by Calculated Risk on 1/17/2008 08:59:00 PM

Here is some info from the Washington Mutual conference call, and a spreadsheet of WaMu credit risk (courtesy of Brian):

Although we are not seeing significant changes in early stage delinquencies, once a borrower is delinquent, it is difficult for them to cure their home because many prices in the country are not only deteriorating, but homes are also taking longer to sell. In addition, liquidity for consumers has decreased, with far fewer refinancing opportunities, especially for nonconforming loans. We don't expect to see an end or reversal of this trend until the level of home inventories peaks and starts to decline.

We expect the following three groups of high risk loans to drive the majority of the credit losses going forward:

$18.6 billion in subprime loans,

$15.1 billion in home equity seconds, with combined loan to values greater than 80% that were originated in 2005 through 2007, and

$2.1 billion of prime option ARMs with loan to value greater than 80% that were originated in 2005 through 2007.

The subprime portfolio is comprised of $16.1 billion in home loans and $2.5 billion of home equity loans. You will note that this portfolio comprises 44% of our total residential loan net charge-offs, but only represents 8% of our total real estate loan portfolio. The subprime portfolio is the group of loans that is responsible for the largest increase in our allowance for loan losses in 2007. However, this portfolio is in run off mode and shrank 7% in 2007. As it was the first portfolio to experience problems, we anticipate it will be the first to see delinquencies and losses peak. There has been significant press regarding potential stress to the subprime borrower, as a result of their rates adjusting upward. We've been very proactive in working with our subprime customers to modify their loans to minimize that risk.

The second group of loans comes from our home equity portfolio. At year end, only 30%, or 17.8 billion of our home equity loans were second lien and had original LTVs greater than 80%. Of that amount, 15.1 billion of those loans were originated between 2005 and 2007, when home values were near their peak. We have broken these out and identified them as being high risk group. In the fourth quarter, that group of loans comprised 26% of our total net residential loan charge-offs, but only 8% of our total real estate loan portfolio. Over the past two quarters, we have seen the number of losses from this portfolio as well as the severity of losses increased as home values have decreased. One additional important fact is this only 6% of our home equity loans were originated through our wholesale channel, as the majority were originated through our retail channels.

The last category is option ARMS. Option ARM loans with original LTV> 80% totaled $3.4 billion, or 6% of the total option ARM portfolio. Approximately two thirds or $2.1billion of these were originated between 2005 and 2007. As you can see, we don't originate many option ARM loans at LTVs above 80%. However, one of the key credit events in the life of an option ARM is when the loan recasts and minimum payments can increase dramatically. You can see on the chart that we have approximately $4.8 billion, or only 8% of the portfolio that will be impacted by recasts in 2008. As a result of recent declines in CMT rates, the MTA index used for most of our option ARM portfolio has declined, which is also taking pressure off these borrowers. The average LTV at origination of our option ARM portfolio was 72% and current average FICOs of 694. As a result, as has been the case historically, many of these borrowers may refinance their loans before the loan is recast.

The $2.1 billion of high risk loans had an average LTV at origination of 90%, which is why we've broken them out for you. During the fourth quarter, these high risk loans collectively accounted for approximately 70% of our total real estate loan net charge-offs, representing only 19% of our total real estate loan portfolio at year end. When you exclude this group of loans, the remaining first lien loans have a weighted average LTV at origination of 66%, and a current average FICO of 718. In the second lien loans have an averaged combined LTV at origination of 66% and a current average FICO of 740. For the remaining portfolio has a solid customer profile with equity cushion to withstand declines in home values

Our credit provision guidance is unchanged from what we stated in early December. We expect net charge-offs in the first quarter to be up 20 to 30% and the provision to be in the range of 1.8 to $2 billion. While difficult to predict, we expect the quarterly loan loss provision for each of the remaining quarters of 2008 to be at a similar level. If actual charge-offs differ from this expectation

Q&A, Fox Pitt:

I'm wondering if you can tell us on the loans that are charging off in your first lien and home equity portfolios what is the loss severity that you are experiencing, and how has that changed versus a year ago? On your credit card portfolio, can you tell us what percentage of your portfolio is newer vintages and what percentage is California?

Wamu:

With regard to severities what we're seeing on prime and home equity, you know, clearly severity rates are clearly up year-over-year. We weren't even talking about severity rates a year ago. Given home price declines in key states like California , Florida , the severity rates for home equity can approach 100%, for example. In the, in the prime space, those are more like 25 to 30% type range and that obviously depends on the underlying collateral, how much capital -- how much equity's in the home, and how the individual area has performed in the environment. With regard to your questions about card, just give you some perspective. At the end of the year about 19% of our total outstandings are in California , and we haven't seen any differentiation as far as charge-offs as a percentage of our portfolio. It's pretty consistent based on the weighting in California.