Potential Rent-A-Ledge customer alert --
Is WaMu Out on Ledge?
Earlier Stumbles Cut Into Bank's Credibility On Mortgage Holdings
By ANN CARRNS
September 7, 2007; Page C1
With its share price down more than 20% so far this year, Washington Mutual Inc. ought to be a textbook buying opportunity for investors hunting for major mortgage lenders that are down but not out.
WaMu has "good liquidity," or diverse sources of funding, according to a Moody's Investors Service report last week. The Seattle thrift's retail-banking operation is raking in cheap deposits to help fund new mortgages. And about the best thing going for it these days is that it doesn't look like the next Countrywide Financial Corp.
But stumbles made by WaMu long before the credit-market turmoil have undermined the credibility that other subprime lenders -- such as Wells Fargo & Co. -- are leaning on to lift their ailing stocks.
The result: Even though WaMu has tightened underwriting standards for riskier loans, many analysts and investors are taking a talk-is-cheap attitude about the assurances. "My opinion is it'll get worse," says Stuart Plesser, a Standard & Poor's stock analyst who slapped a "sell" recommendation on WaMu last week. He thinks the share price is likely to sink an additional 8% in the next year.
In 4 p.m. composite trading yesterday on the New York Stock Exchange, WaMu shares rose 19 cents to $36.01 -- about where the stock traded in 2000. Investors do benefit from the stock's dividend yield, now at 6%, compared with about 3.4% for Wells Fargo and 5.2% for Wachovia Corp.
WaMu shares trade at about 9.3 times projected per-share earnings for the next year, compared with a median of roughly 11.4 for its peers in the KBW Bank Index, according to KBW research. Just three of 19 analysts following the stock are urging investors to buy, according to Thomson Financial.
With a stock-market value of about $32 billion, WaMu had $20 billion in subprime mortgages as of June 30 -- or about 9% of its overall loan portfolio. Dismal results in the company's home-loan unit are expected to sap profit for at least several more quarters, partly because of rising loan-loss provisions, estimated by WaMu at $1.5 billion to $1.7 billion for 2007.
It doesn't help that, among the largest U.S. mortgage lenders, WaMu last year made the highest proportion of loans to real-estate investors or second-home buyers, according to data filed with federal regulators. Those loans are considered especially risky, generating an outsize share of defaults, the Mortgage Bankers Association said last week.
WaMu also is exposed to some teetering mortgage lenders through its little-known warehouse funding operation. Typically, WaMu's mortgage-firm customers would make loans, then sell them to investors and use the proceeds to pay off the warehouse loans from WaMu. But the shriveled secondary market has pinched that business.
For example, WaMu was the largest warehouse lender to First Magnus Financial Corp., of Tucson, Ariz., which specialized in prime and Alt-A mortgages. But when lenders demanded that First Magnus put up more collateral to compensate for dropping loan values, it couldn't sell enough loans to generate the cash and filed for bankruptcy-court protection last month. That leaves WaMu on the hook for about $1.1 billion in loans that First Magnus couldn't sell, according to bankruptcy-court filings.
WaMu Chairman and Chief Executive Kerry Killinger wasn't available to comment. Libby Hutchinson, a WaMu spokeswoman, says executives feel "quite good" about the thrift's position in the First Magnus loans, because the delinquency rate is "immaterial" and WaMu has plenty of room on its balance sheet to hold the loans if they can't be sold at a profit. WaMu expects to sell a "significant portion" of the loans next month, she adds.
As for loans backed by nonowner-occupied homes that still are in WaMu's loan portfolio, Ms. Hutchinson says they generally have higher credit scores and loan-to-value ratios than loans where borrowers live in the home. "We have been and continue to be comfortable with their performance," the WaMu spokeswoman wrote in an email.
"I know they've done some poor underwriting," says Keith Stribling, Los Angeles-based co-manager of Highmark Value Momentum Fund, with assets of $475 million. The fund held 110,000 shares of WaMu as of June 30, down 17% from a year earlier. "Everyone went after market share, and people get less focused on the details." Mr. Stribling says the fund is maintaining its current position.
WaMu's mortgage business can tap the Federal Home Loan Bank system, unlike most of Countrywide. That is another reason WaMu is better-insulated from the sort of liquidity squeeze that drove Countrywide into last month's sale of $2 billion of convertible preferred shares to Bank of America Corp.
WaMu also has been reducing its exposure to option-adjustable-rate mortgages, which let borrowers choose their monthly payment but can increase the total amount owed. WaMu says it is "very comfortable" with the performance of its option ARMs, citing its more than 20 years in that business. But those loans accounted for half its home-loan portfolio as of June 30. Overall nonperforming assets surged 87% to $4.03 billion from a year earlier.
WaMu just hired away Countrywide's chief credit officer, John P. McMurray, who starts at WaMu later this month. Countrywide's turmoil aside, Mr. McMurray "is highly respected" in the industry and will "bring immediate added value," Mr. Killinger said in a statement.
Despite the moves to shore up confidence, few investors have forgotten bad bets WaMu made in its mortgage-hedging operation in 2004, when the mortgage business was still booming. The flub contributed to a 25% profit slide for the year and fueled doubts that still linger, despite a reshuffling of WaMu's management. WaMu also had to scale back its ambitious retail-bank branch expansion after the effort fizzled in some markets, such as Chicago and Atlanta.
Ms. Hutchinson, the spokeswoman, says that in recent years, WaMu has "reduced or exited business lines to improve profitability and lower risk; diversified our revenue sources" and cut costs "to improve efficiency."
"The real dilemma of being a value investor with these companies is you don't know how everything is inter-related," says John Buckingham, CEO of Al Frank Asset Management Inc., which has $850 million under management. "People don't know where the next bombshell is." The Laguna Beach, Calif., firm, known for taking buy-and-hold positions in beaten-up stocks, had about 161,000 WaMu shares as of Aug. 31, down about 6% from a year earlier.
William Nygren, manager of the Oakmark Select Fund, with nearly $6 billion in assets and 20.2 million WaMu shares as of June 30, says WaMu just needs some time to navigate the mortgage industry's problems. Even if the thrift has to sharply increase loan-loss reserves or write down loans, that would be "trivial in size compared to their deposit base," he says.
Although Oakmark Select's stake in WaMu is down about 9% from early 2006, Mr. Nygren said that is mostly a byproduct of fund redemptions over the past year and shouldn't be read as a sign he has cooled on the stock. WaMu remains the fund's largest position.
Mr. Killinger has said WaMu plans to take on between $15 billion and $25 billion in additional home loans as it tries to seize market share from other lenders. Fred Cannon, an analyst with Keefe, Bruyette & Woods, which provides investment-banking services to WaMu, says he expects any new loans to be "similar or worse" than WaMu's existing portfolio. He rates WaMu's shares the equivalent of a "hold."
Hopes that WaMu's profitable retail bank, with 2,600 branches in 16 U.S. states, will attract a takeover also have dimmed. Some analysts and investors say potential suitors are likely to remain leery until the extent of problems in WaMu's mortgage portfolio becomes clearer.
Write to Ann Carrns at ann.carrns@wsj.com |
