Is WaMu the Next Countrywide?

Not very "conservative"..... But it is getting very dangerous when you combine this with the percentage of earnings that is coming from capitalized interest and add the unpaid principle to the mix..... It should be clear that Washington Mutual is also using the latest accounting innovation "Mark-to-Make-Believe Gains" ( at least the increase is modest compared to Wells Fargo.....)

Das ganze scheint nicht sonderlich konservativ.....Wenn man aber dazu noch die Auswirkungen des sog. "capitalized interest" hinzunimmt wird es halsbrecherisch. Unter dem Begriff versteht man die Tatsache das bei den Krediten mit negativer Tilgung die nicht gezahlten Zinsen einfach der G+V der Bank zugeschlagen werden (als wären diese Gelder tatsächlich geflossen ). Zudem wächst dank der negativen Tilgung die Kreditsumme weiter an und erhöht so das Risiko. Es ist geradezu selbstverständlich das Washington Mutual auch die neueste Errungenschaft der kreativen Buchführung "Mark-to-Make-Believe Gains" für sich entdeckt hat. Immerhin ist das Ausmaß nicht ganz so üppig wie bei Wells Fargo

wamu credit quality....and capitalized interest up 300%. January 2007

Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $1.07 billion and $292 million for the years ended December 31, 2006 and December 31, 2005.

The total amount by which the unpaid principal balance of Option ARM loans exceeded their original principal amount was $852 million, $681 million, $474 million, $298 million, and $160 million at December 31, 2006, September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005. ( up 432%!!!!!)

An analysis of the largest 20 banks and thrifts by TheStreet.com Ratings shows that four institutions are under-reserved for possible credit losses, a red flag as the economy slows and mortgage defaults rise.

Perhaps more troubling, the numbers show that one of those institutions -- Washington Mutual -- could join Countrywide in facing serious liquidity problems as worries about the housing and mortgage markets multiply. Meanwhile, another big lender, National City , could see its earnings and dividend come under pressure as a result of its low reserve levels.

With the financial sector under increasing stress, TheStreet.com Ratings checked two key ratios to measure the strength of big banks' balance sheets: loan-loss reserves as a percentage of nonperforming loans, and nonperforming assets as a proportion of core capital and reserves.

Banks and thrifts walk a fine line in setting their quarterly loan-loss provisions, which add to their reserves against future losses. If they reserve too little, they can be seen as taking on more risk in the event of a decline in credit quality and padding their earnings for the current quarter (since the loan-loss provision lowers net income). If they reserve too much, investors, analysts and regulators may see the institution as over-reserving -- so it can manage earnings by under-reserving at a future point when earnings would otherwise weaken.

> This should hurt overall banking earnings for years to come....

> Das sollte die Bankgewinne noch Jahre belasten......

A good benchmark for loan-loss reserve coverage is 100% of nonperforming loans, which are loans past due 90 days or more. If a bank is forced to charge off loans totaling more than its loan-loss reserves, the losses eat into capital. That can hurt earnings if loan quality continues to deteriorate.

Another thing to consider is headline risk. As we have seen with Countrywide, any bad news in this environment can cause depositors to flee -- every bank's worst nightmare

Looking at the largest 20 banks and thrifts, it is clear that four are under-reserved and two have an alarming level of capital exposure to nonperforming loans. Here's a look at the four cases.

At Washington Mutual, as at the other institutions, credit quality is in decline, and reserves appear somewhat skimpy. Given those trends, in a worsening economic environment liquidity -- as well as the bank's dividend -- could come under pressure.

The bank reported nonperforming assets comprising 1.40% of total assets as of June 30, double the level from a year ago. The thrift's net income rose 9% from a year ago in the second quarter, but its ratio of reserves to nonperforming loans dropped to 43.4% -- its lowest level in more than five years.

Meanwhile, Washington Mutual's ratio of nonperforming assets to core capital and loan-loss reserves was 19.17% -- a very high level for a large bank. Most banks and thrifts we surveyed showed a number well below 10%.

If we assume that when disposing of a repossessed home a bank is likely to recover 70% of the remaining loan balance, the institution would still be comfortably well-capitalized, with a risk-based capital ratio of 11.76% (it needs to be 10% to be considered well-capitalized).

OK so far, but what if a significant portion of the loans past due only 30-90 days are eventually foreclosed? Loans past due 30-89 days totaled $2.9 billion. Addressing the expectation of a continued decline in credit quality, CFO Thomas Casey revised the holding company's guidance for reserves for the second half, saying the company would set aside $900 million to $1.1 billion for reserves during the second half of 2007. This will have a major impact on earnings.

