Monday, March 5, 2007

Put Volumes Surges on Washington Mutual and Countrywide

Washington Mutual (WM) is big in Alt-a adjustables with loan loss reserves of just .6%, about 40% below the average bank. Across the WM options chain, put options volume is running 39k to 9k against the calls.

I received a very nice note yesterday from a fellow who was formerly the President of a midwestern financial thrift. He pointed out to me that allowance for loan losses at Downey Financial (DSL) are at just .44%!!! That's pretty awful considering this is a California based lender with great exposure to Alt-a. Put volume there totals only 2800 contracts today, vs calls at 870, though volume is very light.

Countrywide Funding (CFC) options volume is also skyrocketing. Put volume is running about 4-times call volume today.


Themis said...

Downey Saving lossess are projected to be .44% is that less than 1/2 of 1% .Did I read that correctly? IS that an error?

mikestevens said...

That's correct. Here's a snippet from Lehman's (laughable) research report from last week: "Assuming loan loss provisions at a run rate of $5 million per quarter, up from $2 million or less in 2005, we also forecast reserve ratio to rise from 0.44% at year-end 2006 to 0.70% by 4Q08, reflective of mid 1990s levels."

What they conveniently ignore is that the option ARM market and stated income underwriting didn't even exist ten years ago.

To put numbers to this, as of year end 2006, they have a valuation allowance of $61 million against a total loan portfolio of over $14 billion, $13.5 billion of which are negative am loans.

Themis said...

Looks like their is going to be a re-adjustment of the PPS on Downey.

Jim K said...

but here's the good news.. they allotted a full $200,000 towards loan losses in q4! shhh. don't tell anyone.