In order to get a better idea of the likelihood that these two leading mortgage lenders will “go under”, I thought it would be a good idea to dig into their last 10-K annual report filing to obtain information on what is their total exposure in higher risk loan categories.
As you read through this post, keep this quote in mind:
The option ARM is “like the neutron bomb,” says George McCarthy, a housing economist at New York’s Ford Foundation. “It’s going to kill all the people but leave the houses standing.”
Let’s start with Washington Mutual’s portfolio, shall we?
Option ARMs $63.4 billion
Loans with combined loan-to-value over 80% (and no insurance) $7.5 billion
Home equity loans and home equity lines of credit $15.6 billion
Interest-only loans $11.7 billion
Total exposure: $98.2 billion
You can find all these numbers on page 79 of their last annual report found here.
Now the way to assess the likelihood of insolvency would be to divide their total equity by this total exposure. It is more accurate to use “tangible equity” (which subtracts intangible assets that have no value in liquidation).
Tangible equity: $14.4 billion (Source: Yahoo Finance)
Therefore, it would only take a writedown of 15 percent on their higher risk loans for Washington Mutual to be completely wiped out. (14.4B / 98.2B)
Also, keep in mind that 1/2 of their total loan portfolio is in California (ground central for the US real estate meltdown—the highest risk region of the country).
Let’s move on to Countrywide Financial now.
Here’s the breakdown for their higher risk loan portfolio:
Option ARMs $32.7 billion
Second-lien mortgages $7.4 billion
Hybrid ARMs $14.5 billion
Home equity lines of credit $12.6 billion
Total exposure: $67.2 billion
You can find all these numbers on page 108 of their last annual report found here.
Countrywide’s tangible equity amounts to $14.9 billion. (Source: Yahoo Finance)
Therefore, in the case of Countrywide it only takes a writedown of 22 percent on their higher risk loans for them to be completely wiped out. (14.9B / 67.2B)
Just as with Washington Mutual, about 1/2 of Countrywide’s total loan portfolio is in California.
Please note that these calculations do not take into account any losses that these companies might experience in the rest of their “normal risk” portfolio holdings. So the writedown thresholds to reach insolvency would actually be lower than what I have indicated earlier.
So when you contemplate these numbers, you need to ask yourself:
How likely is it that Washington Mutual and Countrywide Financial would have to take these kind of writedowns on their higher risk loans?
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