UPDATE 2-Washington Mutual curbs subprime loans, profit up

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NEW YORK, July 18 (Reuters) - Washington Mutual Inc WM.N, one of the largest U.S. mortgage lenders, on Wednesday said it will stop offering some popular home loans for subprime borrowers, after rising defaults caused losses to mount.

The largest U.S. savings and loan also said second-quarter profit rose 8 percent, topping analysts’ estimates, to $830 million, or 92 cents per share, from $767 million, or 79 cents, a year earlier. It said its retail banking and credit card operations grew, while its mortgage unit pared its losses. Revenue rose 4 percent to $3.79 billion.

Analysts on average expected profit of 89 cents per share on revenue of $3.65 billion, according to Reuters Estimates. Shares of WaMu, as the thrift calls itself, rose 3.7 percent in after-hours trading.

In an interview, Chief Executive Kerry Killinger said that effective immediately, Seattle-based WaMu will require full documentation of income and assets from prospective subprime borrowers, eliminating riskier “stated income” loans.

WaMu will also no longer offer subprime adjustable-rate mortgages with initial fixed terms of fewer than five years. This eliminates so-called 2/28 and 3/27 loans, which carry low initial rates that jump to much higher, floating rates after two or three years. Stagnating home prices have left thousands of U.S. homeowners unable to refinance after rates reset higher.

The thrift will also require tax and insurance escrow accounts for all new subprime home loans.

“Too much money, and some would say, irrational money flooded the subprime market in the last couple of years,” Killinger said. “This led underwriting standards to decline, credit spreads to narrow, and volumes to surge, and now has caused delinquencies to soar.”

Killinger said WaMu has reduced subprime loan volume 70 percent, and is selling most subprime loans the thrift makes. Still, he said “we’re absolutely committed to the subprime mortgage business. It serves a very important customer need.”

Countrywide Financial Corp CFC.N, the nation's largest mortgage lender, and H&R Block Inc.'s HRB.N Option One Mortgage Corp. unit halted 2/28 subprime ARMs this week, spokesmen for the respective companies said.

WaMu shares closed down 75 cents to $41.61 on the New York Stock Exchange, but rose to $43.13 after hours.


The home loans unit posted a $37 million loss, down from a loss of $113 million in the first quarter. A year earlier, the unit posted a $50 million profit. Overall loan volume fell 24 percent from a year earlier to $31.5 billion. Killinger expects the unit to be profitable by year end.

Operating profit in retail banking, WaMu’s largest unit, fell 5 percent to $558 million. A decline in credit quality and less lending income more than offset the benefit of 406,000 net new checking accounts. Net interest margin rose to 2.90 percent from 2.65 percent.

Though WaMu opened a record 928,000 credit card accounts, rising loan losses caused card profit to fall 22 percent to $141 million. Commercial banking profit rose 35 percent to $113 million.

WaMu set aside $372 million for credit losses, up 66 percent. Net charge-offs more than doubled to $271 million. Killinger citing housing market deterioration and a growing card business for the increases. “We’re very pleased with the growth in card receivables,” he said.

WaMu now plans to set aside $1.5 billion to $1.7 billion this year for credit losses, up from its prior $1.3 billion to $1.5 billion forecast.

The thrift operates about 2,235 branches, and ended June with $312.2 billion of assets.

Through the close, WaMu shares were down 9 percent this year, compared with declines of 3 percent in the Philadelphia KBW Bank Index .BKX and 11 percent in the KBW Mortgage Finance Index .MFX.