The sharp downturn in the housing market took banks by surprise, but they are beginning to recover, banking executives said Wednesday at an investor conference.
Washington Mutual Inc. President and Chief Operating Officer Stephen Rotella, speaking at the UBS 2008 Global Financial Services Conference, said the speed and severity of deterioration in the housing market was much greater than anticipated, which will dampen the bank's earnings through 2008.
Seattle-based Washington Mutual was anticipating a decline in housing prices would be offset by a strong economy and low interest rates, Rotella said. But, the soft declines expected never developed and instead a steep drop in the market occurred.
To combat rising delinquencies and defaults among mortgages, Rotella said Washington Mutual has tightened its underwriting criteria and ramped up its loan-loss provisions to cover bad loans.
Since the middle of 2007, mortgages have increasingly defaulted, while housing sales have tumbled _ both combining to send home prices lower. Problems in the mortgage market started among subprime mortgages _ loans given to customers with poor credit history. But, rising defaults spread to the broader mortgage market, especially home equity products.
During the first quarter, when Washington Mutual lost more than $1.1 billion, the bank set aside $3.5 billion to cover defaulted loans.
Rotella said loss provisions greatly exceed actual net charge-offs _ loans written off as not being repaid.
Wells Fargo & Co. also rapidly increased its reserve build in recent months as it too was not immune from the downturn in the housing market, said John Stumpf, the San Francisco-based bank's president and chief executive said at the same conference.
Stumpf said Wells Fargo has taken measures to improve its credit quality, including restricting the size of loans it will offer based on a property's location. Wells Fargo reviews its loan limits on a monthly basis, Stumpf added.
Wells Fargo took a $2 billion provision for credit losses during the first quarter, $500,000 of which was to help build its reserves for future losses. The first-quarter reserve was about $600 million less than the prior quarter.
Shares of Wells Fargo rose 2 cents to $28.99 in afternoon trading. Washington Mutual shares rose 3 cents to $9.91.
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