Sounds reasonable to me. Are there put options on WaMu? If so, buying some that expire next year is probably the safest/best way to play it.

From my experience, WAMU has been the most vigilant client I’ve had over the last several years as far as qualifying their clients. In addition, very strict appraisal guidelines with an internal appraisal staff department and very selective contract fee appraiser list.

I’m sure there are bad loans on the books, possibly from the many bank purchases they have made, but their main wholesale and retail division, which probably accounts for the majority of their volumn (anyone care to verify this), is probably the most sound loan portfolio in the industry.

From the thousands of REO and NOD properties I’ve noted in the last year, I only recall several from WAMU or Long Beach.

Powayseller, what makes you so sure this is a good short? With a 5% yield I would be consider buying this now.

You DO know that if you short this, you are on the hook and have to pay the person you borrowed the shares from the $2.08/share dividend right?

You are right davelj. You must be new to the blogosphere… where such gems as “the market is clueless as usual” and “I can time the RE market” are posted all the time. Or someone predicting high inflation and utter chaos in one post, and then predicting deflation and utter chaos in the next thread.

There are some very bright posters here, but because of low barriers to entry, some posters could be 6-year olds pulling our legs. Some posters sound very assertive and authoritative, regardless of whether they know what they are talking about. But we get to used to it, and learn to tell the good from the not so good.

“I don’t believe in efficient markets theory.”

This explains alot.

A little tidbit to keep in mind about WaMu: They just laid off their entire appraisal staff, including their supervisors and managers. For most of their employees, their final day is 09/12/2006.

WaMu has contracted with 2 appraisal management companies (LSI and E-Appraiseit) to perform all appraisal and review functions. The fee appraisers who were working directly for WaMu were already cut off, and those who have no other options have already started working for the AMCs, at fees that are 35% – 50% less than what they were getting before. Nobody on the appraisal side of this sees this move as having good results.

I’ve had occasion to speak with a couple of the soon-to-be laid off local managment as well as a couple of the already-laid-off fee vendors, and everyone I’ve spoken to is deeply angry and resentful. Since they now have to do a lot more assignments to make the same amount of money, and since the AMCs are notorious for constantly harrasing their appraisers with 5x daily phone calls and lowball fees, there’s a lot of scheming going on right now on how to do the absolute minimum amount of work necessary to collect the reduced fee. Time is money. Unlike before, most of these people are not taking the position that the company’s exposure to bad loans is a high priority.

I’m already hearing real horror stories about how bad some of these AMC appraisals going to WaMu are. The AMCs are notorious for failing in their review functions and meddling with those appraisers who are trying to complete their due diligence. They’re quite candid that their priorities are about getting appraisals back fast and cheap, everything else be damned.

In the appraisal community, most of the AMCs are generally reviled as parasites, and the people who choose to work for them have often been characterized as being the bottom of the barrel. Lots of really inexperienced appraisers and has-beens who can’t find work anywhere else.

Bottom line here is that WaMu’s exposure to fraudulent loans and poorly developed appraisals is skyrocketing at a critical time. They could not have picked a worse time to give up on appraisal quality. They should be tightening up their standards at this juncture, not gutting them.

Another thing I’m hearing is that WaMu is rolling out a new loan program that will more easily enable overencumbrance of properties. This is also a poor decision (on a long term basis) to be making at this time.

It’ll probably take a while before any of these decisions come back to roost, so it may not figure into your decisions to short right now. But sooner or later these decisions are going to cost them – big time.

I agree, going forward they will have serious issues to deal with. I am one of those who will no longer be doing work for WAMU as I refuse to deal with the likes of LSI. I’d rather take the day off than work for sub-standard fees and deal with the phone monkeys.

In my previous post I was speaking directly towards their current loan portfolio which I believe is probably very solid. If standards and quality go down the drain like most believe, I think it will take at least a year or two for that to be reflected as an increase in defaults.

I still don’t think this is a good time to short WM. Countrywide and Wells have been cutting corners on collateral evaluations for years and it shows in the REO and NOD lists.

That’s a good question for which I have no answer. I THINK a lender like WaMu is more likely to retain market share, even in a declining market. I know they do a large percentage of the high-dollar mortgages here in SD County and they’re hooked in as the primary mortgage lender on several of the new home subdivisions.

I know that about 50% of the appraisals WaMu was sending out for field reviews were getting cut and those loans were not being made. Many of those would now fly through the AMC reviews because they take so many shortcuts. If it’s bad to take shortcuts in an appraisal, it’s 5 times worse to do it in a review.

To be sure, a bad appraisal and an overencumbered property do not make for an automatic loss, but it does increase the odds when the borrower has little or no skin in the game and the markets are in decline.