Washington Mutual adds $500 million

to losses, says CEO Kerry Killinger this morning. So they now set $2.2 billion in losses for this year; the increase of $500 million is just from July! Want to know what's really going on in WM? Look at the line-item in their SEC filings: Capitalized interest income from optionable adjustable-rate-mortgages.

In the six months ending 2006, they had $439 million of capitalized interest; this year is $706 million. So I'll do a back of the envelope estimate on this $706 million. (remember this is interest on your mortgage that isn't paid. It is deferred. The idea is that upon a sale of the house, WM will get this money back. Or will they?)

Let's assume that on a $2000 payment that a homeowner is making, the interest only amortized payment is $2500, so $500 a month is going on the deferred payment--or as they call it the capitalized interest payment-a payment the homeowner is not making which is added to the loan owed on your home. So if you have a deferred interest of $706 million for the six months, and assuming that those with deferred interest are only paying 80% of the principal due, then you have actual due of interest payments of $3.5 billion in six months, or $7 billion of interest in a year, tied to these ARM mortgages.

Now if I assume a rate of 8%,on these mortgages, just multiply $7 billion by 12.5 to calculate the balance on these loans. (8x12.5=100), and I have (7X12.5) $87.5 billion principal balance of ARM mortgages that already they are not making a minimum of payment, and deferring interest. Now we know that WM has over $375 billion in these ARM's that are going to reset, but let's do the math on the $87.5 billion, of ARM's they are "collecting" (see they aren't collecting anything) deferred interest. In other words at least a quarter of their ARM mortgages are having a bit of trouble so far.

And if I assume a default risk of 5%, on the 87.5 billion, I have $4.37 billion of mortgages at risk, and assume that they can get back at least 65%, of this collateral on those defaulted mortgages, then WM looses 35% on this 4.37 billion or $1.5 billion dollars. Add in the $700 million of deferred interest or "capitalized interest income from ARM's" and the loss is $2.2 billion, of which WM set aside for this year.

Now I'm not an economist from Princeton, and I don't have a PHD, and this was done in 10 minutes, but it's a starting point for those that do figures on a napkin.

And maybe, the Fed should find one, and wipe their brow. The CEO's of the mortgage companies already have.