N E W S F L A S H
WASHINGTON MUTUAL SELLS $7 BILLION IN SECURITIES
WaMu Raising Capital by Sale of Equity Stock
Listen to the financial news this a.m. and you will not be able to help yourself from laughing out loud.
Washington Mutual is raising $7 Billion through the sale of equity securities.
"How can they do that?" you ask.
It appears that WaMu is borrowing an idea from their home owner customers that the fastest way to operate a budget is to spend capital. In the case of home owners, the fastest access to cash is through a credit card or home equity. WaMu must have learned by example from the home owners to whom they loaned money against the customer's home equity. I believe that this action dilutes the WaMu shareholder equity by about 100%.
THE HOME OWNER EXAMPLE. Home owners use credit cards for every day purchases of goods and services. However, credit card purchases, unless paid off monthly, increases their debt and the percentage of debt to their monthly income. As the credit card balances, as a percentage of the available credit limits increase, the credit scores decline. Further, the interest rate on these credit cards can be as much as 15-24% beginning the date the charge is made.
Home equity loans, however, is like spending cash.
- Home purchase price - $360,000
- Estimated home market value - $400,000
- Mortgage balance - $290,000
- Estimated home equity - $110,000
By any measure, the home owner has $110,000 of capital. They can borrow up to 80 to 90% of that capital. In the case of FHA Cash Out loans, they can borrow up to 95% of their equity. They made a 20% down payment when they purchased.
BUT WAIT! WHAT HAPPENS IF THE MARKET VALUE OF THE REAL ESTATE DECLINES?
That home that had a market value of $400,000, in some areas, Florida, California, Nevada, now has a market value of $300,000, a 25% decline and not unusual for 2007. So, the home owner with high credit card balances decides that they would like to pay of the credit card balances with a home equity loan. Sounds reasonable because the interest rates are surely lower, 5,6,7% or so? Makes sense.
So, the home owner makes an application for a Home Equity line of credit. "Not a problem", says the friendly lender. "You'll have your money in a week or so. We'll get the appraiser out quickly." 
Then comes the call from the friendly lender, "Good news. Your home appraised for $300,000. Based on the appraised value and your mortgage balance, we can offer you a home equity line of $6,000."
The home owner who has $31,000 in credit card balances thought he would pay off the high interest credit card balances and lower their monthly debt service. The minimum payment on the credit cards has gotten higher and higher.
"HONEY, I CHANGED MY MIND. WE'RE NOT GOING TO TAKE OUT A HOME EQUITY LOAN. GET THE KIDS TOGETHER. WE'RE GOING OUT TO MCDONALDS FOR BREAKFAST.
DO YOU HAVE YOUR VISA CARD?"
Courtesy, Lenn Harley, Broker, Homefinders.com, 800-711-7988.
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