No. 1 U.S. S&L says it will stop offering loans for borrowers with poor credit; cites growth in retail banking and credit cards, smaller loss at mortgage unit.
July 18 2007: 5:32 PM EDT
NEW YORK (Reuters) -- Washington Mutual Inc., one of the largest U.S. mortgage lenders, said Wednesday it will stop offering some of the most popular home loans for subprime borrowers after rising defaults caused losses to mount for dozens of lenders.
The nation's largest savings and loan also said second-quarter profit rose 8 percent to $830 million, or 92 cents per share, from $767 million, or 79 cents, a year earlier. It said its retail banking and credit card operations grew, while its mortgage unit pared its first-quarter loss by two-thirds.
Results topped the average analyst forecast by 3 cents per share, according to Reuters Estimates. Shares of WaMu (Charts, Fortune 500), as the thrift calls itself, rose 3.3 percent in after-hours trading.
In an interview, Chief Executive Kerry Killinger said that effective immediately, Seattle-based WaMu will require full documentation of income and assets from prospective subprime borrowers, eliminating riskier "stated income" loans.
He also said WaMu will no longer offer subprime adjustable-rate mortgages with initial fixed terms of fewer than five years. This would eliminate so-called 2/28 and 3/27 subprime loans, which carry low initial rates for two or three years before jumping to much higher rates that float.
"Too much money, and some would say, irrational money flooded the subprime market in the last couple of years," Killinger said. "This led underwriting standards to decline, credit spreads to narrow, and volumes to surge, and now has caused delinquencies to soar.
Killinger said that despite the changes, "we're absolutely committed to the subprime mortgage business. It serves a very important customer need."
Washington Mutual shares closed down 75 cents to $41.61 on the New York Stock Exchange, but rose to $43 after hours.
Through the close, the shares had fallen 9 percent this year, compared with declines of 3 percent in the Philadelphia KBW Bank Index and 11 percent in the KBW Mortgage Finance Index.
I'm surmising that was subprime CC holders, not subprime mortgage holders, that accounts for the lionshare of CCC profits.
Subprime mortgages are profitable only if the borrower can keep up the payments. Subprime CCs are profitable even when they go into default. The losses from a defaulted CC aren't real, thus they can be inflated to 3 times the actual loss with fees and interest. Not so with a mortgage loan. There's a real piece of property that has to get liquidated.