Subprime Pig Meets WaMu

News on continued problems in the Subprime area seem to pick up speed almost every day. The most recent articles point to Washington Mutual (WaMu) considering to set aside some $412 million to $2.1 billion in extra reserves because of a lawsuit brought on by New York’s state Attorney General.

The suit alleges that First American Corporation and eAppraisalIT colluded with WaMu to inflate the appraisal of homes. This is a serious charge which apparently goes way beyond subprime loan issues and focuses on appraisals of all kinds.

The potential repercussions could be grave indeed. If the suit holds up, poorly performing securitized loans could be put back to WaMu from bondholders on the basis of fraudulent appraisals. That means that WaMu would be forced to put the bad loans back on its balance sheet and then mark them to market.

Let’s look at some numbers. During the period in question, WaMu originated some $275 billion of real estate loans, of which some $172 billion were sold as mortgage backed securities. The article estimates that about some $33 billion could be put back to WaMu, which then might require some $412 million to $2.1 billion in reserves.

The latest figures released yesterday showed that credit losses could amount to $2.7 to $2.9 billion and WaMu did not expect much growth but higher expenses in the next year. Their most recent financial statement as of 6/30/07 showed assets of $312 billion and liabilities of $288 billion, which leaves equity of some $24 billion.

While that is a decent equity cushion, I am not sure how long that will last as Subprime exposed companies are moving through a time where obligations and/or losses seem to change by a few billion dollars on a weekly basis.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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