WaMu Confirms Rumors, Will Exit Much of Mortgage Origination Business

The rumors are true.

Washington Mutual, Inc. (WM: 4.27 +5.69%) confirmed Tuesday morning that it would raise $7 billion via a direct placement of securities with an investor group led by an affiliate of TPG Capital; that number is $2 billion greater than the $5 billion that had been reported earlier by the Wall Street Journal, ahead of the deal’s formal announcement.

Under the terms of the deal, TPG will serve as anchor by purchasing $2 billion in newly-issued WaMu securities. Other investors were not named.

WaMu shares were off more than 10 percent in morning trading on the NYSE.

“We’re very pleased that TPG and these major investors have expressed their confidence in WaMu’s underlying value and its growth potential,” said WaMu chairman and CEO Kerry Killinger. “This substantial new capital — along with the other steps we are announcing today — will position us for a return to profitability as these elevated credit costs subside.”

As expected, TPG will gain a seat on the company’s board. Founding partner of the private equity giant, David Bonderman, will join the 11-member group. In addition, Larry Kellner, chairman and chief executive officer of Continental Airlines and former executive vice president and chief financial officer of American Savings Bank, will become a board observer at TPG’s request, WaMu said.

Scaling back on mortgages
As HW reported Monday evening, the deal with TPG includes provisions that will see the Seattle-based lender substantially scale back its footprint in residential mortgage origination. In addition to a complete exit out of wholesale lending, the bank will also close its free-standing loan origination offices as it looks to refocus entirely on bank retail origination activity.

The company did not provide details on the number of employees affected by the move, although it said it expects the closures to take effect before the end of the second quarter.

WaMu said poor performance in its mortgage portfolio would likely drive a net loss of approximately $1.1 billion, or $1.40 per diluted share, for the first quarter. It expects to record a provision for loan losses for the quarter of approximately $3.5 billion and expected first quarter net charge-offs of approximately $1.4 billion, it said.

The estimated first quarter loss would come on top of a $1.84 billion loss reported for the fourth quarter.

The bank’s portfolio includes $57 billion in option ARM mortgages; so-called negative amortization loans have been a fast-increasing source of losses for lenders as housing prices have fallen in key markets throughout the United States and put millions of borrowers in the position of owing more on their mortgage than their home is worth.

Disclosure: The author owned no positions in WM when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.