WAMU has been selling 71% of their option arm PRODUCTION, not their portfolio. This has no effect on the loans they keep on their balance sheet; they’re still responsible for all of the neg-am implications for the loans they portfolio.

As with virtually all large thrifts, WAMU owns a subsidiary mortgage company. This mortgage company generates loans, some of which the thrift keeps on its balance sheet (portfolio) and others it sells either in flow, bulk or securitized form into the secondary market. WAMU sells these loans because either they (a) don’t have the capital to portfolio all of the production, (b) don’t want credit exposure to all of the production, or (c) the economics on the premiums they receive for selling the production are better than the economics of keeping the paper on balance sheet.

The loans on their balance sheet, however, they’re basically stuck with for the short term (although they can always try to sell them at some point). And those loans typically fall into two bifurcated tranches: (1) the loans they’re really comfortable with which probably have low LTVs, high FICOs, etc. (the majority) and (2) the stuff they couldn’t package up and re-sell – higher LTVs, lower FICOs, etc. – because the market didn’t want them (the minority). This is the case with most large thrifts. Obviously it’s the second group, the nasty stuff, that people are really worried about.