Washington Mutual let fly with a market bombshell Monday that seems likely to set the stage for the fourth quarter earnings season – the company said it will likely swing to a net loss in the fourth quarter as it adjusts to “unprecedented challenges in the mortgage and credit markets.” The company slashed its expected fourth-quarter dividend to $0.15 per share from $0.56 per share in the third quarter, as it adjusts to a sharp change in its mortgage lending strategy. The bank said it will close approximately 190 of 336 home loan centers and sales offices, and close nine of its mortgage processing and call centers amid a move to restructure its home lending business. More than 3,150 employees will lose their jobs. WaMu’s take on near-term industry performance was unabashedly bleak, with the thrift saying it expects national mortgage originations to shrink to $1.5 trillion in 2008, down about 40 percent from an estimated $2.4 trillion this year. Not surprisingly, WaMu also said it will cease all subprime lending operations and will close its WaMu Capital Corp. division (earlier speculation on the fate of WaMu Capital was published last week). The losses are clearly piling up, and Wamu said it now expects to spill some red ink in the fourth quarter — primarily due to a fourth quarter after-tax charge of approximately $1.6 billion for the writedown of all the goodwill associated with its lending business, in addition to a provision for loan losses now expected to be between $1.5 and $1.6 billion. Earlier estimates provided by the company had pegged loan losses at $1.3 billion. Restructuring of its lending and servicing operations will also result in approximately $140 million in additional expenses in the fourth quarter, WaMu said. In the face of these losses, CEO Kerry Killinger said the bank will seek to raise an additional $2.5 billion in capital in order to “further fortify WaMu’s strong capital and liquidity position.” Fitch Ratings and Moody’s Investors Service immediately downgraded Washington Mutual’s debt rating, with Fitch saying it expects “further, meaningful asset quality deterioration in the residential mortgage portfolio.” From Moody’s press statement on its downgrade:

Moody’s said that the downgrade was based on its view that credit losses from WaMu’s mortgage operations will be noticeably higher than previously estimated. Of particular concern is WaMu’s approximately $43 billion second-lien-home-equity portfolio. Moody’s said that higher provisions are likely to lead to poor reported results throughout 2008 and 2009. Moody’s previously expected WaMu’s profitability to begin to recover in 2009; however, Moody’s now believes this will not occur until 2010.

I’m sure I don’t need to tell HW readers that these are huge changes at a very large bank; but perhaps the largest news here lies in the old adage that “actions speak louder than words.” Closing retail loan centers and shuttering processing centers isn’t typically something that’s done unless you are certain you’re facing a protracted downward cycle; pulling back on retail, precisely when everyone in this industry is focused on retail origination, should speak volumes regarding WaMu’s expectations.