Sept. 10 (Bloomberg) -- Washington Mutual Inc., the largest U.S. thrift, said that conditions in the housing market are creating a ``near-perfect storm'' and may force the company to set aside more money to cover bad loans.

Chief Executive Officer Kerry Killinger told the Lehman Brothers Holdings Inc. financial services conference today the thrift may have to increase its loan-loss provision by $500 million. The bank had forecast provisions of $1.5 billion to $1.7 billion for the full year.

Housing foreclosures in the second quarter rose to a record, according to the Mortgage Bankers Association in Washington. Lenders are cutting staff and scaling back operations as borrowing has fallen. At least 100 mortgage companies have closed their doors or sought buyers since the beginning of 2006.

``The combination of rising delinquencies, higher foreclosures, more housing inventories, increasing interest rates on many mortgages and greatly reduced availability of mortgages due to limited liquidity is creating what we call a near-perfect storm for housing,'' he said.

Washington Mutual fell 28 cents to $34.74 by 4:03 p.m. in New York Stock Exchange composite trading. The stock has declined 24 percent this year.

``It now appears that housing and capital market corrections will be worse and longer lasting than even we expected,'' Killinger said.

One-Time Writedown

The firm expects to take a $200 million one-time writedown in the third quarter on the value of loans moved to its portfolio, Killinger said. The loans are ineligible to be sold to government-sponsored agencies, such as Fannie Mae and Freddie Mac.

Washington Mutual has about $107 million in total subprime and alternative-A mortgages on its books, Killinger said.

The thrift plans to add more loans to its portfolio as competitors drop out of the market, calling this ``one of the best times'' for doing so.

Punk Ziegel & Co. analyst Richard Bove lowered his earnings per share estimates for 2007 to $3.36 from $3.52. He expects the firm to earn $3.92 in 2008, down from $3.98. He rates the shares ``buy.''

Credit-default swaps of Washington Mutual saw a 10 basis point rise in the cost of protection against default to 140 basis points, according to Phoenix Partners Group. A basis point on a contract protecting $10 million of debt for five years is equivalent to $1,000 a year.

Credit-default swaps are used to bet on a company's credit worthiness. A rise signals deteriorating credit quality.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: September 10, 2007 16:33 EDT