business

Investors Welcome WaMu News

Shares climbed Wednesday as the bank reported higher than expected earnings and unveiled a plan to aid stressed subprime borrowers

Washington Mutual (WM) announced a plan on Apr. 18 to commit $2 billion toward its customers’ subprime loans, as the bank comes up with ways to fight problems that recently hurt its earnings during the three months ended March 31.

The plan was announced as WaMu unveiled 2007 first quarter results. The bank's net income was $784 million, compared with net income of $985 million during the same period of 2006, when it had an $85 million after tax partial settlement related to Home Savings goodwill litigation. "Our Home Loans business was challenged during the first quarter by difficult market conditions," CEO Kerry Killinger said in a press release Apr. 17. The company suffered $164 million of losses related to subprime loans.

But the company's first quarter earnings amounted to 86 cents per share, compared to the consensus estimate of 83 cents. WaMu's stock rose 4.8% to $42.04 per share in afternoon trading on Apr. 18.

Over the past 12 months, the Seattle savings and loan bank has taken steps to mimimize its damage from the subprime mortgage industry meltdown. In its latest effort announced Apr. 18, WaMu subprime borrowers who remain current on their existing loans and anticipate pending payment increases may apply for new discounted fixed-rate loans or other mortgage products available to them. The bank hopes to help WaMu homeowners with subprime mortgage loans stabilize their finances and avoid foreclosure, according to a press release Apr. 18. Toward that end, WaMu has a commitment to refinance up to $2 billion in subprime loans at discounted interest rates.

The news hits after interest rates rose and housing prices fell during recent months, making it harder for borrowers to meet their mortgage payments by refinancing. As investors nervously watched more people failing to pay their mortgage debts, WaMu's stock has shed around 5.5% of its value year to date.

"With more than 60% of its loan portfolio in short-term adjustable-rate mortgages that are scheduled to reprice this year, we expect charge-offs to increase further by year-end," Morningstar analyst Erin Swanson said in a research note. "However, we don't believe these near-term housing issues will hold WaMu down over the longer term. The strength of WaMu's retail banking operations and diversification efforts will enable the firm to weather the storm."

For example, WaMu lowered its noninterest expenses 2% during the first quarter from the year-ago quarter. WaMu even managed to increase its net interest margin, or the amount that it profits on assets like loans, to 2.79% during the March quarter from 2.58% in the December quarter. The company shored up its balance sheet by taking steps in recent months such as selling off loans that don't yield much profit. And now, of course, some WaMu customers will be able to apply for those new discounted fixed-rate loans.

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