Washington Mutual: WaMu and the $239 Billion in Outstanding Loans. $52.9 Billion in Option ARMs. Analysis for the Upcoming Year.
Washington Mutual has been taking a major hit with the current credit and housing crisis. Washington Mutual is down 71% on a year to date basis and with the recent announcement of a $3.3 billion quarterly loss, things will continue to be difficult. Washington Mutual is categorized under a S&L/Savings Bank and even given the current share price, is still ranked amongst the top for market cap in this category.
This is an amazing stat in itself since the institution has lost over 71% of its value in this year alone. The market has been punishing all financial institutions across the board and this reflects the widespread credit and housing problems:
Washington Mutual currently has over 43,000 employees. In their recent public quarterly report, we can see in one of the attachments the break down of their loan portfolio and we can see why given the current loan distribution why Washington Mutual will potentially have a difficult time if the housing market does not improve. Just for perspective, IndyMac the recently taken over S&L/Savings Bank had assets of $32 billion. WaMu has approximately $320 billion. In this article we are going to look at the $239 billion loan portfolio of WaMu with a major focus on the Option ARM subsection. First, let us see the breakdown:
*Source: Edgar Online
What you’ll first notice is that WaMu holds a large amount in home equity loans. $60 billion in home equity loans is a lot and given how things are playing out in certain markets like California where WaMu has a large presence, many of these loans have made homeowners go underwater.
You will also notice $16 billion in subprime loans. With such high default rates for subprime loans this is another section that will have continued losses simply because of the overall declining housing market across the country. In addition, many subprime loans are made to borrowers who simply do not have the means to stay current and by default, subprime loans are made to those with poor to substandard credit. People get dings on their credit when they miss payments so the history is already there. Of course the past is no indicator of future behavior but it is a good indicator.
The major issue we will be seeing in the next few months is with the Option ARMs. WaMu currently has $52 billion in Option ARMs with approximately half of the loans in California. California as we recently discussed is now making up nearly 10% of all the nationwide foreclosures. The trend should continue since the recent numbers for the state show that the median price is now down by 37.7% on a year over year basis. This will prove to be problematic in the upcoming year. And just to highlight this, let us first look at the recast dates for the Option ARM portfolio:
As you can see from the chart above, the major recasts won’t start until 2009 and this will remain all the way through 2012. You can see that for the third and forth quarter of this year only $2.2 billion of the Option ARMs will recast. The trouble with many of these loans is that you have the option to pay an artificially low rate for 1, 2, 3, or even 5 years and then all of a sudden be hit with a stunning rate increase. In fact, 80 percent of Option ARM borrowers in the country make only the minimum payment. This minimum payment sets up a negative amortization scenario where the actual balance of the loan increases. What this means is the borrower isn’t paying any principal down and is most likely not even covering the interest of the loan so the balance grows. There are caps for the growth and they are hitting at the worst time possible.
What is more troubling is that many of the Option ARMs are already seeing trouble and the bulk of the recasts are still months away:
As you can see from the chart above, problems with these loans started increasing in the third quarter of 2007 when the NCO rate was 0.26%. Now, we are already up to 3.91% and as you see from the above recast chart, we haven’t even seen the start of the major recasts occurring.
What this tells us is the quickly deteriorating California market is hurting the Option ARM folder quickly. Keep in mind that at least statistically in 2007 California was still up on a year over year basis. To go from a positive to a negative 37.7% is an absolute crash and will put the portfolio in a precarious situation. Many borrowers who would like to sell their home now find that they are underwater with a market that is tanking. The assumption from many analysts that buyers would not walk away from homes was based on factors that were largely absent in these loans. That is, down payments of 10 to 20 percent on fixed rate mortgages. As the negative equity position increases, there is more incentive for the buyer to walk away and with zero down loans in many cases, that 37.7% decrease provides plenty of incentive. These loans are sure to increase the REO numbers for WaMu. Let us now look at the actual region breakdown:
$26.3 billion of the Option ARM loans are in California. An additional $6.8 billion are in Florida. These are the hardest hit states in the entire country on a nominal basis and they compose $33.8 billion of WaMu’s Option portfolio. Given that we are extremely early in the recast period and just given the median price drop the vast majority of these loans are underwater. Short of a boom in California and Florida housing prices these items will drag WaMu down for the foreseeable future.
