WaMu's Big Credit Cushion Brings Huge Loss

Credit deterioration in WaMu's residential mortgage portfolio has been significant as housing prices sharply fall, forcing the nation's largest thrift to raise $7 billion in capital from a group of institutional investors led by TPG as well as a restructuring of the company away from mortgage broker-originated home loans.

Other banks, including Citigroup(C Quote), Wachovia(WB Quote) and National City(NCC Quote) have also been hit hard by the latest credit cycle.

WaMu said that it shortened the time period used to evaluate defaults for its prime mortgage portfolio to one year from three years "to reflect the evolving risk profile of the loan portfolio and adjusted its severity assumptions for all single family mortgages to reflect the continuing decline in home prices." Its loan-loss reserve now totals $8.46 billion.

Still WaMu now expects cumulative mortgage-related losses "to be at the upper end of the range" it disclosed in April of $12 billion to $19 billion and that 2008 should be the "peak year" for provisioning. Firm-wide net charge-offs totaled $2.2 billion in the second quarter. Nonperforming assets totaled 3.62% of total assets compared with 2.87% at the end of the first quarter, it said.

WaMu said that at the end of the second quarter it had a tangible equity to total tangible assets ratio of 7.79% compared with 6.40% at the end of March. It also decreased total assets by $10 billion to $309.7 billion, which freed up roughly $550 million in capital. Additionally, the company had over $40 billion of readily available liquidity at quarter-end.

But perhaps one ray of light in WaMu's earnings was the company's statement that "early stage delinquencies for the subprime and home equity portfolios showed early signs of stabilization in the quarter."

WaMu closed Tuesday up 6.2% to $5.82, after the financial sector rallied on positive sentiment by Wachovia. The bank said it wouldn't need to raise additional capital, despite posting an $8.9 billion loss for the second quarter.