Washington Mutual Inc, the largest U.S. savings and loan, said on Wednesday the U.S. housing slump will persist through 2008, causing loan losses to mount and mortgage lending to fall to an eight-year low.

Washington Mutual's shares fell more than 9 percent to their lowest level since August 2000.

The Seattle-based thrift, which is also one of the largest U.S. mortgage lenders, expects to set aside $1.1 billion to $1.3 billion this quarter for credit losses, and a similar amount or slightly more in the first quarter of 2008.

It expects credit losses to remain elevated through 2008. The thrift set aside $967 million in the third quarter, and expects to set aside $2.7 billion to $2.9 billion this year.

The soft landing we were anticipating quickly transitioned to a severe downturn, Chief Executive Kerry Killinger said in a presentation to investors in New York. This process is painful.

Lax underwriting standards industrywide meant too many borrowers were able to buy homes they could not afford. Delinquencies and defaults are mounting as falling home prices leave hundreds of thousands of borrowers unable to refinance.

Capital markets also seized up, saddling lenders with losses on subprime and other loans that investors will not buy.

The market for nonconforming loans, which Fannie Mae and Freddie Mac cannot purchase, is illiquid, Chief Financial Officer Tom Casey said.

WaMu, as the thrift calls itself, expects mortgage lending nationwide to slump to $1.5 trillion in 2008 from an estimated $2.3 trillion to $2.4 trillion in 2007. The Mortgage Bankers Association estimates $1.9 trillion of originations for 2008.

Shares of WaMu fell $2.19, or 9 percent, to $22.14 in morning trading on the New York Stock Exchange.

Citigroup Inc and Merrill Lynch & Co are among other companies to post mortgage losses. On Tuesday, Capital One Financial Corp, the credit card and banking company, boosted its forecast for 2008 credit losses.

PRESSURES

WaMu shares have fallen by about half this year through Tuesday, wiping out more than $18 billion of market value, as a $498 million mortgage lending loss caused a 27 percent drop in overall profit from January to September, to $1.83 billion.

This environment is unlike anything I have seen in my career, said David Schneider, president of home loans.

WaMu's other businesses include branch banking, credit cards and commercial lending.

Killinger said home prices in California, Arizona, Florida and Nevada will face above-average pressure through 2008. California is WaMu's largest home-lending market.

He nevertheless said WaMu has contained its own lending risks. Like many lenders, WaMu stopped offering some riskier home loans, including some allowing borrowers with little or no money down to take out loans where rates reset quickly.

The thrift also has a $2 billion program to help borrowers who are struggling to keep up with mortgage payments.

Killinger declined to address specifically whether WaMu will maintain its 56 cents-per-share quarterly stock dividend, which some analysts have said may need to be cut. The dividend equates to a 9.2 percent yield as of Tuesday's close.

He said he would not speculate on market conditions in January, when the board meets next to consider the dividend.

Our directors continue to review market conditions and factor in our liquidity, capital position, earnings and other financial factors in setting the dividend, he said, adding that he has most of his personal wealth in WaMu stock.

WaMu shares began the year at $45.49.

(Additional reporting by Al Yoon)

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