SEATTLE - Washington Mutual Inc. 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 said it also will write down the value of various loans and portfolios by about $410 million.
In July, WaMu said problems with subprime mortgages, or loans to borrowers with bad credit, had spread to other types of home loans. The bank is a major lender of adjustable rate mortgages, including "option" ARMs, which let borrowers make small monthly payments at first as the size of their debt mounts.
As the housing market cools, such borrowers may find themselves with a debt that has grown larger than the value of their homes.
Washington Mutual has already booked $706 million in uncollected interest from this type of negative amortization loans during the first half of the year.
Libby Hutchison, a WaMu spokeswoman, would not say whether the losses the bank warned of Friday are adjustments to the way that revenue is recognized, due to delinquent payments from overextended homeowners.
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.