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Those ill-fated twins of the mortgage calamity, Washington Mutual (WM, news, msgs) and Wachovia (WB, news, msgs), are getting clobbered again, after some dramatic housecleaning at the top.
Wachovia's board kicked out chief Ken Thompson last week. He was largely responsible for the bank's ill-timed 2006 purchase of Golden West Financial. An adjustable-rate-mortgage machine during the housing boom, Golden West tracked much of the muck into the house of Wachovia -- before it was obvious these loans would become so widely problematic.
Washington Mutual hasn't gone so far. It merely stripped chief Kerry Killinger of his role as chairman, beginning next month. Like Wachovia's Thompson, Killinger oversaw his bank's star-crossed foray into the subprime lending.
To some, those changes will sound like a fresh start. But don't count on these two banks to get up off the mat anytime soon. Based on a new analysis from a stock research firm, I'd wager a tsunami of profit-crushing write-downs on bad loans will hit each bank this year. Substantial assets -- homes they hold loans on -- simply aren't worth as much as they're owed, and the loans won't be repaid.
Home foreclosures still haven't peaked, and Wachovia and Washington Mutual haven't faced the extent of the damage, at least judging by their financials, say the accounting sleuths at Gradient Analytics.
These problems are a big deal to people whose mortgages are involved, of course. They also matter to investors who own these battered stocks or might be tempted to buy them.
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The stocks have fallen an additional 25% in the past week or so, hitting lows not seen in more than a dozen years. Washington Mutual trades under $7 a share, compared with $44 a year ago. Wachovia's shares have fallen below $20, down from $55 about a year ago.
New lows often signal a good time to buy stocks, but not in these cases. Here's why.
Many more foreclosures ahead
Foreclosures hit a record high in the first quarter, when homeowners walked away from about 448,000 mortgage loans. Matters are only going to get much worse, predicts Mark Zandi, the chief economist at Moody's Economy.com.He bases his gloomy outlook in part on insights about worsening consumer credit trends that he gets from data compiled by Equifax, one of the credit reporting bureaus. "Foreclosures have been rising for just over two years, and they will rise for another year," Zandi says. "It is a serious problem that is not going away fast."
Zandi thinks defaults on first mortgages will jump 60% this year to 2.3 million, compared with 1.4 million last year. Then, in 2009, he expects defaults to hit 1.7 million, still 18% above last year's level. And defaults will remain at high levels "well into next decade," he says, as a delayed effect from adjustable-rate mortgages, or ARMs, kicks in.
Monthly payments on many ARMs aren't going up too much right now because they are linked to market interest rates, which are low. But the Federal Reserve will raise rates at some point, and that will create issues for borrowers in two or three years.
Meanwhile, the unrelenting decline in home values won't let up. Zandi predicts home prices will fall 12% this year and nearly 8% in 2009. This will lead to more foreclosures because it leaves a lot of new homeowners owing more than their homes are worth. This makes it tempting for them to walk away from mortgage payments when they are hit with an unexpected expense or job loss, fairly common problems because so many new homeowners have moderate incomes.
"These households are living on the financial edge, and it doesn't take much to push them over," Zandi says.
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Mortgage crisis not limited to subprime loansMike Larson, an interest-rate and real-estate analyst, discusses why mortgage woes are moving up the food chain as home prices decline.
Currently, about 9 million homeowners have no equity or their homes are worth less than they owe. Given the expected fall in home prices, that number will rise more than 30% over the next year, to 12.2 million homeowners. "If their incomes are disrupted to any significant degree, they are candidates for foreclosure or default," Zandi says.
Federal regulators agree. "As long as the housing market is on a downward path, as long as those prices continue to fall, I think there's a risk that the losses could continue to mount on a variety of loans," Federal Reserve Vice Chairman Donald Kohn told the Senate Banking Committee last week.
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