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WaMu Paints Negative Outlook for Mortgage, Housing Market

During a presentation to investors in New York this morning, Washington Mutual painted a bleak picture for mortgage lending and the housing market in general in 2008.

WaMu predicted that new U.S. residential loan originations will likely total only $1.5 trillion in 2008, far lower than recent industry forecasts of $2 trillion.

“The slowdown was more severe than either we or the industry anticipated,” Chief Executive Officer Kerry Killinger said in the annual presentation to investors.

The thrift expects to set aside a further $1.1 billion to $1.3 billion for credit losses in the fourth quarter and a similar amount in the first quarter of 2008 as a result.

“The soft landing we were anticipating quickly transitioned to a severe downturn,” Killinger said. “This process is painful.”

Killinger also noted that housing markets in California, Arizona, Florida and Nevada will face “above-average pressure” in 2008, and that home prices will fall faster than many have forecast.

Bad news for Washington Mutual, who holds about 49 percent of its loan portfolio in California, its largest home lending market.

Chief Financial Officer Tom Casey called the market for non-conforming loans “illiquid”, though Killinger told investors that liquidity was beginning to return to the market and that WaMu had “contained” its lending risks.

In response to the recent First American lawsuit, David Schneider, president of the thrift’s home loan division said it was investigating the matter.

“We take accusations such as these very seriously,” Schneider said.

In regard to the current mortgage crisis, Schneider said, “This environment is unlike anything I have seen in my career.”

Finally, WaMu also said it expected the U.S. Federal Reserve to lower its benchmark federal funds rate, which currently sits at 4.5 percent, to 4 percent by June.

WaMu’s negative outlook sent shares of banks, mortgage lenders, and homebuilders down in early trading.

Shares of Washington Mutual were down $4.12, or 17%, to $20.11 on the news, their lowest level since August 2000, and the largest decline since the stock market crashed on Oct. 19, 1987.

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