WaMu’s Net Income Drops 75 percent for 3rd Quarter

Washington Mutual saw its net income drop 75% for the 3rd quarter as its provisions for loan losses and portfolio-loan write downs ate away at top-line revenues. Those provisions now total to close to $1 billion in charges. These include both loans that are being hold to sell by Washington Mutual and those that WaMu has held, but now has little chance of recovering. From Yahoo! Business:

Rising delinquencies and defaults among mortgages, especially subprime loans given to customers with poor credit history, have led to the near disappearance of investors willing to buy the loans in the secondary markets and forced lenders to reserve more cash for losses.

Washington Mutual gets a lot of its profit from the deferred interest booked in accordance with GAAP from the negative amortization loans that it has on its books. It also has one of the thinnest loan loss provisions out of the major banks. This means that problems associated with loan losses and profit margins are impacting WaMu more than other banks that don’t derive such a large portion of their “income” from the deferred interest accrued on loans held.

This exposure should raise an eyebrow for avid industry watchers, as thin loan loss and questionable “profit” tend to lead to liquidity problems. Definitely something to keep an eye on moving forward.