WaMu Buyout by Chase Likely to Impact Collection Agency Network

JP Morgan Chase & Co. is likely to expand relationships with its network of collection agencies, but is unlikely to add others after picking up more than $200 billion in net loans and leases as a result of the company’s acquisition of Washington Mutual, the largest U.S. savings and loan, for $1.9 billion.

To finance the purchase and cover writedowns and losses, JP Morgan raised $10 billion in a stock sale.

JPMorgan Chase acquired the assets and most of the liabilities of Washington Mutual Bank from the FDIC, which was named the receiver after the bank was closed in late September by the Office of Thrift Supervision (“Regulators Seize WaMu; Chase to Buy Assets,” Sept. 26).

As of the end of the second quarter, Washington Mutual had $233 million in net loans and leases, with the majority ($183 billion) in loans for 1-4 family properties, according to Jim Eckenrode, banking and payments research executive for financial services research and advisory firm TowerGroup.

Washington Mutual also reported a provision for loan losses of $8 billion on its balance sheet, though management anticipated another $19 billion in loans could go bad. Indeed, the amount of loan losses reported on the income statement had ballooned from $1.5 million to $3.5 billion to $6 billion in the last three quarters, according to Eckenrode.

Out of the $183 billion in loans backed by real estate, $125 billion was in first liens, $53 billion was in home equity loans, and the rest was in other types of real estate loans.

“I think like with most other banks, most of the loans are fine,” Eckenrode said, though the chargeoffs of the Washington Mutual loans are likely to be high.

Eckenrode pointed out that the amount paid for Washington Mutual was less than one-fifth of what Banco Bilbao Vizcaya Argentaria SA paid for the much smaller Compass Bank a year earlier. So even if there are more writedowns, JPMorgan should benefit from the profit from the acquisition. How much depends on the legislation that is expected to be approved by Congress, perhaps as early as Friday.

“It’s still a good deal to pick up the bank infrastructure and branches for that price,” Eckenrode said.

In addition to the problem home loans, Washington Mutual also had a credit card portfolio that was increasing charge-offs on a quarterly basis, reaching $169 million by the end of the second quarter, nearly 60 percent higher than the year earlier figure.

The more of those debts Chase can collect, the more profitable the acquisition will be. Most of the concentration is likely to be on the newer delinquencies, with the older ones more likely to be written off, said Dimitri Michaud, consumer finance analyst for Kaulkin Ginsberg.

While Washington Mutual had relationships with numerous collection firms, Chase is likely to expand relationships with its own network of firms rather than trying to bring in any firms that WaMu was using, unless the firm was working for both financial institutions, Michaud added.

“[Chase] knows its agencies; it’s always easier to work with agencies that you know,” Michaud said. “Chase has a good core of collection agencies.”