We have all been talking about ‘The Pay Option ARM Implosion’ that may make the Subprime Implosion look like a walk in the park in bubble states like CA. While loan defaults across subprime are declining, defaults in the Alt-A space, led by Pay Option ARMs are surging. This will wipe out higher priced regions, as the mortgage ooze spreads from outlying subprime areas into more affluent suburban and urban areas. Please see my June CA Home Sales Report and June CA Foreclosure Report for more detail on this.
We all can see what has happened to the stock prices of the largest Pay Option ARM lenders such as American Home Mortgage, Countrywide, IndyMac, WaMu, Wachovia, Capital One (Greenpoint), Downey Savings, First Federal, BankUnited and even Lehman, Bear and Deutsche Bank to some degree but the latter more on the conduit level. All have performed horribly and all were Pay Option ARM loaded. This is no coincidence.
Now Dr. Martin Weiss, from Weiss Research, adds his hard facts today, which confirms what many have been saying for a year. The WaMu and Wachovia clips below are only part of the story and I suggest you read the entire thing. Dr Weiss’ Unthinkable Truth; Undeniable Reality is a great, quick read.
Many things he points out are very similar to the research piece I released last week called WaMu: Liquidy Options are Running Low. To get a great overview of both WaMu and Wachovia, read both. -Best Mr Mortgage
Washington Mutual In a Death Spiral?
Washington Mutual, America’s largest savings and loan, is unfortunately, also one of the nation’s largest subprime lenders.
A direct consequence: It appears to be in a death spiral, losing $3.3 billion in the second quarter … admitting to losses of as much as $19 billion this year … and probably on its way to losses of an estimated $26 billion.
That estimated loss is over four times its total market value as of Friday’s close … twelve times its yearly earnings in the best of times.
Can it get a new capital infusion to stave off failure?
Perhaps. But on April 8, Washington Mutual already got an injection of $7 billion from private equity firm TPG Capital. And now, less than five months later, an amount equivalent to TPG’s entireinvestment has been more than wiped out with the plunge in Washington Mutual’s shares — to a meager $3.82 on Friday.
What’s worse, the TPG deal restricts Washington Mutual’s ability to raise new, desperately needed capital going forward. And further impairing its ability to raise capital, Moody’s announced that it is reviewing the thrift for a downgrade to junk status.
Here’s the big problem: As of the latest reckoning, Washington Mutual has $214.6 billion in residential mortgages on its books. And among those, more than three-quarters are in non-traditional categories — option ARMs, subprime loans, home equity loans and multi-family mortgages. Less than one-quarter is of the traditional, single-family prime variety.
Just in option ARMs alone, Washington Mutual has $52.9 billion, one of the biggest such portfolios in the industry. Moreover, 62.5% of its option ARMs are in two of the hardest hit states — Florida and California.
Nonperforming assets are growing by an average of 36% each quarter. If they continue to grow at that rate, they could reach a whopping 6.7% of total assets by year-end.
Investors are pulling out. Rumors are swirling that creditors may be doing the same. Bankruptcy looms.
Wachovia Also Suffering Huge Losses
Wachovia, the nation’s fourth largest bank with nearly $800 billion in assets, is also in danger. Its staggering $8.9 billion loss reported last week may be just the tip of the iceberg.
Its big blunder: The acquisition of subprime lender Golden West Financial for $24 billion at the very peak of the real estate market in 2006.
The net result for the bank: It’s now stuck with option ARMs valued at $122 billion concentrated in California, the state with one of the worst mortgage default rates.
Net result for shareholders: Over $55 billion of their wealth has been wiped out since the acquisition — more than double the total purchase price of Golden West.
The big problem going forward: Wachovia has $231 billion in residential real estate loans on the books. But only 22% of these are classified as “traditional mortgages.” Most of the rest are higher risk.
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