Lenders Squawk Despite Fed's Balk

While the market focused on Dow 10,000 and two little words from the Fed Tuesday, it was the mortgage lending industry that made the most noise, throwing cold water on the entire banking sector.

Washington Mutual(WM Quote), the nation's largest savings and loan, warned that its earnings will be lower than expected due to a decrease in mortgage volume and other factors. Its stock dropped $3.57, or 8%, to $40.28 after the announcement. The Philadelphia Bank Sector Index dropped 11.95, or 1.3%, to 939.40.

To be sure, it has been a stellar year for banks, homebuilders and anyone else associated with the skyrocketing housing industry. The Philadelphia Bank Sector Index has risen from 772 to 939, or 21%, for the year. Component stocks focused on mortgage origination have done even better than that.

But now may be a good time to consider whether the bull run in mortgage lending stocks has reached its peak.

The Washington Mutual announcement was blunt and seemed to reverberate across the board as the entire sector was down from the opening bell, while the rest of the market attempted and abandoned a weak rally toward Dow 10,000. Every major bank and mortgage originator was down for the day, in some cases sharply.

High Finance It's been a good year for lenders
	Current Price	YTD Change	First Call Estimated 2004 PE
Washington Mutual(WM Quote)	40.04	23.31%	8.43
IndyMac Bancorp(NDE Quote)	28.37	50.66	9.24
Greenpoint Financial(GPF Quote)	33.57	7.25	9.02
Golden West Financial(GDW Quote)	99.32	34.60	13.02
JP Morgan (Dow Component)(JPM Quote)	34.85	36.99	11.17
Wells Fargo(WFC Quote)	56.44	16.20	13.80
BankOne(ONE Quote)	44.08	17.39	13.08
Bank of America(BAC Quote)	75.37	6.64	10.62
Citigroup (Dow Component)(C Quote)	47.03	29.38	12.31
Philadelphia Bank Index	939.4	21.54	-
Source: TSC Data, Mortgage Bankers Association, Thomson First Call

Predictions as to the end of the mortgage boom have been in the public domain for months, but Washington Mutual CEO Kerry Killinger went a ways toward confirming those predictions Tuesday with hard numbers. Calling the outlook for the mortgage market "uncertain," he sang the swan song for the conditions of the last few years that have produced outsize results.

"Washington Mutual benefited from extraordinary mortgage volumes over the past few years, which allowed us to fund the expansion of a national retail banking franchise and multifamily lending business while producing solid earnings growth," Killinger said. "Now that the mortgage market has clearly slowed, we are adjusting our business to adapt to the new realities of the current environment."