WaMu stock plunges 17% on bad news

NEW YORK —  Washington Mutual Inc. shares tumbled 17% to a seven-year low Wednesday after the nation’s largest savings and loan said mortgage losses would mount through 2008, and a probe into alleged inflated home appraisals widened.

New York Atty. Gen. Andrew Cuomo said his office was examining whether Washington Mutual pressured a big title insurer to inflate home values in appraisals, making it possible for borrowers to obtain mortgages they couldn’t otherwise afford.

The shares of banks, thrifts and mortgage lenders declined broadly Wednesday as investors worried that mounting losses and probes into lending practices might reduce profits.

Seattle-based Washington Mutual expects to set aside $1.1 billion to $1.3 billion in the fourth quarter for credit losses, and a similar amount or slightly more in the first quarter of 2008.

It also expects credit losses to remain “elevated” through 2008. The thrift, known as WaMu, set aside $967 million in the third quarter, and expects to set aside $2.7 billion to $2.9 billion this year.

“The soft landing we were anticipating quickly transitioned to a severe downturn,” Chief Executive Kerry Killinger told an investor meeting in New York. “This process is painful.”

Delinquencies and defaults have mounted as home prices have fallen and interest on adjustable-rate mortgages has climbed, leaving thousands of borrowers unable to refinance.

Capital markets also seized up, saddling lenders with losses on loans that investors refused to buy. The market for so-called nonconforming loans is “illiquid,” WaMu Chief Financial Officer Tom Casey said.

“Investors can’t really get a handle on what the numbers will look like,” said Chris Armbruster, an analyst at Al Frank Asset Management in Laguna Beach. “Financial stocks are falling knives right now.”

Citigroup Inc. and Merrill Lynch & Co. are among other companies to post big mortgage losses.

Cuomo said he issued subpoenas to mortgage giants Fannie Mae and Freddie Mac for information on home loans they bought from WaMu. The companies also agreed to hire an independent examiner to review WaMu appraisals and mortgages.

Last week, Cuomo sued title insurer First American Corp., accusing its eAppraiseIT unit of inflating appraisals under pressure from WaMu. He did not name the thrift as a defendant.

Late Wednesday, WaMu said that it was continuing its own investigation into the matter, and that it “takes any allegations of improper practices seriously.” It also said Fannie Mae and Freddie Mac were continuing to buy its loans.

Shares of WaMu closed down $4.19 at $20.04.