Wachovia Corp. and Washington Mutual Inc. posted billions of dollars in mortgage losses Tuesday, far more than analysts had forecast, but their stocks rose as investors apparently concluded that the home-lending sector could work through its deep troubles.
Despite a staggering $8.9-billion second-quarter loss -- more than it has ever earned in a full year -- Wachovia shares rocketed $3.61, or 27%, to $16.79. Shares of Washington Mutual rose 34 cents, or 6.2%, to $5.82 before it reported a $3.3-billion loss after the close of trading.
Wachovia and Washington Mutual are both major players in retail banking and mortgages. Charlotte, N.C.-based Wachovia, the fourth-largest U.S. bank, ran into trouble after its 2006 acquisition of Oakland-based Golden West Financial Corp., whose World Savings was a major adjustable-rate lender. Seattle-based Washington Mutual grew to become the nation's largest savings and loan by acquiring a series of California thrifts.
Their results illustrate how rising home-loan delinquencies, first seen among high-risk subprime mortgages, have migrated to nontraditional loans made to people with good credit scores. These adjustable-rate mortgages with low initial rates were often made without verifying borrowers' earnings.
The main contributor to Wachovia's losses was its now discontinued specialty of "option ARM" loans that allowed borrowers to pay so little that their balances rose. In the second quarter, Wachovia set aside $5.6 billion for loan losses, including $3.3 billion on option ARMs
Washington Mutual said it too was experiencing surging losses on option ARMs -- even as problems with subprime loans are "flattening out" and home-equity delinquencies "are showing signs of flattening," as company President Steve Rotella put it.
Wachovia's $8.9-billion loss, the equivalent of $4.20 a share, contrasted with net income of $2.3 billion, or $1.23 a share, in the second quarter of 2007. The bank slashed its dividend to 5 cents from 37.5 cents, the second reduction in the payout this year, and said it would eliminate 10,750 jobs.
Wachovia has $122 billion of option ARMs on its books. Of those, 58% are in California, where falling home prices and rising loan balances have devastated a key measure of the creditworthiness of mortgages.