If banking industry conditions deteriorate, Washington Mutual's divdend could come under pressure. The company paid out 60% of its second-quarter earnings to shareholders. This payout ratio is high, considering that the thrift is under under-reserved -- so it is conceivable that the dividend may have to be reduced in coming quarters, if asset quality continues its dramatic decline.

Liquidity is also a major concern. A high percentage of Washington Mutual's deposits are in non-retirement accounts with balances exceeding $100,000. We call these large, partially insured deposits "hot money." Washington Mutual's hot-money ratio was 37.6% as of June 30. As we saw last week with Countrywide Bank, these deposits can fly quickly in a time of uncertainty. ....

Mortgage LendersSweeten Savings Rates from the WSJ (free)

Last week, Washington Mutual Inc. raised rates on online six-month CDs to 5.5% from 3.9% and, in recent weeks, began promoting special rates on shorter-term CDs in its branches and through its call centers

Average rates on six-month, one-year and five-year CDs are 3.55%, 3.75% and 4.03%, respectively, according to Bankrate.com.

> Fits perfect to the overall picture.......

> Paßt hervorragend in das Gesamtbild.... Nie ein gutes Zeichen wenn deutlich erhöhte Marktzinsen gezahlt werden müssen...

Disclosure: Short KBW Mortgage Finance Index (including WM)

wamu credit quality....and capitalized interest up 300%.

you wonder that after all the accounting scandals this is legal. nevertheless the quality of the results is very weak. a growing number of the income is coming from the "capitalized interest / neg arms". credit-quality is also worsening etc.

man wundert sich in der tat das nach all den buchhaltungsskandalen solche praktiken immer noch erlaubt sind. aber egal wie man es dreht und wendet. ein immer höherer anteil des gewinns basiert auf zinsen für "kredite mit negativer tilgung" die obwohl niemals gezahlt worden rechtlich einwandfrei als gewinn verbucht werden können (obwohl gleichzeitig die kreditschuld wächst...) zudem verschlchtert sich die kreditqualität zusehends.

net income in the home loan group down from $1.03 billion to a loss of 48 mio!

Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $333 million, $296 million and $133 million for the quarters ended December 31, 2006, September 30, 2006 and December 31, 2005.

Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $1.07 billion and $292 million for the years ended December 31, 2006 and December 31, 2005. ( with net income at $3.56 billion this is not insignificant..../ bei 2,56 mrd$ nicht gerade unbedeutend....)

The total amount by which the unpaid principal balance of Option ARM loans exceeded their original principal amount was $852 million, $681 million, $474 million, $298 million, and $160 million at December 31, 2006, September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005. ( up 432%!!!!!)

Increase in nonperforming assets reflects more difficult credit environment. Weaker credit performance, particularly in the company's single-family residential real estate loan portfolios, contributed to the rise in the level of nonperforming assets as a percentage of total assets to 80 basis points at year end from 69 basis points at Sept. 30 and 57 basis points at the end of 2005. The company continued its practice of selectively selling nonperforming loans, selling $176 million in the fourth quarter and $155 million in the third quarter.

Provision driven by credit card growth. The increase in the fourth quarter provision for loan and lease losses to $344 million in part reflected the growth of the company's on-balance sheet credit card receivables, which increased the provision by $95 million compared with the prior quarter. During the quarter, the company also revised its accounting for credit card receivables held for sale and refined its provisioning methodology for multi-family loans. The impact of these two changes was a net increase to the fourth quarter provision of $25 million. The increase in the provision for 2006 to $816 million from $316 million in 2005 was primarily due to the addition of the company's credit card business acquired Oct. 1, 2005.

Subprime mortgage industry significantly weakens during the fourth quarter. During the fourth quarter, subprime mortgage delinquencies continued to rise as credit conditions deteriorated in the subprime mortgage industry. Weakening subprime mortgage credit performance and market conditions negatively impacted the company's fourth quarter pretax earnings by approximately $160 million. This result was driven by a reduction in fourth quarter gain on sale of approximately $110 million, as well as a reduction of approximately $50 million in the value of the company's subprime mortgage residuals to a balance of $168 million at year end.

and of course the company tries to masks the results.....

On Jan. 3, 2007, the company entered into an accelerated share repurchase agreement with a dealer, buying back $2.7 billion of its common stock

disclosure : short wm