Oct. 5 (Bloomberg) -- Washington Mutual Inc., the biggest U.S. savings and loan, said third-quarter profit fell about 75 percent after the worst housing slump in 16 years caused more borrowers to default.

Earnings may be the lowest since the fourth quarter of 1998 on $1.39 billion of bad-loan provisions and writedowns, the Seattle-based company said today in a statement. Washington Mutual rose as much as 3.4 percent in New York trading after Chief Executive Officer Kerry Killinger, 58, said he expects results to improve in the fourth quarter.

The biggest drop in U.S. home sales since 1991 contributed to a decline in net income that may cut Washington Mutual's earnings to about $187 million, the lowest since the company took a charge in the fourth quarter of 1998 to buy rival H.F. Ahmanson & Co. More than 100 mortgage businesses have closed or been sold since the start of last year. Washington Mutual shares have fallen 21 percent this year as mortgage delinquencies rose to a five-year high and foreclosure rates climbed to a record.

``The horrible delinquencies we're seeing won't turn into horrible losses for at least another year,'' said Mark Adelson, a mortgage consultant at Adelson & Jacob Consulting LLC in New York. ``The alarm is going off from the detector on the ocean floor, but the tsunami hasn't hit the shore yet.''

Citigroup Inc., the biggest U.S. bank, said earlier this week that profit for the quarter fell 60 percent after $5.9 billion of credit and trading losses on loans and mortgage-backed securities. The losses are the biggest reported so far by the world's top banks and securities firms.

Bank of America, JPMorgan

Bank of America Corp., based in Charlotte, North Carolina, and New York-based JPMorgan Chase & Co. report earnings later this month. Bank of America Chief Financial Officer Joe Price said Sept. 17 that ``unprecedented dislocations'' in credit markets will have a ``meaningful impact'' on third-quarter results at the company, No. 2 behind Citigroup based on assets.

``You're going to find a lot of companies having to come clean with these assets on their balance sheets,'' said Terry Wakefield, a mortgage-industry consultant based in Grafton, Wisconsin. ``There's still somewhere between $75 billion and $150 billion of write-offs that have not yet occurred, and they're going to surface as the quarterly earnings process unfolds.''

Washington Mutual said it ``continues to have the liquidity and capital necessary'' to expand businesses and pay the current dividend.

CEO `Disappointed'

``While we're disappointed with our anticipated third- quarter results, we look forward to an improved fourth quarter,'' Killinger said. ``We continue to see good operating performance in our retail banking, card services and commercial group businesses.''

The stock rose 79 cents to $36.07 at 4 p.m. in composite trading on the New York Stock Exchange.

``There's an assumption that they've got this behind them,'' said Gary Gordon, an analyst at Portales Partners LLC. ``I don't think credit losses are going to peak until 2010. The surprise was the speed at which charge-offs are rising.''

No additional details will be available until the company reports final results for the quarter on Oct. 17, Washington Mutual spokeswoman Libby Hutchinson said. Citigroup, based in New York, reports on Oct. 15, and Bank of America has set Oct. 18 for its earnings announcement.

Washington Mutual has cut its lending staff 28 percent since the end of 2005, the company said in a presentation Sept. 10 in New York. The lender fired about 1,000 people last month as it closed two divisions. It had 49,989 employees as of June 30.

Countrywide Jobs

Countrywide Financial Corp., the biggest U.S. mortgage lender, said last month it would fire as many as 12,000 people as investor demand for mortgages dried up. Jobs have been slashed at IndyMac Bancorp, the second-biggest U.S. mortgage company, and Lehman Brothers Holdings Inc., the No. 1 underwriter of mortgage- backed bonds.

Merrill Lynch & Co., the nation's largest brokerage, said today it expected a third-quarter net loss of as much as 50 cents a share from subprime mortgages and writedowns on collateralized debt obligations.

Morgan Stanley, Bear Stearns Cos. and Lehman, three of the five largest U.S. brokerages, reported declining profits last month after reducing the value of their loan commitments and mortgage-bond holdings.

Two U.S. banks have failed in recent weeks, partly because of losses on subprime mortgages, according to regulators. Miami Valley Bank of Lakeview, Ohio, was closed by state regulators and NetBank Inc. of Alpharetta, Georgia, became the first U.S. savings and loan to fail in three years last month.

Toronto-Dominion

Toronto-Dominion Bank, Canada's third-biggest lender, said this week it would buy New Jersey's Commerce Bancorp Inc. for $8.5 billion. A more than 60 percent surge in the Canadian dollar since 2002 has increased Toronto-Dominion's market value, making foreign acquisitions cheaper.

``Typically banks don't like to buy other banks if they can't assess the value of their loans,'' Gordon of Portales said. ``This would decrease the odds'' of a similar takeover deal emerging for Washington Mutual, he said.

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: October 5, 2007 16:09 EDT