If you enjoyed this post click here to subscribe to a complete feed and stay up to date with today’s challenging market!Nearly 1.5 Million Foreclosure Filings in 2008. California Represents 110,000 of Those Foreclosures.
Everyone by now realizes that not all states are facing the same problems with the current housing market. Foreclosures are now accelerating in states that had the highest appreciation in prices and consequently, are causing the most financial damage that is rippling throughout the economy. Foreclosures are the worst sign in any housing market. They destroy money. Lenders lose money since in rare circumstance are they able to recoup the full face value of the mortgage. Borrower are harmed since they lose their home and any semblance of good credit. Much of the rhetoric in Washington is shrouded around these stories and most people realize that there is very little good that can come from a foreclosure.
We keep hearing that things are bad but until we graphically show the growth of foreclosures it is hard to comprehend. I developed a chart that uses data from RealtyTrac for nationwide foreclosure filings and data from DataQuick to highlight the problems in the California housing market. Take a look at this chart:
What you’ll notice in the chart above is that nationwide foreclosures stayed relatively stable in 2006. They were growing but nowhere near the current pace. The more startling fact is the lack of foreclosures in California during this time. You can hardly see it on the graph since California was still booming in 2006.
As things progressed, you started to first see an increase in the notice of defaults in California. These are early signs of problems. Little by little until the second half of 2007 when prices stalled did the entire housing market come crashing down. Now, foreclosures and notice of defaults are spiking at an alarming pace. California foreclosures now make up 8.3% of all foreclosures in the country. Take a look at how quickly this has changed:
This is where you can see how one state with the size of California can quickly drag an entire nation into the doldrums. In the second quarter of 2006 California made up only 0.71% of all foreclosures nationwide. In the second quarter of 2007 it made up 3.56%. Now, California foreclosures make up a stunning 8.33% of all foreclosures nationwide.
Even with the Fannie Mae and Freddie Mac legislation, there is going to be very little relief to states like California that are now becoming a larger piece of the nationwide foreclosure pie. First, many of the loans that are defaulting in California are subprime. In the next few months, the vast majority will be Pay Option ARM mortgages that have in many cases negative amortization. Meaning, many borrowers will now have a larger balance to pay off on a home that is worth much less.
Lenders are still hiding what is really going on in their bottom line. The deferred interest on these negative amortization loans is actually counted as income and the borrower is having an artificially low payment. Once these payments recast, both lender and borrower are going to quickly realize how phony the sense of calm they both shared is.
In addition, the current legislation would require lenders to shave off 15% off the current appraised value of the home. That is assuming the buyer is even up for this since the legislation also requires the buyer to agree to give up their upside on the home to pay off the government in the future. You can already see how this will not help people in California. Let us do a crude example:
You buy a home at: $600,000 at the peak in early 2007
Current appraised value: $400,000 (this is a fair assessment given the state median price is off 35% in one year)
Note went up to: $625,000 (you went zero down and paid the minimum which made the loan a negative amortization product)
You are underwater by: $225,000
Let us now go through the current government program:
Current appraised value: $400,000 x %15 = $60,000 to be shaved off
Refinance loan into government backed loan of $340,000
Do you really think the lender is going to eat a $285,000 loss? Many will elect to foreclose and take their chances with the market. Many borrowers will still find the reduced price too high and walk away anyways either because the conventional mortgage payment is too high or they simply do not have the funds to continue. They also have little incentive if they know any future appreciation will go to the government.
This may help other states but anyone in California thinking this will help is looking at the wrong numbers. It is still up to buyers whether they even want to continue with the program. Lenders may not even want these major losses. Talk about a giant waste of taxpayer money.
