Wash. Mutual Would Sell $1B of Great Western Loans

In a recent filing with the Securities and Exchange Commission, Washington Mutual Inc. disclosed that if it buys Great Western Financial it plans to sell $1 billion of home loans Great Western originated from 1989 to 1993.

Though the loans are still performing, Washington Mutual has decided they're too risky to keep, because the borrowers' equity has dropped below 5%. The Seattle thrift said it plans to sell these loans at a loss of about $100 million.

"Most people who do mergers do this kind of thing," said analyst Charlotte Chamberlain of Jefferies & Co., Los Angeles.

And Washington Mutual has always cleaned up portfolios at the outset, according to analyst Gareth Plank of UBS Securities, San Francisco, a unit of Union Bank of Switzerland.

The Seattle thrift, whose chief executive, Kerry K. Killinger, has earned a reputation for making mergers pay off, typically scours the acquired portfolio for risky loans, boosts the loan-loss reserves, and sells the risky loans at a loss, Mr. Plank said.

Still, the plan underlines that the California real estate crisis of the early '90s is still playing out in the mortgage portfolios of large thrifts there.

After more than doubling in the 1980s, California's median home prices began to fall in 1991. They haven't stopped, and in the past five years, the median home in California has lost about 14% of its value.

"Virtually every major thrift in California wrote a lot of high-LTV loans during the go-go years of the late '80s and early '90s," Mr. Plank said. That means most of Great Western's large competitors, such as H.F. Ahmanson and Golden West, also have a substantial portfolio of loans where borrowers have very little or even negative equity in their homes, he said.

H.F. Ahmanson, which is competing with Washington Mutual for Great Western, declined to say how large its holdings of such loans are.

But spokeswoman Mary Trigg said, "Our credit indicators are so positive, that we think a sale (of such loans) at this point in the cycle would be foolish."

By one estimate, almost a quarter of California homeowners who bought their homes between January 1991 and October 1996 have negative equity. As of last October, 477,000 homeowners who had purchased homes since 1991 had negative equity, according to Experian, an Anaheim, Calif., real estate information company. That was up a fifth from the start of the year.

Hardest hit currently is the Southern California county of San Bernardino, where over half of homebuyers who bought in that period have negative equity. In Los Angeles County, a quarter of homebuyers have negative equity, and in Orange County, about a tenth do.

Still, Nima Nattagh, a market analyst at Experian, said he doesn't expect homeowners to default at the levels of two or three years ago, when aerospace and defense firms gutted their staffs.

"Foreclosures are still going up," Mr. Nattagh acknowledged. "What's changing the equation today is the economic climate is in much better shape. As long as homeowners continue to service their mortgages and meet their obligations, it doesn't really matter whether you have equity or not."

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