SEATTLE – Washington Mutual Inc., the nation’s largest savings and loan, is gearing up for a tough year, from ongoing trouble in the mortgage business to a broadening inquiry into alleged market collusion.
New York Attorney General Andrew Cuomo said Wednesday that subpoenas had been issued to government-sponsored lenders Fannie Mae and Freddie Mac as part of an investigation into conflicts of interest in the mortgage industry, particularly loans purchased from WaMu.
WaMu shares fell $4.19, or 18.3 percent, to close at $20.04, their lowest point in seven years.
Compounding potential legal issues, executives told investors Wednesday in New York that WaMu’s losses on loan defaults in the first quarter of 2008 will continue at the same rate as in the current quarter.
“The soft landing we were anticipating previously quickly transitioned to a severe downturn,” Chief Executive Officer Kerry Killinger told investors.
The company did not say how deep credit losses would be in 2008, but in a note to investors, Lehman Brothers analyst Bruce Harting estimated them at $5 billion for next year, topping his original estimate of $3.8 billion.
The company said it expects fees from its retail banking operations – checking and savings accounts for average people – to grow 12 percent to 15 percent in 2008, essentially the same as 2007.
“This was one area we thought would be a bright spot in guidance,” wrote Harting.
WaMu Chief Executive Officer Kerry Killinger also forecast new mortgages would decline in 2008, according to presentation notes.
Credit rating agency Fitch Ratings lowered its outlook for WaMu to negative from stable on Tuesday, and said in a statement that market conditions will likely remain tough in 2008 for lenders with a strong reliance on mortgages and home equity credit.
WaMu has scaled back its mortgage lending to borrowers with questionable credit, but the implosion of the subprime sector hit the company hard in the third quarter.
WaMu missed Wall Street’s earnings expectations and wrote down a reserve of $967 million – about six times bigger than a year ago – to prepare for new defaults on mortgages and credit card loans.
“In the third quarter, a severe liquidity squeeze dried up mortgage financing … causing refinancings to slow, home sales to plummet, housing inventory to soar and prices to fall,” Killinger said.
This is “a trend we expect to continue into 2008,” he said. Killinger also said he expects new mortgages and refinancings in the industry as a whole to decline again in 2008 – and at a faster rate than other industry estimates.
Killinger told investors that WaMu, having pulled back from the subprime business, is positioned to weather the credit crunch, and that the bank will focus on small businesses and retail customers, and traditional residential mortgages backed by collateral.
In addition to staving off the mortgage crisis, which threatens to extend beyond subprime loans into other chunks of its business, like adjustable-rate mortgages, investors were rattled by allegations from New York Attorney General Andrew Cuomo that WaMu pressured a major real estate company to inflate home appraisals.
Cuomo announced a civil lawsuit against eAppraiseIT, a subsidiary of First American Corp., last week. On Wednesday, Cuomo issued subpoenas to Fannie Mae and Freddie Mac, seeking more information about loans they purchased from WaMu and other banks.
The company did not immediately respond to a request for comment about this specific claim, but in his remarks Wednesday, Killinger responded to the lawsuit against eAppraiseIT by saying WaMu will “defend ourselves from all unfounded allegations and frivolous lawsuits that come our way.”
Cuomo said Fannie Mae and Freddie Mac have now agreed to allow an independent examiner to review all Washington Mutual appraisals and mortgages.