Washington Mutual said the weakening housing market and disruptions in the secondary market will result in a 75% drop in quarterly net income.
This is, again, was a foregone conclusion to those who read this post from last month. In reality, this marks the 5th straight quarter that WaMu's mortgage division has generated a loss. It is just that this time the lost was so significant that it dragged the entire company into a quarterly loss. This trend is very strong now, with defaults in mortgages trending upward, not downward. Of course, WaMu is trading higher after this news because some traders actually believe that this is over. It will be over when WaMu's ill-underwritten loans from the boom disappear from its books. Until then...
Needless to say, this is a contagion that affects all banks that right mortgages for resale, and will eventually put even more pressure on the housing industry.
This graph is from Moody's report, "Subprime Mortgage Market Update: September 2007". It confirms what I surmised from the beginning. The defaults are not necessarily a result of subprime or Alt-A loans, but more so a result of hasty underwriting derived from the fact that the banks weren't lending for their balance sheets, but were lending to sell of the debt to the public/private markets. In other words, using other people's money (OPM). Excerpted from the report:
"The data show that, as we have noted in previous communications, loan performance for the 2006 subprime vintage seems to be driven primarily by the proportions of stated documentation loans and high CLTV loans backing the transactions as well as the proportion of loans that combine (or "layer") these risk characteristics. (Stated documentation loans are those loans for which the borrower's income and assets are not verified by documentation during the loan approval process and therefore are more likely to be overstated.) Interestingly, FICO scores and LTV ratios do not vary significantly between the strongest and weakest performing transactions and on average transaction performance does not appear to have been influenced by these characteristics."