joseph A. Giannone; Additional reporting by Chris Sanders and Mark McSherry; Editing by Andre Grenon, Toni Reinhold)

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