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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ggersh who wrote (95808)	7/22/2008 8:28:08 PM
From: rich evans	Read Replies (1) \| Respond to of 110194

Notes on WM: Their huge loan loss provision is the main reason for their loss. Each loan is analyzed to arrive at the figure. It takes a year to finish a foreclosure and the house is nonaccrual during that period=6% loss. Then you have legal, insurance,taxes,realestate commissions and repairs and maintenance which are substantial. This all averages out to 20% of a middleclass home . Combine this with the 30% house decline and you get the loss severity ratio of 50% which WM is using. This is the same loss severity ration used by some other banks. That is 50% on prime and 100% on seconds and HELOCS. The interest margin rate improved as did the net interest income. But there was a big drop in the Fee/other income of about 1 bill dollars. This is big and if on going would severly impact WM earning power. Basically WM net interest income balances out their expenses, so WM profit is the fee/other income. They lost on asset sales, trading, syndication and other fees.WM must reduce expenses which total over 8 bill a year to offset this loss of earning power. Their retail banks are performing well and this is a plus. But they have lost/closed all their mortgage stores and accept no referrals from mortgage brokers. Once again, a loss of earning power going forward. This earning power going forward is critical to the company recover and stock price. The true number of shares out are close to 2 bill. Since the converts are out of the money at 8.75 a share, WM showed fewer shares. If WM only earns 500mill a quarter-forgetting the loan loss provision- this means 2 bill a year before taxes or $1/share using 2 bill shares.No wonder they are reducing expenses. They had a efficiency ratio in the 80% area. They need to get their efficiency ratio near 50% like other good banks so some of the net interest income can fall to bottom line instead of being eaten up in expenses. They said their losses would be close to 19 bill in home lending. Think about that. These losses are charge offs- real losses not provisions. At a 50% severity ratio, this means that the default on the loans = 38bill. They have only 16 bill of subprime loans about. Their whole mortgage book is about 200bill. This means their default /delinqency is 20% or so. Check their 60 day, 90 day and NPA progression. Add up the delinquency rates and you get this number as their is 100% rollover. Rich