by Christopher Palmeri
Troubled thrift giant Washington Mutual (WM), once one of the biggest players in residential mortgages, will stop making loans through independent mortgage brokers—what the industry calls the "wholesale" side of the business. Instead the company will focus on loans through its 2,200 retail bank branches.
WaMu also announced on Apr. 8 that it will receive a $7 billion cash infusion from private equity firm TPG. The Mortgage Lender Implode-O-Meter, a Web site that traffics in industry gossip, reports that exiting the wholesale business was a condition attached to the TPG investment. According to an internal WaMu memo obtained by BusinessWeek, all loans originated by independent brokers must close by June 13.
WaMu estimates it will lose $1.1 billion during the first quarter and take a provision for loan losses of $3.5 billion. And to further shore up its capital position, the company will slash its quarterly dividend to 1¢ from 15¢. The market greeted the Apr. 8 news by pushing down WaMu's share price 1.27, or 10%, to 11.88 as of 1:15 p.m. ET.
Mitch Ohlbaum, chief executive of Legend Mortgage, an independent mortgage broker in Los Angeles, says he was told by a WaMu representative that Apr. 10 will be the last day to submit new loan applications. The wholesale business is considered risky because lenders have to offer very competitive terms to win business over dozens of rivals. Wholesale lenders are also relying on independent brokers to accurately provide borrower information.
Slammed by Losses
These have been tough times for Washington Mutual. In January the bank reported a loss of $1.87 billion for the fourth quarter, wiping out its earnings for the year, due to higher losses on its loan portfolio. The company has cut its dividend, slashed thousands of jobs, and sought additional sources of capital.
WaMu dates back to a lender founded in Seattle in 1889. It made its first home loan, for $700, the following year. Under current Chairman and CEO Kerry Killinger, WaMu has made dozens of acquisitions, including large regional lenders such as New York's Dime Savings and California's Great Western Financial. The 1999 acquisition of Long Beach Mortgage made WaMu a big player in the risky business of making subprime loans to borrowers with poor credit histories.
WaMu was an early leader in the industry's push to offer adjustable-rate mortgages, in particular one that gave borrowers the option to roll a monthly interest payment on top of the principal of the loan. Killinger told analysts in February that risky adjustable, home equity, and subprime loans made up about $36 billion of WaMu's $244 billion portfolio.
Fallen Star
Once the second-largest mortgage lender in the U.S., the company fell to sixth place overall last year. Its clever television commercials featured a smiling young banker who offered better customer service than the stuffy industry fat cats. At the same time it rolled out cozier new branches featuring tellers operating out on open floors. "WaMu bragged that it wants to be the Starbucks of the banking business; I guess it's doing about as well as Starbucks," quips Guy Cecala, publisher of Inside Mortgage Finance, an industry newsletter.
In early 2007, the bank began throttling back on mortgage loans. Killinger announced plans to focus more on credit-card lending and banking services for small businesses. "We expected a soft landing," one company executive told BusinessWeek earlier this year. "Not many people were predicting the kind of national decline we've seen."
Once an industry star, Killinger has come under fire recently, both for WaMu's poor stock performance and his still generous pay. Several large investment firms have said they will withhold votes for directors at the company's annual meeting Apr. 15.
