SEATTLE – Washington Mutual Inc.(WM) said Friday that the weak housing market and the recent mortgage crunch will lead to a 75 percent drop in its third-quarter net income, making it the latest financial institution to warn investors it took a major hit over the summer.
WaMu, the nation's largest savings bank, reported net income of $748 million in the third quarter of 2006, meaning third-quarter 2007 net income is likely to be somewhere around $187 million.
The decline in third-quarter income will mostly come from rising provisions for loan losses and write-downs of mortgages Washington Mutual currently holds.
Washington Mutual said its loan loss provision for the quarter will total $975 million. The provision exceeds net charge-offs — loans written off as having no chance of being recovered — by $550 million. Loss provisions, on top of paying current charge-offs, are used to cover future losses.
The company will also write down the value of various loans and portfolios by about $410 million.
Washington Mutual will write down by $150 million the value of $17 billion in loans that it was originally intending to sell, but instead moved to its investment portfolio after it could find no buyers in the secondary markets.
Another $150 million in write-downs will be taken in the company's trading securities portfolio. Washington Mutual will also take $110 million in write-downs on investment grade mortgage-backed securities it is holding to sell to investors.
Rising delinquencies and defaults among mortgages, especially subprime loans given to customers with poor credit history, have led to the near disappearance of investors willing to buy the loans in the secondary markets and forced lenders to reserve more cash for losses.
Washington Mutual is not the first financial institution to warn third-quarter profits would take a massive hit.
Citigroup Inc. said Monday its quarterly earnings would fall 60 percent from the previous year as it writes down more than $3 billion in securities backed by underperforming mortgages and loans tied to corporate bonds.
UBS AG(UBS) and Deutsche Bank AG (DB) also said they would write off more than $3 billion in losses due to the declining mortgage market. UBS expects the write-down to leave the company posting a loss in the third quarter.
Shares of Washington Mutual fell 33 cents to $34.95 in premarket trading.