Mortgage Mess - Worst Still to Come / Dollar Still Losing Value

Jonathan Weil in Bloomberg writes about Washington Mutual and how their mortgage mess is about to get worse. Wamu has set aside $1.3b to cover bad loans this quarter.

This is the reason it is trading at book value and it's dividend yield is 8%. The dividend is proabably unsustainable.

http://www.bloomberg.com/apps/news?pid=20601039&sid=a_tXnFCJFfNg&refer=home

The deferred interest from option ARMs also boosts Washington
Mutual's earnings, part of a process known as negative amortization, or
``neg-am.'' That's because option-ARM lenders recognize interest income when
customers postpone their interest payments, even though the lenders got no cash.

For the nine months ended Sept. 30, Washington Mutual recognized $1.05
billion in earnings as a result of neg-am within its option-ARM portfolio. That
represented 7.2 percent of Washington Mutual's $14.61 billion of total interest
income year-to-date. By comparison, neg-am contributed 1.8 percent of Washington
Mutual's interest income for all of 2005 and just 0.2 percent for 2004.

Then there's the bigger picture. While Washington Mutual's loan-loss
allowance rose 22 percent to $1.89 billion during the 12 months ended Sept. 30,
nonperforming assets rose 128 percent to $5.45 billion. So even if Washington
Mutual adds $1.3 billion in provisions next quarter, its loan-loss allowance
still won't be anywhere close to catching up.