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WaMu, Wells Survive Subprime Scares
By Ted Cornwell
For the first time in a while, more attention is being paid to credit risk than to interest rate risk at big mortgage servicers, especially those that hold a substantial number of mortgages in portfolio.
For most companies, a mea culpa with regard to subprime home loan performance was a standard part of first-quarter financial results. But so far, the biggest home lenders have dodged the bullets that have sunk many smaller shops, in part because they have the liquidity to hold loans that they suddenly have difficulty selling.
Everyone was wondering how much damage the subprime mortgage crisis would inflict on companies like Washington Mutual. But WaMu actually reduced its provision for loan losses on home loans from the fourth-quarter level, though the provision was well above year-earlier levels.
And WaMu's chairman and CEO, Kerry Killinger, took pains to explain the company's subprime mortgage exposure to investors and analysts following the release of the company's results. WaMu serviced $709 billion of home loans at the end of the first quarter, including $467 billion of home loans serviced for investors.
While saying that the subprime credit segment of the business was largely responsible for the company's $113 million loss from mortgage banking in the first quarter, Mr. Killinger said WaMu expects its home loans unit to return to profitability later this year.
On the bright side, WaMu's CFO, Tom Casey, said that while nonperforming assets are up sharply, actual charge-offs remain "relatively stable."
But Mr. Killinger told investors and analysts that WaMu was not caught off guard by the downturn in subprime loan performance.
"A correction in housing prices was inevitable and we have been anticipating it for nearly two years now," he said.
He said the sharp rise in subprime mortgage delinquencies, especially for loans originated last year, was driven by the softening of housing markets, a flat yield curve and aggressive competition among loan originators.
Mr. Killinger says WaMu's exposure is limited. The company had $20.4 billion of subprime home loans on its books at the end of the quarter, and 60% of those loans were originated in 2005 or earlier. In addition, WaMu held $6.1 billion of alt-A loans in its held-for-sale account at the end of the first quarter.
For a company with $320 billion of assets, that is a manageable level of exposure.
But WaMu's option ARM portfolio is another story and it remains to be seen how payment-option ARMs will perform over time. WaMu has $58.1 billion of option ARMs on its books as of March 31. The company estimates the average loan-to-value ratio is 59%. The reason the LTV is so low, Mr. Killinger said, is that WaMu sold two-thirds of its option ARM production in 2005 and 2006, so much of the portfolio is older and benefited from house price appreciation in previous years.
The company also has $53.4 billion of home-equity loans on its books, with an average LTV of 71%.
Wells Fargo, San Francisco, has done more to limit its exposure to subprime loans and exotic loan products than most lenders, shunning products such as option ARM lending and aggressive teaser rates.
But that didn't stop Wells from growing its servicing portfolio to $1.4 trillion, up 34% from the prior year.
Even so, Wells Fargo's CFO Howard Atkins said in a recorded call for investors that the company's efforts to minimize exposure to deteriorating subprime home loans shaved $90 million of Wells' first-quarter revenue.
He noted that most of the $24 billion of subprime mortgages in Wells' portfolio consists of debt consolidation loans, not home purchase financing.
As this edition of MSN Bulletin was being sent out, all eyes were on Countrywide Financial, which is scheduled to release first-quarter results on April 26. Will Countrywide fare as well as Wells Fargo and WaMu? Or will it have more explaining to do than its big rivals. Only time will tell.
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